Dr Ernest Kan, the deputy managing partner for markets at Deloitte Southeast Asia, is bullish on the prospects for the equity capital markets of ASEAN and Singapore, in particular, forecasting that infrastructure projects and technology firms will drive IPOs across the region in the coming years.
This will be buoyed by the growth narrative that dominates regional capital markets, in addition to the growing consumption across the region, as well as increased Chinese capital inflows targeted at infrastructure projects in Southeast Asia as part of its Belt & Road Initiative (BRI).
With over 30 years of professional experience, Dr Kan’s expertise in financial audit and consultancy has seen him specialise in IPOs in diverse sectors such as finance, energy & resource, healthcare & life science, manufacturing, technology and telecommunications.
As a Deputy Managing Partner (Markets), Dr Kan also oversees the operations of Deloitte, particularly in the aspect of clients’ management and market development.
In an interview with DEALSTREETASIA, he discusses aspects of the Singapore Exchange (SGX) in regard to its growth strategy and ability to grow its viability as a listing destination, the liquidity and growing appetite for technology stocks in Singapore and ASEAN, as well as the impact of BRI on ASEAN economies.
A common criticism among stakeholders in Singapore’s venture ecosystem is liquidity and conservative valuations when it comes to technology stocks. In light of its strong performance in 2017, what’s your response to these concerns?
I always believe a strong capital market will deliver positive outcomes and it’s understandable for investors and entrepreneurs to review a public listing on a couple of markets. They will look at two major factors: the valuation and liquidity of the capital market. That’s how investors and entrepreneurs should look at if they want to seek a successful listing in equity capital markets.
Now the point is whether a telecoms or technology company should explore a listing in Singapore. I would look at the Netlink NBN Trust listing in 2017 where they were looking to raise S$2.3 billion. In the end, they were oversubscribed, with the money coming in amounting to S$4.6 billion, almost double the amount they were seeking.
Clearly, there is sufficient liquidity for a telco company or any other telecommunications, media & technology (TMT) stock. If there were insufficient liquidity and interest in our market, you wouldn’t have a 2x subscription for such a large IPO. Whatever people may have said in the past about liquidity, Netlink is a good example of a TMT stock that was reliable and backed by a good plan, given the excess money it received. I’d say we have substantial liquidity in the market for the high-quality companies.
In 2017, the SGX established a collaborative listings agreement with the NASDAQ in the US, as part of its ambitions to build itself as a global technology hub. How will this impact its technology listings pipeline in the medium to long term?
The listings collaboration with the NASDAQ is complementary because when we look at our stock market, we are strong in real estate investment trusts (REITs), business trusts and even to a large extent, consumer businesses and industrial products. But we lag when it comes to our TMT cluster.
Its a positive development for the SGX to collaborate with somebody who is strong in that sector and in the US market, which will always attract big companies, especially the NASDAQ.
Southeast Asian technology entrepreneurs often cite the conservative valuations they experience on local bourses as reasons to list outside the region. Fatfish Internet, an ASX-listed venture builder, argues that ASEAN bourses can’t support the high valuations of the startups in the region. Can you weigh in on this?
There has been a recent surge of technology and fintech listings on the Hong Kong Stock Exchange, including Razor Inc, Yixin and Tencent’s China Literature which all had a stellar performance at 18%, 6% and 86% increase in share price at the end of first-day trading.
Building on this momentum, on 15 December 2017, the Hong Kong Stock Exchange announced proposed rule changes to allow dual-class shares on the main board, with a formal public consultation to be launched in the first quarter of 2018. The overhaul in listing regulations to allow dual-class shares is intended to enhance Hong Kong’s competitiveness vis-a-vis the US, especially for Chinese technology IPOs.
We can expect that a growing number of tech firms will look to list in Hong Kong. On this front, there has been news of Xiaomi, the privately owned Chinese smartphone maker, holding talks with investment banks for a possible IPO. Elsewhere, Tencent Music, the music streaming unit of Tencent Holdings, has also invited investment banks to handle its planned listing. Further, Baidu’s video streaming site iQiyi is targeting an IPO too.
As for the Southeast Asian markets, with the strong GDP growth of the Southeast Asian economies which range from 3.0% to 6.9%, we can expect continued growth and certainly, this would spur and encourage developments in the IPO space, in reaction to the success of the recent tech IPOs.
At the beginning of 2016, the Singapore Business Federation (SBF) issued a position paper that called for the SGX to establish a third market board. Such a board could service technology and mid-market enterprises. Additionally, it sought to inject capital from the Central Provident Fund (CPF), Singapore’s equivalent of a pension fund, into the securities market here. This is how Australian and Japanese pension funds underwrite the liquidity of their own securities market. What’s your perspective?
If you look at jurisdictions like the UK, Australia, and Japan, the pension funds are active because of specific schemes for employees in their system. And this certainly helps the stock market. Now, the SBF suggestion is valid and something worth exploring. It’s worth exploring the use of our pension fund equivalent, the CPF, to be involved as a source of funds for the capital markets.
