THE PERFORMANCE OF

INITIAL PUBLIC OFFERINGS

(IPOs) OF SARAWAK LISTED
COMPANIES
By
Nasriman Bin Abdul Rahman
A Research Paper Submitted in Partial Fulfillment of the Requirement
For the Degree of Corporate Master in Business Administration
Faculty of Economics and Business
Universiti Malaysia Sarawak
{2002}
APPROVAL PAGE
I certify that I have supervised and read this study and that in my
opinion it conforms to acceptable standards of scholarly presentation
and is fully adequate, in scope and quality, as a research paper for the
degree of Corporate Master in Business Administration.
Mohamad Bin Jais
Supervisor
This research paper was submitted to the Faculty of Economics and
Business, UNIMAS and is accepted as partial fulfillment of the
requirements for the degree of Corporate Master in Business
Administration.
F o f . Dr. Shazali Abu Mansor
Dean, FEB
U N I W
DECLGRATION AND COPYRIGHT
Name : Nasriman Bin Abdul Rahman
Matric Number : 99-02-0341
I hereby declare that this research is the result of my own
investigations, except where otherwise stated. Other sources are
acknowledged by footnotes giving explicit references and a
bibliography is appended,
Signature
Date
iii
TABLE OF CONTENTS
Approval Page.. . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,
Declaration and Copyright Page.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , , . .
Table of Contents.. . . . . . . , . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , , , , , . +
Acknowledgements.. . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . + . . . . . .
List of Tables.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . & . , . . . . , . . . . . . . . . . . . . . . . . . .
List of Figurea ,................................. ,.,.,..+... ..... ...........
Abstract.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .'. . . . , , . . , . . . . . . . . . . . . . . . . . . . . . . . . . . .
Abstrak ......... ... ... ... ... .........,.... , .,... .................... ..... . .....
CHAPTER 1
1. INTRODUCTION
1.1 Definition of IPOs
1.2 Background Of The Problem
1.3 ObjectiveOfTheStudy
CHAPTER 2
2. LITERATURE REVIEW
CHAPTER 3
3. RESEARCH METHODOLOGY
3.1 Data Collection and Recording
3.2 Data Processing and Analysis
3.3 Hypothesis Formulation
CHAPTER 4
4. FINDING (ANALYSIS AND EVALUATIONS)
4.1 Findings
4.2 Discussion - Comparison with
findings of other researchers
ii
iii
iv
vi
vii
viii
ix
X
CHAPTER 5
5. CONCLUSIONS AND RECOMMENDATIONS
5.1 Brief Summary on the findings
5.2 General Discussion on the finding
5.3 Limitation of the study
5.4 Scope for further research
BIBLIOGRAPHY
The endeavor of creating a research project involves the creative
collaboration of many individuals. Although the extent of my debts
cannot be fully acknowledged here, it is nevertheless a joy to record my
gratitude to the many people who have helped, some without realizing
just how helpful they were.
I want t o extend a special thanks to Encik Mokamad Jais, my
Supervisor, who worked well beyond the call of duty discussing this
project with me from its outset, helping me develop many of the basic
features and reading and commenting in detail on all the related
chapters.
Special thanks also goes to Madam Chang Siaw Ling , Research
Officer of Saraw ak Securities and Mr. Mohammad Jamhari Jamaludin
a staff in Public Information Center, KLSE, Kuching, who provided me
with a lot of information on the background of companies in Sarawak.
Last but not least, I want to thank those of my lecturers, colleagues at
Corporate Master in Business Administration program, Faculty of
Economics and Business, and my wife for their direct and indirect
support and contribution in making this research project a reality. I
pray to Allah for a success in any of their future endeavors. Amin.
NASRIMAN ABDUL RAHMAN
Faculty of Economics and Business
Univeraity Malaysia Sarawak
April 2002
Table 1 Sarawak listed companies in KLSE
Table 2 The difference between the IssuelOffer price and the
closing price of share on the first day of listing
Table 3 The difference between closing index on the first day of
listing and the closing index on the day before the first
day of listing
Table 4 Average market return IPOa of Sarawak Listed
Companies
Table 5 Summary Statistics for Sarawak based IPOs
LIST OF FIGURFS
Figure 1 : t Distribution of Market Adjusted Return for Sarawak IPOs
ABSTRACT
This paper investigates the IPO performance of Sarawak
based listed firms. Using a sample of 22 firms, the
findings suggest that the IPO performance shows the
same pattern as previous studies. These IPOs are
relatively underpriced, possibly due to investors interest
as evidence by the average first day premium fetched of
approximately 83.9%.
