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IPO valuations should leave room on the upside, S&P says

Lorraine Tan, Asia vice-president of Standard & Poor's equity research, talks about the prospects for Asian equity markets in 2010 and explains how companies should price their offerings in order to ensure a healthy stock performance.
Lorraine Tan
Lorraine Tan

What is your outlook for Asia's equity markets this year?
Last year was such a good year for most of the markets that we are not expecting the same sort of returns this year, but as global demand is rising gradually we do think there is room for valuations to improve. Because of that we should see decent returns from most Asian markets in 2010, albeit with much greater volatility and probably with much more emphasis on stock picking. All in all, it should be a decent year, but a more difficult one than last year.

How will the correction at the beginning of the year affect the IPO market?
We had quite a decent correction and consolidation, leading to some uncertainty, and there was some hesitancy among underwriters to go ahead with IPOs that were lining up. Having said that, I do think there is appetite in the stock markets for IPOs. As long as the pricing is at an attractive level there shouldn't be any reason why the IPOs can't go ahead.

There are plans to allow foreign companies to list on the Shanghai Stock Exchange. What factors will be key for such listings to be successful?
There are quite a number of companies in the queue to list in China. Foreign companies have the desire to list in China because the valuations there are higher and there is liquidity. How long it will take for them to list and how successful their listings are going to be will be decided by how the proceeds are going to be used and whether there will be any restrictions on that, but also by how familiar Chinese people are with their names and businesses.

What issues should companies take into account when setting their IPO prices? 
Share prices are a reflection of market sentiment. If a company comes to the market with a valuation that is already too high, there is a tendency for correction. Companies should keep an eye on the initial demand, but bear in mind that even if that demand is very strong, it may not be sustainable over a period of time, especially if there are lots of IPOs coming to market. So it's better for the company to take a bit of premium off the table and ensure there is sustainability in the valuation. If you come to market with a very sizeable offer, you need to take into consideration that there is a tendency for some people to take profit once the shares are listed. 

What kind of discount should issuers offer to attract investors?
It's hard to say what the discount should be, but I don't think the valuation should be at a premium to what the industry group is actually trading at. To ensure longevity and sustainability in a rising share price trend, I think it's always good to come to market with the expectation that there is room for share prices to go up and to allow investors to see some upside over a period of time.

If the first-day trading is strong then naturally there will be a tendency for profit-taking. Sometimes that's beyond the company's control, but it's good for the issuer to be mindful of what is a sustainable outlook.

What types of companies are most likely to issue new shares this year?
Service-related and commodity companies will probably choose to come to the market to raise money for expansion or other reasons. On the energy side, I think some smaller players, if they can, may come to the equity market to get funding as well, given that equity markets have risen and the banks are still a bit reluctant to lend.

What's your outlook on the stock performance of Rusal and other Russian companies that might list in Hong Kong?
The timing of Rusal was probably a bit unfortunate. It came to market when commodity prices were soft and the company's debt also added limitations. Its weak debut was a big distraction, but if it is a decent company with good prospects, I think the share price will come back up. I myself haven't looked at Rusal yet, so it's hard to say specific things about the company.

Since the average investor is far away from Russia, it will take a bit of education to get people comfortable with other Russian names, given that Rusal's share price fell after the IPO. But if they are big companies there will be some recognition of the names. Also, companies with a strong balance sheet and a decent management history will stand a good chance to be well received by investors. It will also be beneficial if the debts of these companies are not an issue. Their valuations could be lower than on IPOs by Chinese companies due to the lesser familiarity. 

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