How not to launch an IPO


Let Lotte Chemical Titan Holding Bhd, the petrochemical producer that went public in Malaysia last month, be a lesson to all companies in how not to launch an initial public offering (IPO).

A wave of bullish reports by banks initiating coverage of the Lotte Group’s plastics unit prompted a 9% surge in the shares on Tuesday (and a further 0.8% gain as of lunchtime yesterday). But all the praise came from the very banks that underwrote the offering — JP Morgan Chase & Co, Malayan Banking Bhd, Credit Suisse Group AG and HSBC Holdings plc — and it still wasn’t enough to reverse the stock’s 34% drop since its July debut.

The shares are down about 20% over the period, compared to a 1% increase in the MSCI Malaysia Index. Analysts have a consensus target price 44% higher than the current price.

As my father always told me, it’s only a mistake if you don’t learn from it. So, here are the lessons:

Get the pricing right: The long-delayed offering (Lotte Co Ltd, South Korea’s fifth-largest family-owned conglomerate, took the unit private six years ago) was mispriced from the outset.

Bankers overestimated demand, thinking a dearth of share sales would drum up demand for Malaysia’s largest IPO since 2012.

That interest never materialised and it had to cut the bottom of its price range to RM6.50 a share, from RM7.60, and slash the shares on offer by a fifth. The stock dropped below the listing price on day one.

Then, Lotte Chemical Titan bought back millions of its own shares, rendering it non-compliant with Bursa Malaysia rules that at least 25% of the stock must be in the hands of public shareholders.

Communication matters: Investors don’t like to be surprised by big stuff just weeks after an IPO. A 72% plunge in Lotte Chemical Titan’s second-quarter (2Q) profit rattled shareholders and sent the stock down 24%.

The biggest culprit for the shortfall was a water supply interruption in April that caused plant shutdowns in Malaysia. The company included the incident in its 499-page offering document but not in a key section at the beginning on material events or risk factors.

Perhaps, more importantly, the company didn’t disclose any financial impact, so investors weren’t expecting the heavy toll on profit.

It’s better to under-promise and over-deliver: The earnings miss came even more as a surprise to investors considering executives have spent the past few months crowing about the “resilient” market for raw materials that go into plastic and synthetic fibres used in everything from cars to appliances. Instead of using the paltry results to set more realistic expectations, the chemical maker came out with another round of rosy forecasts.

One thing analysts got right amid the recent barrage of glowing initiation reports is that the selloff in Lotte Chemical Titan’s shares probably created a short-term buying opportunity. The company is trading at a 40% discount to regional industry and Malaysian equity market peers, HSBC estimates.

Still, after so many missteps, it’s hard to see how investors can trust these upbeat projections from Lotte Chemical Titan executives and the banks that orchestrated its IPO.

There’s no guarantee the production mishaps will right themselves quickly. Meanwhile, Lotte is building new plants as raw material prices decline and overcapacity in China further pressures the industry.

Investors should focus on the numbers and tune out the bullish chatter. — Bloomberg

  • This column does not necessarily reflect the opinion of Bloomberg LP and its owners.