While the Philippine Stock Exchange logged some hefty equity placements last year, all of the initial public offerings were in the small- to mid-cap space. There were a total of five IPOs during 2014 with an average size of just $63 million.
Foreign investors don’t usually play in this end of the market and most of the deals in 2014 were marketed and allocated solely to domestic buyers. Only SSI Group, a high-end retailer, had a portion of its shares distributed to offshore investors.
“Anything with a market cap of less than $200 million isn’t covered by the foreign brokers,” said Ed Francisco, head of BDO Capital, which acted as underwriter on deals for Double Dragon Properties, Century Pacific Food, and Phoenix Semiconductor. “Foreign investors themselves don’t really start to buy shares until they reach about $450 million in market cap, as there often isn’t enough liquidity and their trading activity can move the market.”
The predicament makes it hard for offshore fund managers to gain access to vibrant new companies, many of which are capitalising on the Philippines’s large upwardly mobile population.
It also means they miss out on some stellar returns. Shares in tuna canner Century Pacific Food jumped 16% on its debut in May last year, while retail mall developer Double Dragon Properties and mobile content provider Xurpas both traded up by 50% on their first days in April and December, respectively.
Since then, shares have continued to climb. Century Pacific Food is up 47% on its IPO price, while Xurpas is up 170% and Double Dragon is up a whopping 350%.
As their market valuations have grown, so some foreign investors have begun to buy their shares in the secondary market, Reggie Cariaso, head of equity capital markets at BPI Capital, said.
“There is a lot more foreign interest in these mid-cap companies from funds that have an Asean or sector-specific focus,” Cariaso said. “So far the big global funds aren’t buying but I am guessing this will change with time.”
Cariaso said investing in mid-caps may be the only way for foreign investors to get access to new consumer plays. “For a while, Jollibee and [Universal Robina Corporation] were proxies for Philippines consumption because there weren’t that many other pure consumer companies listed on the exchange,” he said. “This scarcity value is one of the main reasons Jollibee trades at such a significant premium.”
Improving liquidity
The lack of liquidity in mid-cap stocks is a major deterrent for large offshore funds. Many new listees choose to release just 10% to 20% of their stock, making for painfully thin volumes. Average daily trading in Xurpas shares, for example, is equivalent to just $770,000.
“We tell clients that if they really want to attract foreign investors, they need to increase their free float,” Francisco at BDO said. “Very often this is a two-step process where a company issues a small IPO and follows this with a larger placement once their share price has reached equilibrium and they have more expansion needs.”
Nix Nolledo, the president and founder of Xurpas, said his company is using its IPO proceeds to build a bigger business. It currently makes most of its revenue from selling mobile apps and games, but in February this year it bought a controlling stake in local human resources consultancy called Storm.
Storm operates a platform that allows company employees to exchange their employee benefits for products and services. The move signals a shift by Xurpas into selling physical goods as well as digital goods.
“The money we raised from the IPO will be spent doing more deals like Storm, where we acquire new content and products,” Nolledo said. “We are looking locally for these acquisitions but we also want to expand into markets like Indonesia and Thailand.”
Nolledo said the IPO has allowed Xurpas to travel overseas with confidence.
“Being a listed company gives us a certain legitimacy because we are complying with the PSE’s disclosure rules and governance standards,” he said. “It makes it easier to enter negotiations.”
Potential partners also derive comfort from knowing the company’s management is incentivised to perform. Nolledo and his two partners at Xurpas sold none of their own shares in the IPO and are contracted to a one-year lockup on the sale of any shares.
Nolledo is already flagging a return to the equity markets. “Some of the companies we are looking at acquiring are quite large, so there’s every chance we will issue a follow-on at some stage.”
Pricing is tricky
It could be argued that the original owners of Xurpas and Double Dragon have paid handsomely for their membership to the PSE. When share prices jump by 50% on their debut it usually raises questions about whether the underwriters mispriced the deal and left too much on the table.
“There are only a few stocks in the Philippines to act as comparables,” Cariaso said, indicating the challenges faced when setting a price range. “Finding a Filipino valuation benchmark isn’t easy.”
Eduardo Olbes who heads SB Capital in Manila said issuers have to make a trade off; “I am sure there are some issuers who see their share price skyrocket and wish they had only released 10% of their stock instead of 20%, but it is a compromise. You have to give investors a positive experience and ensure there is enough liquidity in the shares to sustain investor interest.”
Nolledo tries not to focus too much on the stock price and is aware that Xurpas’s IPO had to be priced favourably in order to attract investors. “We started in 2001 with capital of $1,500 and now we have a market cap of around $400 million, so we can’t complain,” he said. “There aren’t that many mobile tech plays in the Philippines and our business model is novel, even by regional standards.”
