the performance of ipo of sarawak listed companies

7/27/2019 The Performance of IPO of Sarawak Listed Companies

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THE PERFORMANCE OF

INITIAL PUBLIC OFFERINGS

(IPOs) OF SARAWAK LISTED

COMPANIES

By

Nasriman Bin Abdul Rahman

A Research Paper Submitted in Partial Fulfillment of the Requirement

For the Degree of Corporate Master in Business Administration

Faculty of Economics and Business

Universiti Malaysia Sarawak

{2002}


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APPROVAL PAGEI certify that I have supervised and read this study and that in myopinion it conforms to acceptable standards of scholarly presentationand is fully adequate, in scope and quality, as a research paper for thedegree of Corporate Master in Business Administration.

Mohamad Bin JaisSupervisor

This research paper was submitted to the Faculty of Economics andBusiness, UNIMAS and is accepted as partial fulfillment of therequirements for the degree of Corporate Master in BusinessAdministration.

F o f . Dr. Shazali Abu MansorDean, FEBU N I W


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DECLGRATIONAND COPYRIGHT

Name :Nasriman Bin Abdul RahmanMatric Number : 99-02-0341

I herebydeclare that this research is the result ofmy owninvestigations, exceptwhere otherwise stated.Other sources areacknowledged by footnotes giving explicit references and abibliography is appended,

SignatureDate

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TABLEO F CONTENTSApproval Page.. . . . . . . . . . . . . . .Declaration and Copyright Page.. . . . . . . .Table of Contents.. . . . . . . . . . . . . . , ,Acknowledgements.. . , . . . . . . . . .List of Tables... . . . , . , . . . . . .List of Figurea,................................. ,.,.,..+....... ..........Abstract.... . . . . . . .'.. . . . . .Abstrak ......... .. .. .. ...........,....,... ........................ .....

CHAPTER11. INTRODUCTION

1.1 Definition of IPOs1.2 Background Of The Problem1 .3 ObjectiveOfTheStudy

CHAPTER 22. LITERATURE REVIEW

CHAPTER 33. RESEARCH METHODOLOGY

3.1 Data Collection and Recording3.2 Data Processing and Analysis3.3 Hypothesis Formulation

CHAPTER 44. FINDING (ANALYSISAND EVALUATIONS)4.1 Findings4.2 Discussion - Comparison withfindingsof other researchers

iiiiiivviviiviiiixX


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CHAPTER55. CONCLUSIONS AND RECOMMENDATIONS

5.1 Brief Summary on the findings5.2 GeneralDiscussion on the finding5.3 Limitation of the study5.4 Scope for further research

BIBLIOGRAPHY


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The endeavor of creating a research project involves the creativecollaboration of many individuals. Although the extent of my debtscannot be fully acknowledgedhere, it is nevertheless a joy to record mygratitude to the many people who have helped, some without realizingjust how helpful they were.I want t o extend a special thanks to Encik Mokamad Jais, mySupervisor, who worked well beyond the call of duty discussing thisproject with me from its outset, helping me develop many of the basicfeatures and reading and commenting in detail on all the relatedchapters.Special thanks also goes to Madam Chang Siaw Ling , ResearchOfficer of Sarawak Securities and Mr.Mohammad Jamhari Jamaludina staff in Public Information Center, KLSE,Kuching, who provided mewith a lot of information on the background of companies in Sarawak.Last but not least, I want to thank those of my lecturers, colleagues atCorporate Master in Business Administration program, Faculty ofEconomics and Business, and my wife for their direct and indirectsupport and contribution in making this research project a reality. Ipray to Allah for a success in any of their future endeavors. Amin.NASRIMAN ABDUL RAHMANFaculty of Economics and BusinessUniveraityMalaysia SarawakApril 2002


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Table 1 Sarawak listed companies in KLSETable 2 The difference between the IssuelOffer price and theclosing price of share on the first day of listingTable 3 The difference between closing index on the first day oflisting and the closing index on the day before the first

day of listingTable 4 Average market return IPOa of SarawakListed

CompaniesTable 5 Summary Statistics for Sarawakbased IPOs


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LIST OF FIGURFS

Figure 1 : t Distribution of Market Adjusted Return for Sarawak IPOs


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ABSTRACTThis paper investigates the IPO performance of Sarawakbased listed firms. Using a sample of 22 firms, thefindings suggest that the IPO performance shows thesame pattern as previous studies. These IPOs arerelatively underpriced, possibly due to investors interestas evidence by the average first day premium fetched ofapproximately83.9%.


