Is Malaysia’s IPO Boom Overhyped?

– By Dhara Ranasinghe
CNBC
27 Aug 2012

Malaysia is marking itself out as the IPO destination to beat this year with a string of billion-dollar-plus deals. Impressive, for sure, but don’t take the booming IPO market as a sign that Malaysia is poised to become a regional financial hub, experts say.

The reasons for this, they add, are simple: once the slew of big Malaysian companies seeking new listings runs out there is likely to be a dearth of initial public offerings (IPOs) in Malaysia. Because Malaysia is still developing open and liquid capital markets, foreign firms looking to list in the region are likely to pick Singapore and Hong Kong over Kuala Lumpur.

All the big companies listed in Malaysia this year are local firms. To really develop itself as a centre for IPOs, Malaysia needs to attract new listings from big foreign firms in the way Singapore and Hong Kong have done in the past, analysts add.

“Part of the boom in the Malaysian IPO market can be explained by the well-developed pension system in Malaysia, which has allowed for growth in domestic demand for equities,” said Herald Van Der Linde, Head of Equity Strategy, Asia-Pacific at HSBC in Hong Kong.

“However, when it comes to comparing Malaysia with Singapore and Hong Kong, these markets are much larger, more diversified and much better developed. As such, they can compete for global IPOs. This is unlikely to happen in Malaysia yet,” Van Der Linde said.

Pay-TV company, Astro Malaysia last week said it would launch an IPO, worth about $1.75 billion. The new listing, expected by the end of September, would be Malaysia’s third largest this year and follows a $3.3 billion listing in June by palm oil firm Felda Global Ventures and a $2.1 billion IPO by state-backed IHH Healthcare last month.

The high-profile listings – Felda’s IPO is the biggest globally so far this year after the listing of Facebook – have certainly made investors sit up and pay attention to the developments in the Southeast Asian economy.

The hot IPO market in Malaysia also compares with a generally lackluster market globally as the fragile state of the global economy prompts many companies to shelve their IPO plans. Jeweler Graff Diamonds postponed a $1 billion listing in Hong Kong in May, while motor racing company Formula One earlier this year postponed a listing, worth up to $3 billion, in Singapore.

Despite these setbacks, the long-term outlook for IPOs in Asia still favor Hong Kong and Singapore over Malaysia, analysts said.

“To have a large IPO market, you need an international investor community and that isn’t there in Malaysia,” said Sanjay Mathur, Director of Research Strategy Asia ex-Japan at Royal Bank of Scotland in Singapore.

“You need to have an unfettered flow of capital, a diaspora of fund managers and a strong linkage with other financial centers,” Mathur added, referring to the things Malaysia would need to turn its booming local market into a regional one.

According to research firm Dealogic, Malaysia has moved to third place after the U.S. and China in rankings of new listings in value terms globally. That’s up from twelfth place last year.

Analysts point out that the boom in the Malaysian IPO market must be seen in the context of what is happening in Malaysia locally and not as a sign of what is changing in terms of Malaysia’s role regionally.

The Malaysian government, keen to open up the equity market, has encouraged firms to list and the growth of large domestic pension funds has meant there has been strong demand locally for the new listings.

HSBC says that the core of Malaysia’s pension system is the Employees Provident Fund, which covers around half of the country’s work force. It adds that the equity portion of the fund is estimated to have grown to almost 30 percent of total assets in 2010 from below 5 percent in 1991 and 20 percent in 2000.

Against this backdrop, the momentum in Malaysia’s IPO market was expected to continue for a little while longer. Malaysian Power firm Malakoff and Karex, the world’s biggest condom maker, are both said to be considering listings in the months ahead.

“The IPOs will continue for a while. Remember there is a herd mentality, so if one company does well that encourages others,” Mathur at RBS said.

From the perspective of a foreign investor, what Malaysia lacked was a regional exposure, analysts said. Hong Kong has attracted new listings from global companies keen to tap into the China growth story – examples of this are the listings of commodities trader Glencore and luxury goods firm Prada in 2011.

“We are looking at very different markets here,” said Chris Wong, Senior Investment Manager at Aberdeen Asset Management in Singapore. “Hong Kong is the market centre for the greater China story and Singapore is a magnet for the regional story.”

While Malaysia’s equity market has attracted a lot of attention because of the large IPOs, the benchmark stock index is up about 7.8 percent year-to-date, this is a similar performance to Hong Kong’s Hang Seng index and perhaps not as impressive as the 15 percent rally in Singapore’s stock index.

“As for the outlook on IPOs in 2013, I would think that this is very dependent upon global growth and how Europe will resolve its crisis,” said HSBC’s Van Der Linde. “If it was up to Asia, it should be a good IPO market – demand for equities is rising and companies need to invest more and can tap equity markets for this.”