Kujian ini bertujuan mengkaji prestasi IPO bagi syarikat
yang ditubuhkan di Sarawak dun berdaftar di bawah
BSKL. Kajian ini menggunakan sarnpel22 b ua h syarikat
yang mana hasil kcljian mnunjukart prestasi IPO adulah
sama dengan penemuan oleh kajian lain sebelum ini. IPO
ini kebanyakannya di bawah harga (underprice)
kemungkinannya disebabkan oleh minat pelabur, yang
mana perkara ini dibuktikan oleh purata premium hmri
pertama iaitu pada kadar 83.9%.
THE PERFOFMANCE OF INITIAL PUBLIC OFFERINGS
(IPOs) OF SARAWAK LISTED COMPANIES,
CHAPTER 1
INTRODUCTION
Definition of IPOs
One of the most attractive areas of investment is Initial Public
Offerings (IPOs). IBuying shares the first time they are offered
to the public has considerable natural appeal, especially in a
bull market, tempting investors with potentially phenomenal
short-term returns as well as exposure to exciting new
companies and industries. And since the early 1980s,
privatizations of state-owned corporations around the world
have become an additional source of new issues, providing
investors with the opportunity to get low-priced stakes in big,
stable businesses, often the dominant incumbents in core
sectors of the global economy.
The objective of any new issue is to achieve the highest value for
the issuer, while ensuring a buoyant start to secondary trading.
Shares are generally offered at a fixed price, set by the sponsors
of the issue, and based on multiples, forecasts of likely future
profits, or a combination of multiples and forecasts.
Most companies start out by raising equity capital from a small
number of investors, with no liquid market existing if these
investors wish to sell their stock. 21f a company prospers and
needs additional equity capital, at some point the firm generally
finds i t desirable to "go publicn by selling stock to a large
number of diversified investors. Once the stock is publicly
traded, this enhanced liquidity allows the company to raise
capital on more favorable terms than if i t had to compensate
investors for the lack of liquidity associated with a privately-
held company, Existing shareholders can sell their shares in
' Ivo Welch, (1999)
Jay R. Ritter, (1998)
open-market transactions. With these benefits, however, come
costs, In particular, there are certain ongoing costs associated
with the need to supply information on a regular basis to
investors and regulators for publicly-traded firms. Furthermore,
there are substantial one-time costs associated with initial
public offerings that can be categorized as direct and indirect
costs. The direct costs include the legal, auditing, and
underwriting fees. The indirect costs are the management time
and effort devoted to conducting the offering, and the dilution
associated with selling shares at an offering price that is, on
average, below the price prevailing in the market shortly after
the IPO. These direct and indirect costs affect the cost of capital
for firms going public.
Firms going public, especially young growth firms, face a
market that is subject to sharp swings in valuations. The fact;
that the issuing firm is subject t o the whims of the market
makes the IPO process w high-stress period for entrepreneurs.
Because initial offerings involve the sale of securities in closely-
held firms in which some of the existing shareholders may
possess non-public information, some of the classic problems
caused by asymmetric information may be present. In addition
to the adverse selection problems that can arise when firms
have a choice of when and if to go public, a further problem is
that the underlying value of the firm is affected by the actions
that the managers can undertake.
Background Of The Problem
Fixed price IPOs are frequently underpriced, providing
opportunities for 'stags', investors who buy in anticipation of an
immediate price rise. Big instant profits may often be made if
shares can be purchased at the offer price and sold soon after
dealing begins - returns in the order of 5-25% in one day, but
with high variance across offerings. Understandably, such offers
are often oversubscribed, leaving the sponsors to decide on the
appropriate equity allocation: by ballot, by scaling down large
applications, or by giving preferential treatment to certain
investors, typically their favored clients though in some cases
the private investor, The method varies by country: in some
countries, like the United Stabs, it is discretionary; in others, i t
is mandated equal for equal submissions.
Like privatizations, private sector new issues are often viewed
as a route to quick and easy profits, but for every ten or so
successes, there is usually one that goes wrong or seriously fails
to perform.
