Please excuse our cynicism, but we've grown a little tired of the way issue managers push up the issue prices of companies they are bringing to market. The way they do this is entirely legal: allocate most of the issue to fund managers and others, the so-called placees, and reserve just a tiny number of stocks for the public. Invariably, the demand for the public tranche far outweighs supply, which assures the company and issue managers that there's plenty of demand left over for listing day. As a result, the share price goes up and there's good reason to sip champagne by the close of trade.

But we think this common practice distorts the market by creating the false impression there is huge demand for a stock, when actually there is just huge demand for the tiny number of shares reserved for the investing public. The rising tide lifts the price of all the shares of that company.

Some examples:

Dynamic Colours

Issue: 64.5 mln shares
Public: 3.3 mln shares

That's 5.1% of the total issue. Given that 91 mln shares were bid for by the public, there was clearly huge surplus demand.

The stock hasn't held onto its 21.5 cent issue price, instead falling to around 15 cents.

The issue manager was UOB Asia.


Yongmao Holdings

Issue: 111.55 mln shares
Public: 3.8 mln shares

That's just 3.4% of the total issue.

The issue manager was CIMB-GK Securities.


Centraland Ltd.

Issue: 245 mln shares
Public: 5 mln shares

That's a ratio of just 2%.

The stock is a good ten cents above its issue price of 35 cents.


First Resources

Issue: 225 mln shares
Public: 3 mln shares

That's just 1.3% of the total issue.

There were applications (=demand) for 244 mln shares from the public, but only 3 mln were on offer to them.

The issue manager was Citigroup Global Markets Singapore Pte Ltd.

Surprise, surprise, the stock debuted above S$1.20 and has been riding on the wave of demand eversince.


So, henceforth in our IPO Briefings, we're going to allocate demerit points to those companies where the public tranche is so amazingly tiny it has a capillary effect on the listing - where the stockprice is magically pushed up by huge demand chasing a tiny fraction of the overall issue, thereby raising "all boats".

Our rating scale will be as follows:

<2% = 5 demerit points
2%-3% = 4 demerit points
3%-4% = 3 demerit points
4%-5% = 2 demerit points
5%-6% = 1 demerit point

According to this system:

Dynamic Colours would receive 1 demerit point
Yongmao = 3 demerit points
Centraland = 4 demerit points, and
First Resources = a full 5 demerit points

The only problem, of course, is that neither companies, nor issue managers, and a fair few "early birds" who secure shares during the IPO and watch the price rise, aren't really going to care.

But that's fine.

This index is for the rest of us, who usually miss out.


Mark Laudi, who is unlikely to subscribe to shares under these circumstances.

Labels: Centraland, Dynamic Colours, First Resources, Initial Public Offers, IPO, Yongmao