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Kujian ini bertujuan mengkaji prestasi IPO bagi syarikatyang ditubuhkan di Sarawak dun berdaftar di bawahBSKL. Kajian ini menggunakan sarnpel22 buah syarikatyang mana hasil kcljian mnunjukart prestasi IPO adulahsama dengan penemuan oleh kajian lain sebelum ini. IPOini kebanyakannya di bawah harga (underprice)kemungkinannya disebabkan oleh minat pelabur, yangmana perkara ini dibuktikan oleh purata premium hmripertama iaitu pada kadar 83.9%.


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THE PERFOFMANCE OF INITIALPUBLIC OFFERINGS(IPOs) OF SARAWAK LISTED COMPANIES,CHAPTER 1

INTRODUCTION

Definition of IPOsOne of the most attractive areas of investment is Initial PublicOfferings (IPOs). IBuying shares the first time they are offeredto the public has considerable natural appeal, especially in abull market, tempting investors with potentially phenomenalshort-term returns as well as exposure to exciting newcompanies and industries. And since the early 1980s,privatizations of state-owned corporations around the worldhave become an additional source of new issues, providinginvestors with the opportunity to get low-priced stakes in big,stable businesses, often the dominant incumbents in coresectors of the global economy.The objective of any new issue is to achieve the highest value forthe issuer, while ensuring a buoyant start to secondary trading.Shares are generally offered a t a fixed price, set by the sponsorsof the issue, and based on multiples, forecasts of likely futureprofits, or a combination of multiples and forecasts.Most companies start out by raising equity capital from a smallnumber of investors, with no liquid market existing if theseinvestors wish to sell their stock. 21f a company prospers andneeds additional equity capital, a t some point the firm generallyfinds it desirable to "go publicn by selling stock to a largenumber of diversified investors. Once the stock is publiclytraded, this enhanced liquidity allows the company to raisecapital on more favorable terms than if it had to compensateinvestors for the lack of liquidity associated with a privately-held company, Existing shareholders can sell their shares in' vo Welch, (1999)Jay R. Ritter, (1998)


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open-market transactions. With these benefits, however, comecosts, In particular, there are certain ongoing costs associatedwith the need to supply information on a regular basis toinvestors and regulators for publicly-traded firms. Furthermore,there are substantial one-time costs associated with initialpublic offerings that can be categorized as direct and indirectcosts. The direct costs include the legal, auditing, andunderwriting fees. The indirect costs are the management timeand effort devoted to conducting the offering, and the dilutionassociated with selling shares at an offering price that is, onaverage, below the price prevailing in the market shortly afterthe IPO. These direct and indirect costs affect the cost of capitalfor firms going public.Firms going public, especially young growth firms, face amarket that is subject to sharp swings in valuations. The act;that the issuing firm is subject t o the whims of the marketmakes the IPO process w high-stress period for entrepreneurs.Because initial offerings involve the sale of securities in closely-held firms in which some of the existing shareholders maypossess non-public information, some of the classic problemscaused by asymmetric information may be present. In additionto the adverse selection problems that can arise when firmshave a choice of when and if to go public, a further problem isthat the underlying value of the firm is affected by the actionsthat the managers can undertake.

BackgroundOfThe ProblemFixed price IPOs are frequently underpriced, providingopportunities for 'stags', investors who buy in anticipation of animmediate price rise. Big instant profits may often be made ifshares can be purchased at the offer price and sold soon afterdealing begins - returns in the order of 5-25% in one day, butwith high variance across offerings. Understandably, such offersare often oversubscribed, leaving the sponsors to decide on theappropriate equity allocation: by ballot, by scaling down largeapplications, or by giving preferential treatment to certain


