Jason Saw, group head of investment banking at CGS International (CGSI), predicts that more companies will go public once the US Federal Reserve (Fed) lowers interest rates.
“The region has many high-quality companies generating healthy returns and some of these are just waiting for the right conditions to list,” he says, noting that the upcoming meeting will likely see the US central bank cut rates by 25 basis points (bps) to 50 bps. “The rate cuts will set the stage, but the bourses in the region will, of course, still have to compete with other major stock exchanges for a piece of the pie.”
In a July interview with The Edge Singapore, Saw said the first half of 2024 was generally slow for initial public offerings (IPOs) in Singapore and Asia. “IPO numbers are down, fundraising [has been] down [as well]. As you can see, activities have slowed and that’s generally because of the macro environment,” he notes, attributing the lacklustre IPO scene to persistent high interest rates and higher cost of equity (COE), which result in lower company valuations.
In 1H2024, Singapore saw just one IPO, compared to three listings the year before. This year’s sole listing was Singapore Institute of Advanced Medicine Holdings (SAM) on SGX’s Catalist board, raising $26.2 million at 23 cents per share.
Southeast Asia also experienced a slowdown, with IPO deals falling 21% y-o-y to 67. Funds raised in the region amounted to US$1.4 billion ($1.89 billion), down 59%, while total market capitalisation for IPOs stood at US$5.78 billion, 71% lower y-o-y, according to a Deloitte report.
When we spoke, Saw notes that valuations for healthcare companies remain high, although they have come off. For instance, pricing something at an interest rate of 2% versus 5% makes a “big difference” in a company’s P/E multiples.
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In addition, higher interest rates have led retail and ultra-high-net-worth (UHNW) investors to favour safer investments such as bonds, which offered yields of 4% at the time, compared to just 1% previously.
Saw says reviving the slow IPO market will require improvements in the macroenvironment, particularly in terms of rate cut expectations. While fundraising activity continues, they are slower compared to the same period last year.
“I think there are a lot of businesses raring to go IPO, not just in Singapore, but across Asia Pacific (APAC). They’re just waiting for the right window,” says Saw. At the time of our interview, the hot sectors identified by Saw are companies in the consumer space, healthcare and advanced manufacturing.
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When it comes to IPOs, the ecosystem varies in different markets as well. “In the broader market, every exchange faces its own issues in terms of trying to support the mid-market, trying to attract valuations, because the shiniest and brightest things are all going to the US,” he adds. “In Southeast Asia, there is a lack of large listings this year. It’s a function of rates and market support in different ways.”
Revitalising the market
Singapore’s stock market has become a focal point following a recent paper by the Singapore Venture and Private Capital Association (SVCA). The paper urged SGX and government bodies to seek ways to revitalise the local market. It proposed channelling private funds booked in Singapore to invest in the city-state’s market and recommended that Singapore’s pension and sovereign funds mirror their international counterparts by investing locally. SGX’s market statistics for August reveal that there have been nine delistings so far this year and no IPOs on the Mainboard.
When The Edge Singapore spoke to several key players in June (see Issue 1142, June 17: Rekindling the fire) on ways to jump-start the local stock market, multiple government agencies were said to have been considering the suggestions.
On Aug 2, the Monetary Authority of Singapore (MAS) announced that it would establish a review group to recommend measures to strengthen Singapore’s equities market within a year. The group is made up of 10 leaders from the public and private sectors, including Temasek Holdings’ CEO Dilhan Pillay, SGX chairman Koh Boon Hwee and Neil Parekh, partner and head of Asia, Australia and New Zealand, Tikehau Capital. The group will be chaired by Transport Minister Chee Hong Tat, who is also the Second Minister for Finance and a board member of the MAS.
At SGX’s results briefing for FY2024 ended June 30 on Aug 8, SGX Group CEO Loh Boon Chye revealed that companies were preparing to list on the bourse’s Mainboard. “We hope the market stays more favourable [and] more conducive, but you’ve seen some US numbers in the last week. So, all things have to be aligned,” said Loh then.
For Saw, Singapore needs to bolster support for its mid-market caps. While the local market’s three banks, DBS Group Holdings, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank U11 (UOB) and REITs, are “well-priced,” SGX’s sub-billion-dollar companies and IPOs “struggle” against their regional counterparts.
