Good day! How are your trades? Last week, we have an I.P.O. which was launched to the public last August 19, 2019. Have you bought the stock? It went up to around 44% during its opening day and went up to around 300% from its IPO price. What a good start. Did you buy it? If you did, congrats to you! I hope you have taken some profits before it went down.
There are a couple of things you need to know before you buy an I.P.O. or Initial Public Offering. I will discuss some of these things in this article so that you will be prepared next time if ever there will be I.P.O. to be launched and you wanted to invest in it like the ALLHOME and AXELUM. But of course first and foremost, let us discuss what is Initial Public Offering based from Investopedia.com.
“An initial public offering (IPO) refers to the process of offering shares of a “private corporation” to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes share premiums for current private investors. Meanwhile, it also allows public investors to participate in the offering.
A company planning an IPO will typically select an underwriter or underwriters. They will also choose an exchange in which the shares will be issued and subsequently traded publicly.”
You may read further about I.P.O. and other investments terminologies thru Investopedia.com.
So as mentioned above, an IPO is a process where a private corporation offers shares to the public in order to raise funds for the company. There are several ways for a company to raise funds. There are a few ways that I know:
1. The stockholders will add fund to the company or the company will look for new investor/investors and issue stocks
2. The company will loan from a Financial Institution
3. The company will issue a Bond or if the company is a Bank, the may issue LTNCD.
4. The company will issue an IPO.
5. The company will issue a Follow On Offering.
6. Others – there may be other forms that I might be able to mention.
There are important things that you have to know about the company prior to investing in their IPO. As due diligence, you have to know some important information about the company prior to buying their shares because you have to at least know where you are going to invest your hard-earned money. Few things that you must know about the company are as follows:
1. How old is the company?
2. What is its main business?
3. Who are the owners?
4. Are they known in their industry?
5. Financial Statements – if possible (you must know if the company is earning or will potentially grow in the future) and how much is the company worth.
Another thing you must know is the purpose of the company for issuing IPO or why does the company need to raise fund? Because the issuance of an IPO is a way for the company to raise funds, as due diligence, we have to know the purpose of the company for issuing the IPO. There could be so many reasons for a company to issue IPO but the most common reasons are;
(1) for future projects and
(2) to pay for the debts of the company and
(3) combination of both.
These are the few information that will be provided to you by the underwriter prior to buying an IPO. An Equity Underwriter’s role is to administer the public issuance and distribution of securities which in the case of KPPI, the underwriter is BDO Capital & Investment Corporation.
IPO underwriters are typically investment banks that have IPO specialists on staff. These investment banks work with a company to ensure that all regulatory requirements are satisfied. If you want to know further about underwriter, you may read it thru Investopedia.com.
In KPPI’s case, their reason for issuing an IPO is to use the proceeds to fund key property acquisitions for leasing purposes. You may refer to PSE Edge’s website for details of IPO of KPPI in the link provided below:
You may also want to read about the following information:
1. How many IPO Shares will be issued by the company
2. How much is the offer price and what is the minimum amount to stock that we can purchase?
3. How much is the IPO and what is the percentage of IPO based on the Authorized Capital Stock of the company?
4. When is the offer period?
5. And most importantly, when is the Listing date?
In the case of KPPI, the listing date was on August 19, 2019, Monday. The stock opened at Php5.87 and went up to Php 8.49 during that day. It was around 44% above its offer price. It became tempting to the public because it was the first IPO for this year in PSEI. The closing price is Php 8.15. And then the price went more than 300% from its IPO price.
Back then, like other stocks, we do not know where the price will go from its IPO price but the buyers keep on buying even if the price is already high. Demand is too high which cause the price to push up by more than 300%. Not everyone was able to ride it though because if you are observing the price action, the price movement is lagging and we cannot rely on chart anymore because it cannot cope up with the quick movement of the price.
Anyways, if you were able to gain from KPPI, congratulations to you! But if you were not, do not worry. It only means you still need to improve and learn more. I was able to ride it but I only gained 20% in total. I cannot handle the lag yet. It makes me nervous. But I will make sure I will improve myself so I will be able to ride those kinds of volatility.
Not every IPO is successful and will jump as high as KPPI. We do not know for sure what will happen. It can also go down so don’t get too excited with IPOs. All you can do is to backtest previous IPOs from a few years back so will have ideas on the potential plays. Based on my backtesting of IPOs, usually, the price goes up during its listing day and it may go further up in few days but after that, the price will go down even lower from its IPO price for quite a long time.
Though there are few IPOs that have been successfully going up after its IPO date like WILCON (2017) and HVN among others, usually, the value of the stock goes down further for a long time.
How about IPO Sad stories.
There was also a case like CALATA shares (CAL) which was delisted by PSE after few years from its IPO date and there are also companies that wanted to voluntarily be delisted from PSE just like the recent disclosure of Travellers International Hotel Group, Inc. (RWM) after going further down from its IPO price. These are sad stories of investors who bought the IPOs for the long term. (or biglang long term)
In short, availing of IPO is not always a happy story. Actually, it was usually a sad story for the Investment public. There is a high risk in availing IPO and it is also disclosed in the Risk portion of the documents that will be provided to you prior to availing IPOs. You must do your due diligence in this matter. It is up to you if you wanted to assume the risk as they say in the investment world, “The Higher the Risk, The Higher the Return”. But I would like to share with you my point of view about IPOs.
It is very tempting to avail it after what happened to KPPI but you must always do your own due diligence prior to buying the IPOs like the upcoming Allhome and/or the Exelum. Anything can happen. Always think of the win and lose scenarios – Your risk and reward ratio.
I personally prefer to buy on the listing date so I can see the actual demand and supply. As observed, normally, the listing date has a big opportunity to gain but do not be too complacent on your trade and on your paper gain. Make sure to take profit (protect your gains) from time to time. Anyways, no matter how big or small, a gain is still a gain. There is no harm in profit-taking. Be also quick to cut your losses if the price doesn’t go into your bias.
Nonetheless, everyone is excited for the upcoming IPOs because of KPPI.
So Goodluck to us traders! CAVEAT!
Caveat Emptor it means Let the Buyer beware.