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investors, typically their favored clients though in some casesthe private investor, The method varies by country: in somecountries, like the United Stabs, it is discretionary; in others, i tis mandated equal for equal submissions.Like privatizations, private sector new issues are often viewedas a route to quick and easy profits, but for every ten or sosuccesses, there is usually one that goes wrong o r seriously failsto perform.So private investors must always show great caution, beingcareful to study the prospectus, balance sheet and profit andloss account of any potential investment. Investing in IPOs isintrinsically risky and not for the faint of heart. Companies thathave recently reported very good results or which are infashionable industries with their best results at anindeterminate point in the future ahould be scrutinizedespecially diligently.Investors should also note that conflicts of interest and potentialabuses are rife in the distribution of new issues. IPOs areinevitably timed to benefit the seller not the buyer, aiming toextract the maximum value from the market. Indeed, severalstudies indicate that IPOs are usually not good investments,under performing the market over the longer term. Thismay bea reflection of companies 'preparing'the numbers or a couple ofyears, and underwriters over-hyping and sales peopleoverselling the shares, Such activities may be particularlyprevalent in the late stages of a bull market,

The main objective of this study is t o find out the performanceof IPOs of Sarawak based listed companies in KLSE.Hypothesis has been constructed to test the performance ofSarawak's IPOs;whether it is underprice or overprice.


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Although the scope of this study is quiet small compared to theother study on IPOs, this study is regarded as special as itspecifically looking at the Sarawak based listed companies.


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CHAPTER 2LITERATURE REMEW

This chapter will discuss relevant literatures on IPO. OthmanYong, Puan Yatim, ROSZam Zam Sapian (1992) study the short-term and long-term performances of all new issues listed on theKuala Lumpur Stock Exchange (USE) from 1991 o 1995. Ingeneral, this study documents an average initial returns and anaverage over-subscription ratio which are substantially lowerthan the ones reported by the previous studies using Malaysiandata. They also find that correlation coefficients between initialreturns and over subscription ratios are significant for both rawinitial return and adjusted initial return. The significantcorrelation is mainly due to the correlation coefficient of type 2,offer for sale, which represents 173 of the total 227 new issuesfor the entire period of the study. The positive correlationcoefficient for the overall result indicates that the higher theover-subscription ratio, the higher is the initial return. Also, ingeneral, both initial returns and adjusted initial returns aregreater than their respective longer-term returns. They alsofind that regardless of the types of new issue one gets one willend up with more or less the same initial return. Finally, theyfind that none of the correlation coefficients indicates that themean initial return has a significant relationship with any ofthe average annual return over longer-term periods. The onlyexception is the negatively significant correlation betweeninitial returns and average annual returns over three yearsperiod, for both raw and adjusted returns.Wolfgang Aussenegg (1997) investigates the price behaviour ofIPOs on the Vienna Stock Exchange during the period from1984 to 1996. In accordance with the findings for other markets,the average initial returns of Austrian IPOs are significantlypositive. For a total sample of 67 IPOs, an average first dayreturn of 6.6 per cent ia documented, which is lower than formost other IPO markets. More than 30 per cent of all IPOs areoverpriced with negative initial returns. The cross-section ofinitial abnormal returns can best be explained by the ex-anteuncertainty about the value of the issue and the existence of


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"hot-issue" and "cold-issue" periods. In the long-run (first fiveyears) Austrian IPOs underperform benchmark firms by asignificant 73.9 per cent (average buy-and-hold abnormalreturn) with a wealth relative of 0.64. An investor would havehad to invest 56 per cent more money in IPOs han in non-IPOfirms of similar size to have the same wealth five years after thefirst aftermarket trading day. This phenomenon can best beexplained by cross-sectional differences in the ownershipstructure: While the underperformance of family-owned IPOs isvery poor, no positive or negative abnormal performance can bedetected for privatized enterprises or other non family-ownedfirmsgoing public.Norita Mohd. Nasir and Rosliza Mat Zin. (1997) look into theunderpricing of IPOs in Malaysia in 1990 to 1996, and find theinitial public offerings (IPOs) re typically underpriced. Thisetudy use 112 companies for the period 1990-95 nd done withthe objective of determining the level of underpricing and thepossible explanations of the underpricing phenomena. Theresults confirm that underpricing occurs on the Malaysian stockmarket with the industrial sector (1990-93) and constructionsector (1994-95) s the highest contributor, The insignificantprice fluctuation after the first day of trading conforms to theeficient market hypothesis, Analysis on the proxies reveals thatnone of the observable measure for ex-ante uncertainty issignificantly related to the level of underpricing in theMalaysian IPO market.Halil Kiymaz (1999) analyzes the initial and after-marketreturns for the Turkish initial public offerings (IPOs)o providean emerging market case of international evidence onperformances of IPOs, The sample consists of 163 firms listedand traded on the Istanbul Stock Exchange during the period of1990-1996. The results ,show that the Turkish IPOs areunderpriced on initial trading day on average of 13.1%.Theinitial underpricing is 11.7% for industrial firms, 15% forfinancial firms and 17.6% for others. In terms of sub-sectors thehighest return is obtained in Tourism:Transportation group,while the lowest return is observed in Machinery:Equipmentgroup, With the exception of Banking group, all of the sub-


