Although the Philippines has outperformed economies in Southeast Asia in 2016, its Initial Public Offerings (IPOs) have been consistently low for almost a decade. How can the fastest growing economy in the region continue to have a dearth of IPOs?
The Philippine economy posted 7.1 per cent year-on-year growth in the third quarter of 2016 ― higher than China (6.7 per cent), Vietnam (6.4 per cent), Indonesia (5.0 per cent) and Malaysia (4.3 per cent) ― due to overseas Filipino remittance, a thriving business process outsourcing (BPO) sector, a growing middle class, and spendings toward public infrastructure.
Still, the country wasn’t able to gain back its double-digit listings since 2007, registering only two IPOs from 2008 to 2009 before averaging four to five annually, according to data compiled by global professional services firm PWC.
Experts have pointed out that stiffer IPO requirements prevent local businesses to go public. The plan to hike the minimum public float from 10 per cent to 15 per cent is likely to be implemented by the Securities and Exchange Commission (SEC) soon.
The Philippine Stock Exchange (PSE) totaled only four IPOs in 2016, namely: Golden Haven Memorial Parks Inc raising $16.5 million in June, Cemex Holdings Corp in July $537 million, Pilipinas Shell Petroleum Corp in November $2.2 billion, and Shakey’s Pizza Asia Ventures Inc (SPAVI) in December $80 million.
In an interaction with DEALSTREETASIA, PSE chief operating officer Roel Refran, said they aim to double last year’s IPO figures in 2017, and cited several reasons for the dearth of IPOs in the country.
Refran noted there’s a lot more consumer and construction companies that are primed up already for listing this year, even as PSE plans to get more products, and getting ready when the market rebounds. Edited excerpts:
What’s your take on the Philippines’ few IPOs?
In other markets it’s government requirement for them to do a listing, like in Vietnam and also in Indonesia. They do have a lot of push or gravitas to make sure companies list. But in the Philippines is purely private, it’s really more a timing element rather than incentives question. Because incentives wise, it’s no-brainer, it will have to redound in favor of the issuer and directors if they go public.
You see IPO is a good fresh start especially for investors because we look at listings from the perspective of the issuer and the investors, and investors always see an IPO as a good opportunity for them to realize maybe 10 to 15 per cent pop, or uptake in the first day. But to the issuer, the IPO is just the beginning of a series of fund raising. It’s just a milestone they become public and that’s also a gauge of our success, but to us as a market operator the more telling numbers are the annual capital raising.
So we’re working in getting more IPOs in the same way we’re working to get existing companies to consider going back to the market and doing their fundraising through the capital market, top the institutional funds, top the retail.
What keeps local companies from going public?
The big names in business are already listed and it’s now the function of the new companies wanting to list. When we say the big ones, they are the household names like the Ayalas, San Miguel Corporation etc. Other household names are conscious of listing. It’s taking them time to go public because they’re coming from a privately-owned environment which means there’s a lot of housekeeping that needs to be done. So far as the books are concerned, it should be according to standards for listed companies, meaning audited by a class A auditor. Because auditing firms in the Philippines categorize according to those who can sign off on public companies. These are what you call the class A and there’s a lot of them. So for them to accept you, you must make sure your books are in order and that takes time.
Second, I think there’s this propensity of the family-owned corporations to utilize bank financing schemes compared to opening up their boards to the public. Because when you become listed there would be other faces around the table who are not within your family because they represent like the independent directors. If you’re a listed company, 20 per cent or at least two would have to be independent directors. So imagine that, the founders even those who are successful, they think twice to open up their board or the ownership interest in their company. Sometimes it’s the second, third generation that gives them enough arguments, reasons to decide to go on this path. It’s a path to go this process toward listing.
What was the impact of declining number of IPOs from the past 10 years?
