For Singapore bourse, IPOs remain the Achilles heel

Kevin Lim

Singapore is fast losing its charm for Chinese companies, which once drove its IPO bandwagon, threatening its status as a major Asian bourse and posing a big challenge for new SGX CEO Magnus Bocker.

Singapore Exchange (SGX), Asia’s second-largest bourse by market capitalization, enjoys high operating margins and has a successful derivatives business. But it lags behind Hong Kong and other Asian bourses in terms of the value of its listed firms.

“If SGX is unable to secure large listings, the long-term threat to Singapore will be severe,” said Ernest Kan, head of the IPO Group at accounting firm Deloitte & Touche in Singapore.

Being a small country, Singapore needs to attract listings from abroad and one way of doing that is to boost the valuation of foreign firms listed on SGX through steps such as improved investor education, he said.

While bigger rival Hong Kong is leading the world with multi-billion-dollar initial public offerings, many of them from China, SGX is struggling to attract and retain the Chinese firms that once dominated its listing pipeline.

Aberdeen Asset Management strategist Peter Elston said the UK fund manager owns SGX shares because the Singapore bourse operator is well managed and has a 40 percent return on equity. There is also potential for SGX to grow its commodities trading business.

“(But) the long-term growth prospects for SGX is not as good as Hong Kong,” he said.

“Singapore is always going to struggle because it doesn’t have a hinterland like Hong Kong has.”

SGX shares have risen 60 percent in the past 12 months, lagging both the 65 percent jump in the benchmark Straits Times Index .FTSTI and a doubling of Hong Kong Exchanges and Clearing shares.

Goldman Sachs, which has a “neutral” call on SGX, said in a January 10 report that Bocker, who joined in December, has been “surprisingly quiet on the issue of attracting more offshore IPOs, an area that we believe SGX risks erosion,” and hoped he would talk about plans at SGX’s quarterly earnings due on Jan 18.

Industry sources told Reuters they expect at least 10 IPOs in Singapore worth over $100 million each this year, led by India’s No 1 developer DLF which is floating a real estate investment trust to raise up to $1 billion.

SGX is, however, losing some of its better-quality China companies, which suffer from low valuations due to a spate of corporate scandals involving Singapore-listed Chinese firms.

Several firms were taken private by main shareholders last year, while others such as XLX Fertilizer and abalone producer Oceanus now have secondary listings elsewhere in what may be a prelude to an eventual delisting.

Singapore’s stock market is valued at about 3.5 times its GDP, according to Thomson Reuters data, the highest ratio in Asia after Hong Kong.

SGX is by far the biggest stock market in Southeast Asia but is smaller than Shanghai, Shenzhen, Mumbai, Seoul and Taipei.

Industry players say SGX is losing the fight to attract China listings because Chinese firms command higher valuations in Hong Kong and other parts of Greater China. China has also made it easier for Chinese firms to list locally.

For instance, Oceanus last month priced Taiwan Depositary Receipts at a 16 percent premium to its share price, which sparked a rally in its Singapore shares.

Bright spots

Singapore’s IPO market came alive in November last year with the listing of CapitaMalls Asia, which raised over $2 billion and was the city-state’s biggest in 16 years.

Excluding CapitaMall, however, the biggest IPO for 2009 was worth a mere $21 million. Singapore only had one IPO in 2008 that raised more than $100 million — the minimum amount global investment banks typically look at when managing an IPO.

Industry players said that while SGX is losing the battle for Chinese firms, it remains attractive to REITs from the region because of tax incentives and the presence of many property fund managers in Singapore.

“Investors who qualify can enjoy virtually tax-free income yield from their investment in a REIT,” said Ng Joo Khin of Stamford Law, the legal adviser for Oceanus’ TDR and Tiger Airways’ ongoing IPO.

ARA, the Singapore property fund management affiliate of Hong Kong’s Cheung Kong, plans to launch two property trusts — an Islamic REIT with Qatar property and a regional logistics REIT with warehouse operator CWT.

Each REITs will hold properties worth around S$1 billion ($718.4 million) and their IPOs will be managed by DBS, a source involved in the transactions said.

Mapletree Investments, a property firm owned by state investor Temasek, may also float a REIT with up to $2.8 billion worth of assets including Vivocity, Singapore’s largest mall.

Outside the REIT sector, SGX is also able to attract overseas listings in areas such as plantations, mining, oil services and logistics.

Tiger is on an investment roadshow to raise as much as $196 million, while UK private equity firm 3i is likely to divest its stake in oil services firm Franklin valued around $250 million.

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