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For instance, in markets like Malaysia, Indonesia and Thailand, the exchanges see about 30 or 40 companies going public yearly. “It gives you that base load listing, but that’s because they also have a big domestic market,” adds Saw.
In contrast, Singapore is an international market with relatively few domestic companies focused on the local market. “Because of that, I think we need a bit of support in terms of the mid-market,” says Saw. Mid-market caps, he adds, are defined as companies with market caps of $200 million to $1 billion.
“I think [supporting the mid-markets] is important because these companies, small- and medium-sized enterprises (SMEs), are the lifeline of the economy. We don’t always get the shiniest and best listings like Sea and Grab,” says Saw. “There is a long list of players who are third, fourth or fifth in their industries; they are strong and essential to the local economy and deserve to receive better allocations.”
Lack of liquidity?
A common criticism of SGX is its lack of liquidity. Saw attributes this issue to a weak secondary market. “We actually have a very strong system for private equity (PE) and venture capital. If you look at the dry powder in the P/E space in Singapore alone, I think it exceeds US$5 billion or more. So we have enough support there. But I think [the issue] lies in going to the market and trying to IPO a good company, trying to find anchor investors and public market investors.”
Saw also cited the July listing of Johor-based pawnbroker Well Chip Group on the Malaysian Bursa as an example. The IPO raised RM172.5 million ($51.9 million) and was oversubscribed by nearly 12.87 times.
In comparison, Well Chip’s parent company, SGX-listed ValueMax T6I , which owns a 65.5% indirect stake is trading at mid-single digits in Singapore compared to Well Chip’s valuation on the Bursa. As of the close of Sept 11, Well Chip’s market cap was RM852 million, compared to ValueMax’s market cap of $403.7 million. CGSI Malaysia was one of the underwriters and placement agents for the IPO.
To address this, Saw suggests that fund allocators could select 10 to 20 Singaporean fund managers and provide them with seed funding to invest in the market. This approach could also introduce more diversity into the Straits Times Index (STI), currently dominated by the three major banks and Singapore Telecommunications Z74 (Singtel). While Saw recognises that state-owned firms like Temasek Holdings and GIC are already pursuing similar strategies, he notes that relying on only one or two investors could skew the market.
Looking at other countries, Saw suggests that Singapore could take a similar approach by allocating funds to pensions for investment in the local market. “If we could have $5 [billion], $10 billion allocated to 20 asset managers that only invest in Singapore, there could be something,” he says. “If you look at the benchmark STI, the three banks plus Singtel probably make up 40% [to] 50% of the market. I think you need more diversification.”
Another way to introduce diversification is to list some Temasek-backed start-ups on the SGX. “I think Temasek has tried to list some of the start-ups, but when you get feedback from the market, you may not get a favourable market, especially in Singapore,” adds Saw. “That’s why I see improving the secondary market and capital in the secondary market as the most important step to take right now.”
“Again, there are other incremental steps that people talk about in terms of SGX [and] the Catalist board, but really, you need to improve that capital in the market,” he adds. “The good news is, Singapore has a lot of capital. [In November 2023], Singapore’s assets under management (AUM) were reported to be $4.9 trillion in 2022. The question is, how much can we do to support the local ecosystem [and] allocate a couple of billion dollars to fund managers.”
‘Real growth’
Saw also questions the need for the Catalist board, where companies are making profits in the low millions. “Most companies come to market at a profit of $1-, $2-, or $3 million profit. IPO expenses take up a bulk of that. After that, you can’t grow. These companies are not at the point where there’s real growth,” he adds. “So again, something to look at and that also shapes our investors’ confidence. They see many listings that can’t grow or make a profit. That’s something that we have to evaluate for fundamental reasons.”
Regarding Singapore-based companies listed overseas, such as Grab, Saw believes these firms could consider a secondary listing on the SGX. “If valuations are right, other companies would also do secondary listings,” he says.
There is still hope for the SGX. Saw notes that, among the top 30 companies listed on the four exchanges where CGSI operates — Malaysia, Indonesia, Thailand and Singapore — those listed in Singapore are ranked higher than their counterparts in other countries.
However, the country’s regional peers are doing much better in the mid-market space. He adds: “I’d say that [in the] last couple of years, quite a number of mid-market companies want to list on the SGX. But because of confidence issues, these companies can’t get out onto the market because they’re not getting fair valuations.”
