Why the interest in US Nasdaq?

TheEdge Tue, May 09, 2023 02:00pm - 10 months View Original


AS Bursa Malaysia’s initial public offering (IPO) market remains vibrant at the start of 2023, there has been some interest in overseas listings, especially on the technology-heavy US Nasdaq. And this includes the special purpose acquisition company (SPAC), although it has cooled since end-2021. Better valuations and exposure as well as fewer barriers to obtaining higher funding are among the factors that continue to spur overseas listings. However, maintaining market interest after listing is another matter altogether.

Regional private equity investor Ian Yoong observes that the main reason is the lack of interest by US and foreign investors in small- and mid-cap companies with businesses in Malaysia, although there are exceptions.

“Malaysian and regional companies that intend to list in the US should operate businesses that have a regional presence and have a large market capitalisation of US$10 billion (RM44.6 billion) and above at the time of listing,” he tells The Edge, pointing to US-listed Southeast Asian firms that tick all these boxes, such as Grab Holdings Ltd and Sea Ltd.

“My advice to any Malaysian company planning an IPO on the New York Stock Exchange or the Nasdaq is to ‘go big or go home’,” he quips.

Yoong highlights that US fund managers are able to assess the earnings potential of early-stage technology companies that have yet to report profits. Taking Google, Amazon and Tesla as examples, he says these giants managed to fulfil their early promise.

The more flexible listing regulations in the US are another catalyst, with the listingprocess there being more efficient, he says. 

“The listing process for a well-managed large-cap company on Bursa takes about nine to 15 months, while it takes six to nine months for a company to list in the US.”


That said, listing fee-wise, Yoong shares that the cost of listing in the US is much higher at US$4 million to US$10 million, compared to RM4 million to RM6 million for a large-cap firm on Bursa, not including underwriting and placement fees.

“The annual cost of maintaining a listed company on Bursa ranges from RM1 million to RM2 million, excluding the remuneration of independent non-executive directors. For a listed firm in the US, the annual cost ranges from US$600,000 to US$2 million.”

Catcha Group chairman and CEO Patrick Grove believes there isn’t a one-size-fits-all solution for companies.

“I think Bursa is perfect for domestic-focused companies that are profitable. US markets are probably more suitable for globally-focused companies that are still loss-making.

“We have a company called Catcha Digital Bhd, which is a highly profitable digital company, and we believe Bursa is an ideal market for this company. Our other projects are still three to five years away from profitability, and I think Western investors in the US or Australia would appreciate such companies better,” he says.

He is of the view that Western investors are more tolerant of business models that have a five- to seven-year journey to profitability.

Catcha Investment Corp, a SPAC, was listed in the US in February 2021, raising an upsized US$275 million from its IPO. In order to keep Catcha Investment on the global investors’ radar, Grove says Catcha Investment has to bring some “excitement” to the US market. However, he did not elaborate.

Catcha Investment’s share price has risen 3.1% compared with its listing price of US$10 apiece.

Meanwhile, Bursa-listed Catcha Digital slipped into the Guidance Note 2 (GN2) list in August 2017, following the sale of its then-digital asset — Rev Asia Holdings Sdn Bhd — to Media Prima Bhd for RM105 million.

Last March, Catcha Digital was granted an extension up to Aug 5 this year to implement its regularisation plan, which entails the acquisition of the entire equity interest in iMedia Asia Sdn Bhd, an integrated digital media solutions provider.

Bursa arguably too small for large fundraising exercises

Another company that is poised to tap the US SPAC space is Graphjet Technology Sdn Bhd, which turned to the US markets owing to the difficulty of raising a large amount of funding for small companies.

“In smaller capital markets such as Bursa, it is harder to raise large funding and [it] is too small for companies such as Graphjet, which intends to list at a valuation of US$1.5 billion,” says its co-founder and CEO Aiden Lee Ping Wei.

Furthermore, he is of the view that private placements here are not as vibrant as in the US, making it difficult to even raise RM30 million to RM50 million. Hence, the local capital market may not be the ideal environment for Graphjet, given that its required capital expenditure for the first production plant is US$100 million.

“Raising such a significant amount through an IPO or SPAC merger could prove challenging in Malaysia’s market. Additionally, investor preferences in the US capital market tend to lean towards supporting critical materials, further solidifying its appeal for Graphjet’s growth and expansion plans.

“We can choose to remain a big fish in a small pond — facing uncertain growth and an unclear future — or embrace the opportunities in a larger pond with a promising future and abundant room for expansion.

“Although a large number of listed firms in the US might imply intense competition, we confidently position ourselves as a distinct and eco-friendly graphite and graphene producer,” Lee declares.

Graphjet is involved in converting waste into supermaterials such as graphite and single-layer graphene. Lee is confident that offering graphene at a remarkable 80% lower cost than the market price will further differentiate the company’s approach.