So private investors must always show great caution, being
careful to study the prospectus, balance sheet and profit and
loss account of any potential investment. Investing in IPOs is
intrinsically risky and not for the faint of heart. Companies that
have recently reported very good results or which are in
fashionable industries with their best results at an
indeterminate point in the future ahould be scrutinized
especially diligently.
Investors should also note that conflicts of interest and potential
abuses are rife in the distribution of new issues. IPOs are
inevitably timed to benefit the seller not the buyer, aiming to
extract the maximum value from the market. Indeed, several
studies indicate that IPOs are usually not good investments,
under performing the market over the longer term. This may be
a reflection of companies 'preparing' the numbers for a couple of
years, and underwriters over-hyping and sales people
overselling the shares, Such activities may be particularly
prevalent in the late stages of a bull market,
The main objective of this study is t o find out the performance
of IPOs of Sarawak based listed companies in KLSE.
Hypothesis has been constructed to test the performance of
Sarawak's IPOs; whether it is underprice or overprice.
Although the scope of this study is quiet small compared t o the
other study on IPOs, this study is regarded as special as it
specifically looking at the Sarawak based listed companies.
CHAPTER 2
LITERATURE REMEW
This chapter will discuss relevant literatures on IPO. Othman
Yong, Puan Yatim, ROS Zam Zam Sapian (1992) study the short-
term and long-term performances of all new issues listed on the
Kuala Lumpur Stock Exchange ( USE) from 1991 to 1995. In
general, this study documents an average initial returns and an
average over-subscription ratio which are substantially lower
than the ones reported by the previous studies using Malaysian
data. They also find that correlation coefficients between initial
returns and over subscription ratios are significant for both raw
initial return and adjusted initial return. The significant
correlation is mainly due to the correlation coefficient of type 2,
offer for sale, which represents 173 of the total 227 new issues
for the entire period of the study. The positive correlation
coefficient for the overall result indicates that the higher the
over-subscription ratio, the higher is the initial return. Also, in
general, both initial returns and adjusted initial returns are
greater than their respective longer-term returns. They also
find that regardless of the types of new issue one gets one will
end up with more or less the same initial return. Finally, they
find that none of the correlation coefficients indicates that the
mean initial return has a significant relationship with any of
the average annual return over longer-term periods. The only
exception is the negatively significant correlation between
initial returns and average annual returns over three years
period, for both raw and adjusted returns.
Wolfgang Aussenegg (1997) investigates the price behaviour of
IPOs on the Vienna Stock Exchange during the period from
1984 to 1996. In accordance with the findings for other markets,
the average initial returns of Austrian IPOs are significantly
positive. For a total sample of 67 IPOs, an average first day
return of 6.6 per cent ia documented, which is lower than for
most other IPO markets. More than 30 per cent of all IPOs are
overpriced with negative initial returns. The cross-section of
initial abnormal returns can best be explained by the ex-ante
uncertainty about the value of the issue and the existence of
"hot-issue" and "cold-issue" periods. In the long-run (first five
years) Austrian IPOs underperform benchmark firms by a
significant 73.9 per cent (average buy-and-hold abnormal
return) with a wealth relative of 0.64. An investor would have
had to invest 56 per cent more money in IPOs than in non-IPO
firms of similar size to have the same wealth five years after the
first aftermarket trading day. This phenomenon can best be
explained by cross-sectional differences in the ownership
structure: While the underperformance of family-owned IPOs is
very poor, no positive or negative abnormal performance can be
detected for privatized enterprises or other non family-owned
firms going public.
Norita Mohd. Nasir and Rosliza Mat Zin. (1997) look into the
underpricing of IPOs in Malaysia in 1990 to 1996, and find the
initial public offerings (IPOs) are typically underpriced. This
etudy use 112 companies for the period 1990-95 and done with
the objective of determining the level of underpricing and the
possible explanations of the underpricing phenomena. The
results confirm that underpricing occurs on the Malaysian stock
market with the industrial sector (1990-93) and construction
sector (1994-95) as the highest contributor, The insignificant
price fluctuation after the first day of trading conforms to the
eficient market hypothesis, Analysis on the proxies reveals that
none of the observable measure for ex-ante uncertainty is
significantly related to the level of underpricing in the
Malaysian IPO market.
