Initial public offerings in Japan have been in the doldrums for a while. A sales tax increase back in April put the lid on optimism about the economy, and as a result not just the number of IPOs, but the prices they brought, have been disappointing this year.
But the trouble didn’t really start in April. Japan’s IPO market “really crashed” and “was almost nonexistent for about a year or two after Lehman crashed.” Since then, however, it’s “started to creep up,” with 20 IPOs coming in 2010, according to Kenichi Amaki, comanager of the Matthews Asia Fund.
In 2013 that rose to 54, and so far in 2014 there have been 41. “In terms of the number of companies, the IPO market has gotten much healthier, but it’s still much smaller” than it was in 2004 and 2005, with the latter seeing 100 companies making their debuts, according to Amaki.
While the numbers may be coming back slowly, neither offerings nor valuations have made it quite back to where they were either. Ernst & Young’s report on global IPO trends for the second quarter of 2014 indicated that, despite the fact that “[t]he second quarter of the year has historically seen a lull in IPOs in Japan,” this year “18 IPOs rais[ed] combined proceeds of U.S.$1.6 billion. This included three of the region’s top 10 largest deals: Seibu Holdings Inc., Invesco Office J-REIT Inc. and NIPPON REIT Investment Corp.”
The third quarter thus far has seen smaller offerings than in the first half, according to EY’s Q3 report, but nonetheless the trend appears positive. Shinichiro Suzuki, Japan IPO leader, said in the report, “Under fundamentally unchanged market conditions, Japan’s IPO market remains strong with 10 listings in Q3 ’14 raising a total of U.S.$238 million altogether. Internet-related technology, media and entertainment (dining, hospitality and advertising) companies dominated the market, making up 80% of new listings in Q3 ’14.”
“Following a variety of large listings in H1 ’14, including one of the world’s biggest listings of the year to date, Japan Display Inc., Q3 ’14 has generally seen smaller companies coming to market, including an increasing number listing on the Tokyo Stock Exchange’s junior market, MOTHERS (eight IPOs which raised U.S.$198 million altogether). Strong IPO performance is likely to continue, with a number of large IPOs already scheduled for Q4 ’14,” Suzuki said.
However, investors may be looking for a change from small to large, along with better valuations than for a number of companies that recently went public—such as Japan Display, which has fallen to less than half of its March listing price and fell 18% on its announcement on October 16 that it was closing some of its Japan factories that make smartphone high-definition panels.
Considering that last year 52 companies actually opened above the prices set for their IPOs, this year things haven’t been so grand; 30% of the 41 companies that went public so far this year actually either dropped below what were supposed to be opening prices or stay at opening level rather than racking up gains. In particular, large IPOs have been hurting. Even restaurant operator Skylark Co.’s lackluster debut saw share prices drop 4.8% under its offer price on the day of its IPO.
However, offerings may not remain small for long. And investors may have finally gotten the change they sought in the IPO of Recruit Holdings, which rose 7% after opening, at one point reaching a gain of 11%. While Recruit originally sought $1.8 billion and priced its shares accordingly in its filing at the end of September, it actually raised $1.9 billion and sold the second largest number of shares this year—by itself outpacing the whole of the take by IPOs in Q2.
Considering that a total of 70 companies are expected to list by the end of the year, Recruit’s showing injects a note of optimism into the market—something that investors no doubt hope will carry through into the new year, when both Japan Post Holdings and theme park operator USJ plan to go public amid analyst estimates of a total of 80–90 companies looking for investor cash. Japan Post Holdings is expected to be the largest IPO since 1987, when Nippon Telegraph and Telephone went public.
Some analysts are also concerned, however, that amid a weak global economy, supply will outpace demand with so many companies planning to hold IPOs. However, EY’s Suzuki said in the Q3 report, “Favorable legislation also may have a positive effect as the Japanese government is relaxing the exchange listing requirements with the aim of growing the economy and making it easier for companies to go public.” In a friendly environment for IPOs, it remains to be seen how heavily the global economy may weigh on such moves.
Still, caution is the byword of the day. According to Matthews’ Amaki, valuation is key. “I’d be careful about valuations,” he warned, “especially given that globally valuations in, say, Internet sector names have been very lofty in the last couple of years in general. A lot of these companies come out with good stories, very high growth, but I would be wary about companies with stretched valuation. They need to execute their plan perfectly; there’s not a lot of margin for error. Be wary of high-valuation companies.”
Amaki added, “The other thing is that it’s really important to do your homework. Read the prospectus, obviously. Know the company. What we do is talk to competitors, suppliers, customers to make sure they are the company they claim to be. There’s not a lot of fraud or inflated numbers, but it has happened before … so be careful.”