Though compliance with regulations is much more stringent in the US, he says that this is in line with the company’s regulatory framework to protect public shareholders. 

He is confident the company’s robust business model will be able to attract global investors, although trading volume in US-listed Malaysian firms tends to be low.

“The limited interest in US-listed Malaysian firms was likely due to their technology, products and growth potential. In contrast, our business offers exceptional products and adds value to a community dedicated to sustainability initiatives and transitioning towards renewable products and services.”

Last October, Graphjet and Energem Corp submitted an application to the US Securities and Exchange Commission (SEC) for the regulator to approve a merger.

“The listing process is proceeding smoothly, although there was a two-month delay due to the US midterm elections in November last year,” Lee explains.

US SPAC challenges

Why turn to SPAC listings when there has been a negative perception towards SPAC firms in the US lately, with some filing for bankruptcy? According to Bloomberg, at least eight businesses that went public through mergers with “blank cheque” companies have sought protection from creditors since June 2022.

Lee points to the new rules proposed by the SEC in March 2022 to enhance disclosure and investor protection with regard to SPACs.

The rules mandate filings by SPACs, including with respect to financial projections and fairness determinations in de-SPAC transactions; new registration requirements under the Securities Act of 1933 for de-SPAC transactions and the elimination of the safe harbour for forward-looking statements under the Private Securities Litigation Reform Act of 1995 for disclosure in those registration statements.

Lee highlights that Graphjet does not rely on the SPAC model to repay loans or manage its cash flow, as it is in a debt-free position.

Yoong says that the regulatory requirements for listing via SPACs on the Nasdaq are possibly the lowest in any developed market.

“Listing via SPAC is appealing as it is effectively a reverse takeover  of a shell company listed on the Nasdaq. It was easier to raise funds via a de-SPAC exercise in 1H2022 than listing on Bursa. The pool of funds is in the SPAC while an IPO on Bursa Malaysia requires securing investors to subscribe for new shares in  a business that may not be fundamentally attractive.

“The less attractive businesses acquired by many SPACs via de-SPAC exercises are the main reason for the poor performance of the equities of these listed companies post-de-SPAC exercises,” he tells The Edge. 

Other potential SPAC listings include health and wellness products manufacturer Wellous Group Ltd, which inked a definitive business combination agreement with SPAC Kairous Acquisition Corp last December. Upon approval by the shareholders of Kairous and the closing of the proposed transaction, it will result in Wellous becoming a publicly listed company on the Nasdaq.

Also, last August, ARB Bhd proposed to list its Internet of Things business via its indirect wholly-owned subsidiary ARB IOT Group Ltd on the Nasdaq, with an issue price of at least US$4 to raise a minimum of RM17.78 million and up to RM59.32 million.

Two years ago, low-cost carrier AirAsia Group Bhd talked about a listing of its digital arm via a SPAC in the US to raise at least US$300 million.

Even Genting Bhd had mulled plans to monetise its life-sciences division. However, there has been no further update since announcing its proposed merger with Nasdaq-listed GX Acquisition Corp to form a SPAC in an attempt to create a publicly-listed leader in allogeneic cellular therapy.

For VCI Global Ltd, although it is not in the SPAC space, the decision to list on the Nasdaq is premised on the market’s greater focus on technology and innovation, according to its founder and group executive chairman Datuk Victor Hoo.

“By listing on the Nasdaq, we hope to gain access to a more developed capital market than Malaysia, which can provide us with more opportunities to raise capital and grow our business,” he explains.

Operating in Malaysia, VCI Global, which owns investor and public relations firm Imej Jiwa Communications Sdn Bhd, is a multi-disciplinary consulting group with key advisory practices in the areas of business and technology. Its clients are predominantly from Malaysia, but it also serves those from China, Singapore and the US.

“We believe VCI Global has a unique value proposition that will enable us to compete effectively. We have a strong track record of innovation and a talented team of professionals who are committed to delivering value to our customers and shareholders. Listing in the US can provide us with a long-term capital infusion to fuel growth and enhance shareholder value,” he says, when asked about the stiff competition in the US markets.

Hoo believes that the US has more stringent listing rules compared with Malaysia in general as the US exchanges have higher financial thresholds, and stricter corporate governance standards than Bursa.

“We have always adhered to the highest standards in Malaysia, and will do so for the US as well.”

To address the issue of low trading volumes among US-listed Malaysian firms because of a lack of familiarity and awareness among US investors, Hoo stresses that VCI Global will continue to work on increasing its brand visibility and reputation after listing, to attract more interest and demand for its shares from US investors and create value for its shareholders.

Shares of VCI Global have slipped 40% since its recent listing on April 13 at a listing price of US$4 a share. Gross proceeds from the offering are estimated at US$5.12 million before deducting underwriting discounts, commissions and other listing expenses.