Halil Kiymaz (1999) analyzes the initial and after-market
returns for the Turkish initial public offerings (IPOs) to provide
an emerging market case of international evidence on
performances of IPOs, The sample consists of 163 firms listed
and traded on the Istanbul Stock Exchange during the period of
1990-1996. The results ,show that the Turkish IPOs are
underpriced on initial trading day on average of 13.1%. The
initial underpricing is 11.7% for industrial firms, 15% for
financial firms and 17.6% for others. In terms of sub-sectors the
highest return is obtained in Tourism:Transportation group,
while the lowest return is observed in Machinery:Equipment
group, With the exception of Banking group, all of the sub-
sectors experienced statistically significant initial underpricing.
The investigation of factors influencing the initial performance
show that size of issuer, rising stock market between the date of
public offering and first trading day, institutional ownership,
and self-issued offerings are significant determinants of
underpricing.
Dongwei Su and Belton M. Fleisher (1999) identify some of the
causes of cross-sectional differences in underpricing of Chinese
initial public offerings (IPOs) using data compiled for 308 firm-
commitment A-share IPOs (available only to Chinese investors)
and 57 B-share IPOs (available only to foreign investors). They
first formulate and estimate a benchmark empirical model that
relates IPO initial returns to variables widely used in studies of
IPO underpricing. Then they test three hypotheses that may
help explain the high A- share IPO underpricing in China. They
find that IPO underpricing is the largest at the earliest stage of
development of stock markets in China. The extraordinarily
large IPO underpricing is at least partially due to a relatively
small aggregate supply of shares. They also find that A-share
IPO underpricing is better explained by a signaling model that
relates IPO underpricing to subsequent seasoned equity
offerings (SEOs) than by one linking government or employee
ownership to equilibrium IPO underpricing. Issuers with larger
IPO underpricing are more likely to raise larger amounts of
capital through SEOs more quickly. The results support the
notion that the primary purpose for Chinese firms going public
is to raise capital, not to transfer ownership from state to
private citizens. Moreover, they do not find any evidence that
lottery mechanisms have contributed to the high IPO
underpricing in China. Finally, they find some evidence that the
difference in IPO underpricing among A and B shares can be
explained by the differences in domestic and foreign investors'
investment opportunities and investment sentiments.
Morni Hayati Jaafar Sidik, Annuar Md Nasir, Loo Sin Chun
and Mohd Ali Abdul Hamid (2000) examine the performance of
IPOs in Malaysia during the financial crisis between July 1997'
to September 1999, Using the same methodology as previous
studies on IPOs, both the short run and long run performance of
81 new issues on the KLSE were examined. The overall results
provide evidence consistent with previous studies that most
IPOs were generally underpriced on their first day of trading.
An average first day return of 37.12 % was documented, a value
significantly lower than the earlier studies on the KXISE.
Comparing Main Board (MB) and Second Board (SB) IPOs
performances, the results indicate that firms listed on the SB
provided higher returns than firms listed on MB, When a short
run performance (from week one to month six) was analysed,
two important findings were obtained. Firstly, when investors
were fortunate to be allocated with new issues at the offering
price, they were able to gain abnormal returns but the rate
declined if the shares were kept for a longer period. Secondly, if
they purchased the new issues at the aftermarket price,
investors obtained negative returns. If the shares were
purchased at the aftermarket price and hold for w long period,
they performed worse than the market. This study also found
that there is a positive and significant relationship between
initial returns and over subscription rates in the short term but
not in t he longer period. Comparing the performances of IPOs
issued before and after the introduction of capital control, the
study found that IPOs issued after the measures show an
improvement in performance.
Douglas A. Hensler, Martin J. Herrera, Larry J. Lockwood
(2000) document differences in the performance of bank and
nonbank initial public offerings (IPOs) in Mexico during 1987-
1993, They measure performance relative to the Mexican stock
market index. Banks experience much larger initial
underpricing than nonbanks due in part to a hot issue market
in 1987. In the aftermarket, excess returns for banks,
industrials, and services are not significant. Excess aftermarket
returns for brokerage houses are significantly negative. They
also find that underpricing of the privatized IPOs diminishes
over time, supporting the argument that the Mexican
government offered discounts on IPOs issued early in the
privatization program.
Ashley Burrowes (2000) investigates the performance of IPOs in
UK and reveals the expected high level of underpricing usually
associated with the risky nature of small, young and growing
companies, is not supported by the evidence in his study. Raw
market adjusted figures reveal that IPO listed on Alternative
Investment Market (AIM) at the London Stock Exchange
appear to be only conservatively mispriced when contrasted to
main board IPO listings in the US, UK and other countries. Due
diligence listing requirements could be offsetting the otherwise
risky nature of these small, young and growing companies.