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sectors experienced statistically significant initial underpricing.The investigation of factors influencing the initial performanceshow that size of issuer, rising stock market between the date ofpublic offering and first trading day, institutional ownership,and self-issued offerings are significant determinants ofunderpricing.Dongwei Su and Belton M. Fleisher (1999) dentify some of thecauses of cross-sectional differences in underpricing of Chineseinitial public offerings (IPOs)using data compiled for 308 firm-commitment A-share IPOs (available only to Chinese investors)and 57 B-share IPOs (available only to foreign investors). Theyfirst formulate and estimate a benchmark empirical model thatrelates IPO initial returns to variables widely used in studies ofIPO underpricing. Then they test three hypotheses that mayhelp explain the high A- share IPO underpricing in China. Theyfind that IPO underpricing is the largest at the earliest stage ofdevelopment of stock markets in China. The extraordinarilylarge IPO underpricing is at least partially due to a relativelysmall aggregate supply of shares. They also find that A-shareIPO underpricing is better explained by a signaling model thatrelates IPO underpricing to subsequent seasoned equityofferings (SEOs) than by one linking government or employeeownership to equilibrium IPO underpricing. Issuers with largerIPO underpricing are more likely to raise larger amounts ofcapital through SEOs more quickly. The results support thenotion that the primary purpose for Chinese firms going publicis to raise capital, not to transfer ownership from state toprivate citizens. Moreover, they do not find any evidence thatlottery mechanisms have contributed to the high IPOunderpricing in China.Finally, they find some evidence that thedifference in IPO underpricing among A and B shares can beexplained by the differences in domestic and foreign investors'investment opportunities and investment sentiments.Morni Hayati Jaafar Sidik, Annuar Md Nasir, Loo Sin Chunand Mohd Ali Abdul Hamid (2000) examine the performance ofIPOs in Malaysia during the financial crisis between July 1997'to September 1999, Using the same methodology as previousstudies on IPOs, oth the short run and long run performance of


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81 new issues on the KLSE were examined.The overall resultsprovide evidence consistent with previous studies that mostIPOswere generally underpriced on their first day of trading.An average first day return of 37.12% was documented, a valuesignificantly lower than the earlier studies on the KXISE.Comparing Main Board (MB) and Second Board (SB) IPOsperformances, the results indicate that firms listed on the SBprovided higher returns than firms listed on MB, When a shortrun performance (from week one to month six) was analysed,two important findings were obtained. Firstly, when investorswere fortunate to be allocated with new issues at the offeringprice, they were able to gain abnormal returns but the ratedeclined if the shares were kept for a longer period. Secondly, ifthey purchased the new issues at the aftermarket price,investors obtained negative returns. If the shares werepurchased at the aftermarket price and hold for w long period,they performed worse than the market. This study also foundthat there is a positive and significant relationship betweeninitial returns and over subscription rates in the short term butnot in t h e longer period. Comparing the performances of IPOsissued before and after the introduction of capital control, thestudy found that IPOs issued after the measures show animprovement in performance.Douglas A. Hensler, Martin J. Herrera, Larry J. Lockwood(2000) document differences in the performance of bank andnonbank initial public offerings (IPOs) in Mexico during 1987-1993, They measure performance relative to the Mexican stockmarket index. Banks experience much larger initialunderpricing than nonbanks due in part to a hot issue marketin 1987. In the aftermarket, excess returns for banks,industrials, and services are not significant. Excess aftermarketreturns for brokerage houses are significantly negative. Theyalso find that underpricing of the privatized IPOs diminishesover time, supporting the argument that the Mexicangovernment offered discounts on IPOs issued early in theprivatization program.Ashley Burrowes (2000) investigates the performance of IPOs inUK and reveals the expected high level of underpricing usually