Home-grown cash rebate app operator Starbox Group Holdings Ltd successfully made its listing on the Nasdaq last August. It was trading 22.8% lower last Thursday compared with its listing price of US$4 per share, having raised gross proceeds of US$21.5 million for the expansion and upgrading of its software and systems.

Not all overseas listings bear fruit, however. Local tycoon Tan Sri Vincent Tan’s online payment firm MOL Global Inc was delisted in 2016, after its share price fell below the minimum bid price of US$1. The delisting took place less than two years after the offering of its American depositary shares on the Nasdaq Global Select Market.

Hong Kong was once a favourite listing destination for Malaysian firms, especially those in the manufacturing sector.

Linocraft Holdings Ltd, Furniweb Holdings Ltd, BGMC International Ltd, Pentamaster International Ltd and Kingsley EduGroup Ltd are some of the home-grown companies listed in Hong Kong. However, it is worth noting that their share price performance has mostly been lacklustre.

PRG Holdings Bhd’s 68%-owned subsidiary Furniweb, for example, has seen its share price slump 90% since touching a high of above HK$3 in December 2018. Likewise, Linocraft has fallen 94.3% after it peaked at nearly HK$2 in September 2017.

Shares in Pentamaster International, however, have gained 11% from its listing price of HK$1 a share.

Apart from Hong Kong, other favoured markets include Singapore, London and Australia. 

Bursa claims competitive edge lies in adherence to shariah principles

In a battle for quality companies, Bursa Malaysia believes the local bourse’s competitive edge lies in its adherence to shariah principles.

“This unique attribute broadens the pool of potential investors beyond traditional funds and investors, by catering to the additional needs and demands of the Islamic funds and investing communities who require compliance with shariah mandates. We will continue our efforts to engage Malaysian firms that have the potential and fit to list on Bursa Malaysia,” the exchange says in a reply to The Edge’s queries.

For foreign companies that have plans to list in Malaysia — especially those that have operating subsidiaries, businesses or investments here — it says undertaking an initial public offering (IPO) in Malaysia will reduce their reliance on parent companies. It adds that the local exchange provides a robust platform for capital-raising and investment, allowing for greater diversification and exposure.

The Main Market is catered to well-established large-cap firms, the ACE Market is for emerging companies of any size while the LEAP Market is tailored to the requirements of small and medium enterprises, including start-ups.

Bursa says the decision to take a company public and the choice of listing destination are commercial decisions that an issuer would typically deliberate after weighing multiple factors that extend beyond the issuer’s financial performance and growth prospects.

“Key factors to consider include the business segment in which it operates, its market base — whether it is focused on domestic or export-oriented business, its brand recognition, as well as its market presence.

“Furthermore, the issuer must assess the ability of a given capital market to comprehend and recognise its business, to such an extent that it can ascribe the desired value to the issuer’s business and provide the required funding for the company both at the time of the IPO stage and beyond.”

The exchange says its efforts remain towards developing a vibrant ecosystem that is crucial for attracting potential issuers and ensuring sufficient liquidity to support fundraising in the local market. Initiatives taken include product innovations and ecosystem enhancements, as well as continuous dialogue with relevant stakeholders to push for efficiencies that can improve market competitiveness, liquidity and the profile of public-listed companies and visibility.

It also stresses the importance of educating local investors in order to improve and enhance their understanding of investing techniques.

“In an ever-changing market, it is essential especially as new types of businesses develop requiring new valuation methodologies to be explained and understood. For example, the valuations of start-ups, particularly unicorns, are businesses that may not be profitable and continue to incur losses even after listing. Thus, educating investors is one of our initiatives to foster a conducive ecosystem in our marketplace.”

On the recent introduction of the LEAP transfer framework, Bursa foresees an increased number of IPOs on the LEAP Market, as it facilitates a clear path for companies to graduate from the LEAP Market to the ACE Market and allows companies to gain a better comprehension of the transition process.

“Ongoing discussions have also taken place among several parties in the capital market, market intermediaries and government authorities with the aim of enhancing Malaysia’s appeal as a listing destination for companies operating in the technology, halal, healthcare, and environmental, social and governance sectors.”

This year alone, there have been 10 listings on Bursa Malaysia, most of which are on the ACE Market. The top-performing IPO was Oppstar Bhd, the first pure integrated circuit design house on the local bourse, whose share price surged nearly five times to RM2.95 on its maiden trading day on March 15, against its IPO price of 63 sen.

Upcoming new listings include Autocount Dotcom Bhd, Radium Development Bhd, Edelteq Holdings Bhd and DXN Holdings Bhd.

In 2022, there were a total of 34 new listings with total funds raised of RM3.52 billion.

 

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