Low proportion of public tranche shares in IPOs a clear sign of weak demand, say industry players

By CHEW XIANG

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'This week's sentiment can be different from last week's. So we really need to have enough institutional investors who are more sophisticated and can take a longer-term view.' - an investment banker

Investors remain reluctant to part with their cash, which has made it hard for some companies hoping to tap the market, industry players say.

While two firms - China Zaino, a backpack maker, and China Eratat, a sportswear firm - registered their prospectuses last week and have launched initial public offerings (IPOs), sources pointed to the very low proportion of public tranche shares as a clear sign of weak demand.

China Zaino offered just two million shares for public subscription out of 145 million shares in total. China Eratat offered 8 million shares to the public and set aside 155 million shares for private placement. An issue manager noted that in last year's bull market, it was common to leave up to 10 per cent of IPO shares for the public.

That the two China companies have made it to the registration stage is already something of an achievement, because investors now are very selective. An issue manager said: 'Investment banks will not launch an IPO without strong indicative demand.' BT understands both the issues are already oversubscribed.

One result of all this is that share placements have become hit and miss affairs. Some recent placement attempts ran into trouble when their issue managers found themselves unable to drum up enough investor interest, say market players.

China Stationery, which lodged its prospectus in early March, is said to have seen 'poor response' at its roadshows. An industry source said the issue manager had to slash the price from over 30 cents to between 20 and 30 cents a share. 'In terms of valuation, that's not very demanding. But there are many other undervalued companies in the market now,' said the source.

Novo Group, a steel trading company which is trying for a backdoor listing through a reverse takeover of Neocorp International, is also finding it difficult to push through a placement.

Its chairman Dicky Yu told BT last month that the deal would be done and trading would resume by the end of March. But the stock is still suspended more than a fortnight later.

A source not connected with the issue pointed to the low margins associated with trading companies like Novo. 'For investors, they will prefer to buy shares in bigger, more established trading companies,' he said. In contrast to Novo, Noble Group, a major commodities trader, recently raised over $200 million in a successful private placement.

With the uncertainty over placements, a director at an investment bank said companies were turning to rights issues instead. 'Substantial shareholders will be taking it up so there's more certainty,' he said.

He pointed to Olam International, which raised $307 million through a preferential share offer. Because its management team and key shareholders had made undertakings to subscribe for all their entitlements, 'they had no problem with their rights issue', said the director.

Other companies are treading the same path - K-Reit is raising $552 million through a rights issue. Parkway Holdings is also raising $785.7 million through a seven- for-fifteen rights issue at $2.18 a share.

But if a company is keen to get listed or planning to raise funds, there is little point in trying to time the market, said Loo Chin Keong, an executive director at Westcomb Capital. 'It's very difficult. I would advise companies to just lodge their prospectus and wait for a window to come up.'

The spanner in the works remains fickle public sentiment and this is making any share issue tricky.

'This week's sentiment can be different from last week's. So we really need to have enough institutional investors who are more sophisticated and can take a longer-term view,' said an investment banker.

FY2008 Third Quarter Financial Results SGX will be announcing its FY2008 3Q financial results after market hours on 14 April 2008, Monday.