Thailand’s IPO market since 2014 coup shows consumer-related firms are some of the best performers

This week we continue with our story of listing of Sri Trang Gloves Thailand (STGT). As we hoped, the company made a spectacular debut on the Stock Exchange of Thailand (SET) with its share price closing at 67.25 bath which is 99.2% above its Initial Public Offering (IPO) price of 34 baht per share.

This is perhaps one of the most successful IPOs in the recent history of Thailand. The success of this IPO amidst the failure of two large IPOs, Central Retail (CWC), and Asset World (AWC) intrigued us to do some retrospection into what made STSG successful while others failed.

Although a very simple explanation is that investors perhaps believe the offering price of 34 baht per share was too cheap relative to its near-term profit outlook, and valuation of gloves producers listed on the exchange in the region. However, this will be too simple, and perhaps a naïve conclusion.

To understand what makes an IPO successful we looked at data of all the new public offerings since the arrival of present prime minister Prayuth Chan-o-cha, as a leader of the country.

Since May 2014, when PM Prayuth staged a coup d’état to write a new constitution for Thailand, 198 new companies have made initial public offerings, to collectively raise 665.2 billion baht. These offerings included

  • 71.02 billion baht by CRC
  • 55 billion baht by Jasmine Broadband Internet Infrastructure Fund (JASIF)
  • 44.7 billion baht by Thailand Future Fund
  • 41.74 billion baht by Asset World Corporation etc.
  • The smallest offering was 75 million baht by Sky ICT. Surprisingly, this has been also the most successful listing if measured by change in market price from the offering price.

The table below shows the smallest and largest IPOs, and it is evident that the size of the offering is not a key factor for success. From the table below it is apparent that 50% of the top 10 IPOs by size are trading below the offering price. The companies which are small by size are often ignored by the investor community due to lack of information and poor analyst coverage.

To refine our investigation, we eliminated the companies whose present market capitalization is less than 10 billion baht. This reduced our universe size to just 36 companies.

On the top of successful companies in this list is

  • Muang Thai Leasing (MTC)
  • COM7
  • TQM Corporation
  • Gulf Energy and so on.

Bottom on this list is

  • Bangkok Airways
  • Thonburi Healthcare
  • TPI Polene Power
  • Asset World
  • Star Petroleum.

Apart from the size of the listing, the table below shows that it is perhaps the quality of sector is a key factor for a good and successful IPO. A common theme amongst the successful IPOs is the ability to grow business by targeting the local consumers.

Among those that were listed recently which focused on consumer sector were

  • MTC
  • COM7
  • TQM
  • Carabao
  • Do Home
  • Osotspa

This begs to question if local consumption is a success recipe why did CRC, AWC, and Bangkok Airways perform poorly. While it is difficult to conclude why didn’t consumer focus help CRC and AWC in their successful listings as both companies rely on consumers – CRC sells consumer goods through department stores, and AWC operates commercial and retail space for rental income.

One possible answer could be that AWC and CRC are recent listings and benefit of equity funds raised from the public have not been started to appear in their profit and loss yet. (GRAPHIC is attached as separate file well)

Source: Bloomberg

This leads to another question of how long should the investors wait to assess if a new company will become a successful business in the medium term?  And whether initial days of listing on the exchange provide clues to medium to long term success of a company?

To answer this we looked at two factors.

First, the trading volume on the first day of listing as a percentage of a number of shares offered to the public.

Second, share price performance after the 1st week of the listing day.

With these two factors, we tried to assess whether the subscribers of public offering sell their shares quickly. Our assumption here is that if the public believes in long term outlook of a company, the share price will not fall below IPOs price even if a significant number of shares have traded on initial days of trading.

Our first test, i.e. proportion of volume traded on 1st day did not provide much clue except that if share price rose on 1st day unexpectedly, it led to heavy trading on, in a few cases more than the number of shares offered.

On the contrary, if trading on 1st day was heavy, in many cases leading to the change of hands for the entire IPO, the companies became successful listings in the medium term.  Poor trading volume on 1st day shows the listings did not perform well in the later period, and poor liquidity was primarily a result of the absence of new investors interested in buying newly listed companies.

The share price performance after a week of listing day also shows interesting observations. In 9 out of 36 cases, poor performers after 1st week of listing, eventually became winners, whereas only 5 companies with positive 1st week’s share price performance disappointed afterwards. The remaining 14 companies with positive performance in 1st week of listing, went on to improve the price-performance in the medium term.  This implies that IPOs

  1. With strong volume on the trading day often led to outperformance in future
  2. With positive share price performance after 1st week of listing often improved their returns in the medium term.

If past trends are somewhat true, a positive performance by STSG, after one week, could lead to further price gains in the medium term. A word of caution, however, price-performance is driven by the company’s ability to improve profits by expansion. Profit rise from a sudden increase in selling price caused by the demand-supply situation often do not last in the medium term.

Although, STSG may find itself in a similar situation in one year’s time, due to a permanent change in the demand-supply curve, however, its profit curve is unlikely to collapse as is often seen in commodity cycles.

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