Wednesday, January 19, 2011

10 things to look out for - reading IPO prospectus

In the year of 2010, we have seen a sizable number of IPOs (Initial Public Offerings), especially the launch of the most talked about company: GLP - Global Logistics Properties.

Let me share with you a story. I was in the lift with my wife. Joining me was 2 old uncles. One of them told his old pal that the market was recovering. Hence, he had decided to subscribe to GLP IPO. Another main reason - the backing of GIC (Government Investment Corporation Singapore). His friend remained stunned but after composing himself within seconds, he said "Well, xxx, since you were going for it and I am your friend for more than 20 years, ok I would join you. What are friends for?" Maybe the uncles were retirees and flushed with cash/CPF money.

This led me to think that:

(a) the IPO may be oversubscribed (true indeed!)
(b) a good opportunity for IPO Wannabes to go in and out fast!
(c) the awareness ramped up so high that even lift uncles talked about it!
(d) without due diligence and because of government-led IPO, the uncle subscribed
(e) positive market sentiment building up. You can hear people talking everywhere

Anyway, there are more reasons to think. I thought it will be great should there be a few guidelines to look out for. Imagine if it's a mid-cap IPO stock, what will you do first? Especially if the key IPO stakeholders are not known.

So here are my 10 things to ask yourself when reading the IPO prospectus:



1) Who is the issuer of shares, promoters and professionals involved?
2) What is the nature of the business, such as the future growth and plans ahead?
3) Can you map out a brief competitive analysis and visualize the business strategy?
4) Any unique attributes, both internal/external - perhaps robust management?
5) Track record and profitability, including other quantitative indicators?
6) What are the risk factors involved? - able to assume it?
7) How does the company plan to use the IPO proceeds? General statements are vague
8) Do you have Analyst reports for benchmarking purposes?
9) Any peer companies in similar industries/sectors - if so, compare performances
10) Any institutional investors, substantial shareholders or Directors' stake?

A word of caution - be careful on buying in the hot IPO stocks. If you do not know when to sell, you will be stuck when the counter goes below IPO price. Worse, if you accumulate more post IPO because of the thinking "everyone buys in the open market, so the price goes up" - there may be a chance you are just chasing the herd. Once the domino effect collapses and your technical timing is not right, that's it.

The truth is, if the company has value that may be overlooked or undiscovered at the current moment, why not consider buying and holding it for a longer term?

In short, there are always pros and cons. Think carefully.

All the best in IPO-hunting! This year, I think we should see more REITS.

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