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associated with the risky nature of small, young and growingcompanies, is not supported by the evidence in his study. Rawmarket adjusted figures reveal that IPO listed on AlternativeInvestment Market (AIM) at the London Stock Exchangeappear to be only conservatively mispriced when contrasted t omain board IPO listings in the US, UK and other countries. Duediligence listing requirements could be offsetting the otherwiserisky nature of these small, young and growing companies.Finally AIM is discussed in terms of meeting its own targetsand its ability to attract international listings,Maher Kooli and Jean-Marc Suret (2001) investigate Canadianinitial public offerings (IPOs) to provide one case on theinternational evidence on the long-run performance of IPOs.Specifically, they examine whether the choice of a performancemeasurement methodology directly determines both the sizeand power of statistical test, as documented in previous studies(Mitchell and Stafford, 2000; Loughran and Ritter, 2000; andBrav, Geczy and Gompers, 2000). Their sample consists of 4451POs between January 1991 and December 1998. Usingcumulative abnormal returns as an abnormal performancemeasure, they find that the Canadian IPOs underperformsignificantly the sample of seasoned firms with the samemarket capitalization. More specifically, the 3 year and the 5year underperformances estimated on value weighted (VW)basis are statistically significant.Generally, all the studies done in the Malaysian market andother emerging markets document the underpricing do occur. Inthis study, the IPO of Sarawak based listed firms will beexamined to see whether i t show a similar pattern or not.


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CHAPTER 8RESEARCH nTHODOLOGY3.1 Data Collection and Recording

T h e population in this study comprises of 29 Swrawakcompanies listed in the Main Board (MB) nd Second Board(SB) of Kuala Lumpur Stuck Exchange (KLSE).Thosecompanies are listed in the table below.

Out of 29 companies, only a sampIe of 22 companies has theirissue price available for this research purposes, It consists of 9

10


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companies from KLSE main board and the rest 13 companiesare from KLSE second board. 7 other companies where the offerprice could not be obtained are Granite Industries Berhad(GRANITE), Great Wall Plastic Industries Berhad (GWPI),Hock Hua Bank Berhad (HH BANK), Jaya Tiasa Holdings Bhd,Sarawak Enterprise Corp. Berhad, Sarawak Oil Palms Berhad(SOP), and Wijaya Baru Global Berhad.The issue price and the price at the end of first day of listingwere extracted from KLSE website (httt,:llwww.klse.com.my),Company's Annual Report and the MetaStock ProfessionalVersion 7.0. The market proxy used is the KLSE CompositeIndex (KLCI) that is extracted from the MetaStock ProfessionalVersion 7.0.

3.2 Data Processing and AnalysisThe first day return is defined as the percentage change in pricefrom the offering date to the close at the first day of trading lessthe equivalent change in the market index and is calculated asfollows:

Where ari = abnormal returnri = return on the first day of trading of the issuer, = the corresponding change in the market index

The statistical significance of each level of underpricing for eachfirm can be tested using t statistic with n-1 degrees of freedomand is obtained using the equation:

where ARt = Average Abnormal Returntt = the t statistic for the average return for period t


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ot = the standard deviation of the sample mean forperiod t .

3.3 Hypothesis FormulationHo : The initial market return of IPOs is not significantlydifferent from zeroHi : The initial market return of IPOs is significantly differentfrom zeroIf the Ho is rejected, then the IPO of Sarawak listed companiescould be seen as showing similar pattern to the other IPOsstudies documented earlier.


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CHAPTER 4FINDING (ANALYSIS AND EVALUATIONS)

4.1 FindingsIn this chapter the correlation between the return on the firstday of trading of the issue and the corresponding change in themarket index is examined. The result will be use to interpretthe significance level of IPOs among all selected companies.

The formula used is;

Where ri = return on the first day of trading of the issuePt = Closing price of share on the first day of listingPt.1 = IssuelOffer price of share

Table 2 : The difference between the IssueIOffer price and the closing


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Table 2 presents the difference between the IssueIOffer price ofshare and the closing price of share on the first day of listing.From the table above, only 5 companies have their negativereturn on the first day of trading. They are BIG Industries Bhd,CCK Consolidated Holdings Bhd, Subur Tiasa Holdings Bhd,Weida (M ) Bhd, and Zecon Engineering Bhd. The rest havetheir share return in positive value. This reflects that mostIPOs of Sarawak listed companies are underprice.

To measure the change of the market index on the day of listing,the following formula is used;

Where r m = the corresponding change in the market indexI t =Closing Index on the first day of listingZt.1 = Closing Index on the day before the first day oflisting

the performance of ipo of sarawak listed companies

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