Finally AIM is discussed in terms of meeting its own targets
and its ability to attract international listings,
Maher Kooli and Jean-Marc Suret (2001) investigate Canadian
initial public offerings (IPOs) to provide one case on the
international evidence on the long-run performance of IPOs.
Specifically, they examine whether the choice of a performance
measurement methodology directly determines both the size
and power of statistical test, as documented in previous studies
(Mitchell and Stafford, 2000; Loughran and Ritter, 2000; and
Brav, Geczy and Gompers, 2000). Their sample consists of 445
1POs between January 1991 and December 1998. Using
cumulative abnormal returns as an abnormal performance
measure, they find that the Canadian IPOs underperform
significantly the sample of seasoned firms with the same
market capitalization. More specifically, the 3 year and the 5
year underperformances estimated on value weighted (VW)
basis are statistically significant.
Generally, all the studies done in the Malaysian market and
other emerging markets document the underpricing do occur. In
this study, the IPO of Sarawak based listed firms will be
examined to see whether it show a similar pattern or not.
CHAPTER 8
RESEARCH rnTHODOLOGY
3.1 Data Collection and Recording
The population in this study comprises of 29 Swrawak
companies listed in the Main Board (MB) and Second Board
(SB) of Kuala Lumpur Stuck Exchange (KLSE). Those
companies are listed in the table below.
Out of 29 companies, only a sampIe of 22 companies has their
issue price available for this research purposes, It consists of 9
10
companies from KLSE main board and the rest 13 companies
are from KLSE second board. 7 other companies where the offer
price could not be obtained are Granite Industries Berhad
(GRANITE), Great Wall Plastic Industries Berhad (GWPI),
Hock Hua Bank Berhad (HH BANK), Jaya Tiasa Holdings Bhd,
Sarawak Enterprise Corp. Berhad, Sarawak Oil Palms Berhad
(SOP), and Wijaya Baru Global Berhad.
The issue price and the price at the end of first day of listing
were extracted from KLSE website (httt,:llwww.klse.com.my),
Company's Annual Report and the MetaStock Professional
Version 7.0. The market proxy used is the KLSE Composite
Index (KLCI) that is extracted from the MetaStock Professional
Version 7.0.
3.2 Data Processing and Analysis
The first day return is defined as the percentage change in price
from the offering date to the close at the first day of trading less
the equivalent change in the market index and is calculated as
follows:
Where ari = abnormal return
ri = return on the first day of trading of the issue
r, = the corresponding change in the market index
The statistical significance of each level of underpricing for each
firm can be tested using t statistic with n-1 degrees of freedom
and is obtained using the equation:
where ARt = Average Abnormal Return
tt = the t statistic for the average return for period t
ot = the standard deviation of the sample mean for
period t .
3.3 Hypothesis Formulation
Ho : The initial market return of IPOs is not significantly
different from zero
Hi : The initial market return of IPOs is significantly different
from zero
If the Ho is rejected, then the IPO of Sarawak listed companies
could be seen as showing similar pattern to the other IPOs
studies documented earlier.
CHAPTER 4
FINDING (ANALYSIS AND EVALUATIONS)
4.1 Findings
In this chapter the correlation between the return on the first
day of trading of the issue and the corresponding change in the
market index is examined. The result will be use to interpret
the significance level of IPOs among all selected companies.
The formula used is;
Where ri = return on the first day of trading of the issue
Pt = Closing price of share on the first day of listing
Pt.1 = IssuelOffer price of share
Table 2 : The difference between the IssueIOffer price and the closing
Table 2 presents the difference between the IssueIOffer price of
share and the closing price of share on the first day of listing.
From the table above, only 5 companies have their negative
return on the first day of trading. They are BIG Industries Bhd,
CCK Consolidated Holdings Bhd, Subur Tiasa Holdings Bhd,
Weida (M) Bhd, and Zecon Engineering Bhd. The rest have
their share return in positive value. This reflects t hat most
IPOs of Sarawak listed companies are underprice.
To measure the change of the market index on the day of listing,
the following formula is used;
Where r m = the corresponding change in the market index
I t = Closing Index on the first day of listing
Zt.1 = Closing Index on the day before the first day of
listing