On the secondary market, prices on Japan's small-company stock markets bottomed out in May and then dropped to another low in July. Amid this trend, the few 2007 IPO stocks where prices increased in May and June have remained strong since then. But since opening prices for the June IPOs were a very high 92% above offering prices on average, only three of the June IPOs are still trading above their opening prices.
There are 13 IPOs scheduled for August compared with 11 in August 2006. China Boqi Environmental Solutions Technology, which plans a TSE listing, is attracting the most interest. This company is a major provider of desulphurization technologies and water treatment equipment. Investors are very interested in this company as a way to participate in China's environmental protection sector. In addition, there is much interest in the IPO of Kito, a manufacturer of hoists and cranes, as a company that has completed a successful revitalization. Kito had financial problems resulting from real estate investments. In 2003, The Carlyle Group acquired Kito, which was traded on JASDAQ, making it a privately owned company. Since Carlyle still owns almost 75% of Kito's shares, there are concerns about the supply/demand balance. But the stock price may increase following the IPO because the company is posting consistent growth in sales and earnings.
As noted in last month's report, the number of IPOs in 2007 will probably be well below 150. Based on what I have heard from securities companies, the number of IPOs in the second half of 2007 will probably be smaller than in the first half, when there were 73 offerings. Enactment of Japan's Financial Products Exchange Law is forcing companies to tighten their internal controls. The new standards are apparently creating a fairly high hurdle for companies considering an IPO. In fact, the number of 2007 IPOs may fall to the lowest level since the emergence of Japan's small-company stock markets like TSE Mothers and OSE Hercules.
Despite the low level of activity, there may be several significant IPOs during the second half of 2007: Sony Financial Holdings, Willcom (a PHS carrier), MID Urban Development (formerly Matsushita Investment and Development), and Nikko Asset Management. All these companies have highly effective internal control systems because they are subsidiaries of large corporations. Furthermore, there is little risk of a sudden drop in earnings. Consequently, these four companies will probably conduct their IPOs as planned unless there is a major drop in stock prices.
Due to the low prices on Japan's small-company stock markets, we will probably see low valuations for the offering prices of companies newly listed on these markets. Furthermore, there are few worries about an oversupply because of the small number of IPOs. As a result, if the stock price of a recent IPO falls below the offering price, we will probably see a quick rebound as the low valuation draws the attention of investors. I recommend that investors remain vigilant to take advantage these opportunities while selecting stocks carefully.