It’s also true that not all IPOs have shot up on their first day of trading. Phoenix Semiconductor, a local chip-maker and the first South Korean company to list on the PSE, has been trading underwater since listing at Ps3.67 a piece in December last year. At end-March the stock was at Ps2.96 apiece having recovered from a low of Ps2.22. Sources say this is partly because the semiconductor business doesn’t offer the same super-charged growth potential as other sectors, and partly because it is in an industry that local investors don’t understand.
Domestic investors would rather take a punt on consumer stories and are often influenced by how well they know a particular brand. “Even if the issuer is making only a small profit, local investors will buy if they have tasted the company’s hamburgers or worn its shoes,” Francisco at BDO said.
Another factor that determines the success of an IPO is the pedigree of the company’s backers. In the Philippines, family empires dominate and certain entrepreneurs enjoy celebrity status.
Double Dragon, for example, is a joint venture between Edgar Sia, owner of Injap Investments, which runs the Mang Inasal chain of fast-food restaurants, and his partner Tony Tan Caktiong, founder and chairman of the Jollibee Group. Each owns 37% of Double Dragon Properties and both are business superstars.
At the time of listing Double Dragon had no real assets or established revenue streams and had recorded net income of just Ps122 million ($2.7 million) in 2013 – a paltry figure when you consider it has a current market cap of about $440 million.
The company has an aggressive plan to build 100 community malls across the country under a subsidiary called CityMall Commercial Centres, which is 34% held by SM Investments, the shopping mall behemoth headed by Henry Sy.
CityMall has secured 20 sites to build on and the first mall is due to open in Roxas City at the beginning of April.
“Another four malls are substantially completed and will be opening soon after,” Edgar Sia said in an interview with FinanceAsia. “Between SM and Jollibee, each of our CityMalls is already substantially tenanted from the outset. We have the means to achieve our vision because of the partnerships we have formed and the people behind it that can drive results.”
Despite this pedigree, Sia was somewhat surprised by the level of interest in the company’s IPO. “I was optimistic before the listing but when the deal was 14x oversubscribed it was a bit overwhelming,” he said. “I am even more bullish now having seen how the market has received our IPO.” Double Dragon’s shares priced at Ps2 in April last year and are now trading at Ps9 per share.
Buying future growth
Investors are clearly hopeful that these new companies will be able to deliver on their promises to generate high double-digit growth.
“When we first looked at the idea of listing on the stock exchange we were doing a top line of about $3.2 million in revenue with a net profit margin of over 50%,” Nolledo at Xurpas said. “At our last results announcement we had revenues of $8.8 million, meaning we have grown revenues by about 60% year-on-year for the past three years.”
Asked if he thinks this growth pattern will continue, he said: “I think we have the opportunity to sustain it because we are offering higher-value products. Before the Storm joint venture our average sale per digital customer was about 40 US cents, whereas now it is around $300.”
Double Dragon has its own ambitious targets. The company is forecasting net income of Ps1 billion by 2016 and Ps4.8 billion by 2020.
Sia said he will actively court more foreign investors as the company grows. “At the end of February foreign investors made up two-thirds of our free-float, but this still only represents 11% of the entire shareholding and this is relatively low given the 40% ownership limit in the Philippines.”
He said Double Dragon recently appointed a chief investment officer “to implement numerous activities to increase the level of investor awareness of our company.”
Sia also encouraged more mid-cap companies in the Philippines to list. “We need more participation from issuers,” he said. “There are so many promising companies that continue to remain private and would largely benefit from a capital raise in the market.”
Looking ahead at the IPO pipeline, the next mid-cap deals to hit the market will be a Ps7.7 billion offering for real estate company Profriends Group and the likely listing of Asiawide Refreshments, which is the licence holder of RC Cola in the Philippines. Both deals have been flagged in the media but neither had received regulatory approval at the time of writing.
Olbes said SB Capital is working on a few unannounced deals, though it is too early to tell when they will come to market. “While there are a lot of good private companies in the Philippines with focused business plans and compelling value propositions, it isn’t always easy to convince them that they need to go public,” he said. “They also don’t like the idea of disclosing ideas to their competitors.”
Francisco at BDO said his ECM team is also working on three new mid-cap listings, two in the consumer sector and one a mini-conglomerate.
He is eager for companies to list by the end of this year, before the market begins to slow ahead of the national presidential election due in May 2016. “The window of opportunity is wide open now but it may be a different story by the fourth quarter,” Francisco said.
To participate in our poll on investor attitudes towards Philippines' equity market click here.