When you look at IPO numbers, we are among the lowest, compared to Vietnam, Singapore, Thailand and Malaysia. But if you look at the data on annual basis from 2007 to 2011, and another five years from 2011 to 2016, capital raising like your follow-on offering, stocks rights offering, also via private placement, the number was roughly P71 billion from 2007 to 2011. And then in the next five years it was two and a half times that, around P174 billion. So if you look at the progression in 10 years time, while IPO numbers remain to be challenging, those already listed are deciding to come back more often to the market to do their fundraising.
Now we have 266 companies listed. Look at the other markets, they are by the thousands. Quality is important but quantity is also very important because it means more companies are both into the strength of the financial system. It’s really a buy in process. To me it’s a seal of good housekeeping from a corporate governance perspective. This is the lite market compared to opaque market which is really not very heavy regulated.
We want more to formalize, from the informal to the formal and those in the formal for them to consider listing. A lot of the MSMEs (micro and small) are in the informal sector. They’re not even registered for Bureau of Internal Revenue purposes. We encourage more SMEs to become formal in the sense they are now captured in the ecosystem of the government for the purposes of tracking, and risk management.
What do you think of having a startup stock exchange in the Philippines?
That seems great. Personally, I think it would be good if there is a government program for startups to make sure you get the best and the brightest to determine if the risk is worth taking. Sometimes people look at investment opportunities and all they see are the returns but they don’t see the downside. This is high risk investment. That’s where we are coming from. If we are to come up with a program for startups, there are two models, like in India’s NSE they allow only qualified investors to buy from its SME equivalent, because as they say the Indian population is too risky for them, but the smart, sophisticated investors they know the risks. Here in our country we don’t have that filter model.
Anyone can buy on the PSE board. It’s not just the banks, insurance companies, even ordinary Filipinos can buy. That’s why we’re more mindful, we have certain filters on who can list on the SME board. But again, that’s without prejudice to today’s startup opportunities. Technology has evolved, and we have to recognize and accept that and see if you can probably create a protective mechanism for the investors.
But now our SME board, I guess, is rethinking how do you fit the model with startups with no track record? We will see if we can consider limiting it only to sophisticated investors as a start for a phase in period.
What are the qualifications to list?
For the purposes of the EBITDA, it’s P15 million cumulative. So authorized capital stock, P100 million, it’s what you applied at SEC and that you are authorized to get as much as P100 million. Normally paid up is just 25 per cent.
Can this be lowered?
We need to incorporate that and amend the rules. You have to be of a certain scale in terms of your revenue and operations for you to be considered for purposes of listing.
What is PSE doing when it comes to financial literacy?
We interface with government primarily through the SEC and I think it’s also with the finance department. For products we see there’s common interest. We work closely with them. There’s the personal equity retirement account or PERA, like Japan’s NISA account. The collaboration is PSE, BSP (central bank), SEC, and the insurance commission. It has ecosystem and framework. Among the products that could be offered are stocks, mutual funds, insurance products, or fixed income.
While we haven’t done yet by formal partnership, we cross-pollinate in terms of us being a resource speakers in some of their road shows of public companies. If you look at for example the BSP people, their orientation is fixed income. SEC’s orientation is capital markets plus fixed income. It’s getting a healthy happy marriage between the two. So we’re probably more SEC since it is our regulator than BSP. For collaborations it is really more on the campaigns so far. Nothing yet in terms of written materials. That’s the next level, we have to come up with formal written materials not just in English but also in Filipino.
There are only more than 700,000 accounts in the exchange accounts out of our 100 million population. Roughly 40 million are working, and only 700,000 are in banks, it’s a dismal story. In total of more than 3,000 municipalities there is only 38 per cent of banking presence or penetration. And of the 38 per cent, 70 per cent of the savings they don’t put it in the banks. There is already presence but they still keep in their houses. Only 30 per cent are actually saved. It’s risk averseness exemplified. That mentality has to change because that money you’re foregoing income opportunity cost. That’s why the regulators, including us, have to explain what’s your safety net if you invest?