More tech companies seek IPOs as the bubble remains intact

An analyst says valuation is very rich, demand continues to perform and the industry is thriving, so it makes sense

By NG MIN SHEN / Pic  By TMR

Local technology-related companies are likely to seek public listings in the near term, prompted by increasing smartphone usage and the ongoing global paradigm shift towards implanting technology into everyday devices.

Hong Leong Investment Bank Bhd analyst Tan J Young said there has been talk of more tech companies considering initial public offerings (IPOs), on both the Main Market and ACE Market.

“It’s a very opportune time to list now as the industry is doing well. Valuation is very rich, demand continues to perform and the industry is thriving, so it makes sense,” he told The Malaysian Reserve (TMR).

He added that any upcoming tech company-related IPOs would not be affected by factors such as the general election, as export-oriented stocks are less exposed to political issues.

Affin Hwang Investment Bank Bhd senior director and head of equity capital markets Arvin Chia also said there is a large amount of interest in IPOs from tech-related companies.

“Now is a good time to raise capital because investor interest is there. There are various sizes of tech companies looking at going public,” he told TMR.

As per Bursa Malaysia’s stock summary for Oct 5, 2017, the Main Market saw a total of 2.24 billion units traded for a value of RM1.88 billion, of which tech stocks performed respectably with 82.38 million units traded for RM43.48 million.

On the ACE Market, however, tech stocks recorded the highest transaction volume among all sectors at 511.52 million units done, for a value of RM133.31 million.

Additionally, Bursa Malaysia’s Leading Entrepreneur Accelerator Platform Market’s first listing last week was Cloudaron Group Bhd, a Singapore-based information technology provider.

Tech Stocks See Higher Gains

Tech stocks were once seen as an investment made at one’s own risk, owing largely to the US dotcom bubble of 1997 to 2001, which saw excessive speculation and unjustified euphoria surrounding Internet-based companies attempting to ride on the surge in Internet usage.

Today, tech stocks have evolved into a somewhat steadier industry, with many tech companies posting consistent earnings growth.

US- and China-based firms are arguably the sector’s leaders. Amazon.com Inc and Intel Corp are seasoned players battling the new kids on the block such as Facebook Inc, Alphabet Inc (Google’s parent) and Netflix Inc.

One also cannot ignore Alibaba Group Holding Ltd, Tencent Holdings Ltd and Baidu Inc — Chinese firms that have surged to tremendous heights in a somewhat shorter time-span compared to their US counterparts.

Malaysian tech companies, which are largely export-based, have also been attracting attention from investors due to their rising valuations, although this has in turn raised concerns of whether the bubble could burst soon.

Chia said there could be a price correction in the sector’s stocks at some point, in line with typical stock market cycles.

“The tech sector has been earning for a while now and that’s not going to continue forever. But even if there is a correction, it could be good for the sector.

“Valuations can come down from being overly expensive, while earnings continue to grow — then the sector can continue to perform,” he stated.

While companies that produce parts for smartphones have long been benefitting from high smartphone penetration rates, the spotlight has now expanded to include the likes of autonomous vehicles and the Internet of Things (IoT).

“The growth drivers going forward will not only be smartphones, but also smart devices, IoT, smart vehicles and the ecosystem around all of these.

“Smart devices will drive the semi-conductor industry, and this in turn will drive the stock market and tech stocks itself,” Chia said.

This growth cycle could likely continue for another 12 months, he said, tracking the trend of larger foreign tech firms that are innovating and driving the industry.

“We’re not the main product designers. We manufacture the parts for these products and export them, so we’re dependent on other parts of the ecosystem,” he said.

Tan concurred, noting that Malaysia’s tech stocks are deeply embedded into the worldwide supply chain and supported by global trends.

“Thus, the momentum should go in tandem with international tech growth.

“Tech stocks, which have been seeing upward momentum since the beginning of 2017, are expected to sustain growth until at least the end of the year,” he said.

Still in Safe Zone

Amazon currently leads the US pack, trading at 249.7 times its present earnings. Facebook is milder at 37 times, as is Alphabet at 36 times and Apple Inc at 17.7 times.

Chinese powerhouse Alibaba is trading at 60.6 times, while Tencent is at 52.9 times and Baidu at 51.8 times.

Despite the stretched valuations of overseas tech shares, Malaysian stocks are still in the safe zone, according to Chia.

“Local tech stocks are trading higher compared to other sectors but the maximum of 20 times is not a huge bubble.

“If they were approaching 35 to 40 times, then that would be worrying,” he said.

Similarly, Tan said Malaysian tech stocks are still moving at reasonable levels.

“For local stocks, their valuation is still not too high, so I don’t see a bubble. They should certainly be able to deliver on their earnings forecast,” he said.