As for a third board? If you look at other countries, Malaysia launched a third board called LEAP in June 2017 and made it specifically to attract their domestic firms seeking a listing on the Bursa Malaysia.
For Singapore, if we want to make the equity capital markets more vibrant, then we have to consider that direction as one way to keep more of our SMEs seeking a listing here in Singapore, whether on the Catalist or on this third board, where it could be more friendly and with less stringent requirements to conduct a public float.
The Hong Kong Exchange (HKEx) has moved into a very different orbit relative to the SGX. They were exploring the possibility of a third board, which was eventually dropped. Within ASEAN, you have Vietnam, Malaysia and Indonesia looking to establish either third boards or startup stock exchanges that target emerging enterprises. Should Singapore be looking at a private secondaries exchange or is a third board a better solution?
I’d say the capital market fabric in Singapore is very different to the markets in Malaysia, Vietnam, Indonesia, Thailand and elsewhere, as our economy is smaller relative to the other regional economies. In other words, we don’t have the bandwidth in terms of the volume of SMEs compared to these countries.
Singapore needs to seek its own unique solution. When I discuss a third board, what I’m referring to isn’t necessarily a mirror of what has been done in Malaysia as we’re not retaining a lot of our small enterprises here compared to Malaysia.
If anything, the SGX has the highest proportion of foreign companies listed here compared to any other stock exchange in the world. I think close to 40% of the listed corporates on the Singapore bourse are foreign companies. We are by far one of the most international stock exchanges, even compared to Hong Kong. While they claim they are international, most of their listed entities are Chinese in origin while ours are more international in character.
A third board should be able to attract and retain both local and foreign SMEs which are good quality and small. However, we don’t have a sufficient volume of small companies to justify that, while other stock exchanges, like Vietnam’s for instance, have a significant volume of listed enterprises which are all rather small. Fundamentally, they have a stock market that caters specifically to those companies.
Saudi Aramco has shortlisted Hong Kong, New York and London as its primary listing destination. Loh Boon Chye, the CEO of the SGX, has been bullish about attracting a secondary listing of Saudi Aramco listing in Singapore. What’s your take on such a potential listing and its impact on the city-state’s market, given it’s a major oil & gas hub?
Saudi Aramco will be a mega-cap stock once its listed, and they’ve been looking around. It’ll clearly be the larger stock markets. It’s a very reputable and large enterprise. Once they secure a listing on that primary market, if Singapore can attract it, then it speaks very well for the city-state that it can be a premium stock market for quality companies.
While it’s not that large, it always wants to attract quality companies, especially for a primary listing. But for a company the size of Saudi Aramco, if it can secure even a secondary listing in Singapore, then it speaks well of the country’s securities market. And being Saudi Aramco, it would signal that the SGX is an excellent exchange where mega-cap firms can come for even a secondary listing.
2017 saw Razer conduct its IPO in Hong Kong while the SEA Group, the parent firm of Garena, chose to list on the New York Stock Exchange (NYSE). How can such Singapore-based tech enterprise be retained locally? What more can be done to create a more compelling and conducive capital market for this?
There are things that can be done but it’s not just about capital markets but also about the economic context of the geography you operate in. For Razer, their gaming business in China is substantial. That’s a major consideration if you want your brand to be promoted and you’re closer to your main market, which has a very large population.
As a gaming brand with an established name, Razer gets more visibility there. It’s also because of the infrastructure and network of sponsors and bookrunners who can underwrite the valuations and render them very attractive, compared to valuations in ASEAN where you have a smaller population engaged in gaming.
Fundamentally, what do we need to do to attract large companies like Razer and Sea Group to stay put? We have to look at what we’re good at, such as business trusts and REITs.
SGX knows they’re good at it, so they’ve invested a lot of energy and resource into building that cluster and have been successful in doing so. The listing of the Cromwell European REIT (CEREIT) is a perfect example of that, and it was the first pan-European REIT to list on an Asian stock exchange.
As to other clusters such as technology and large-cap listings? The SGX needs to be more active in trying to get larger tech listings here by studying the large-cap listings in Hong Kong and elsewhere in order to discover why those stock exchanges are so successful in attracting those enterprises.
The Belt & Road Initiative (BRI) by China resembles Japan’s own infrastructure projects in the1990s, with some analysts seeing it having a high risk of failure. This initiative comes at a time when China has a significant corporate debt problem and unfavourable demographics. Given these macro trends, what’s the real impact for BRI on ASEAN capital markets, given the troubles its seeing in places like Central Asia and East Africa?
In the late 1980s and 1990s, Japan was going through that process somewhat similar to what China’s going through, where it reached a state where the economy had matured and there’s no room for expansion. If anything, when they promoted this, Southeast Asia benefitted from the entry of many very strong Japanese companies into this region, especially Singapore in the late 1980s.
An example of this is Matsushita – it’s called Panasonic Corporation now – and this saw Singapore benefit tremendously from the expansion of Japanese multinationals into the region in the 1980s. Looking at the past, I think that ASEAN will benefit from the first phase of the Chinese economy growing through the BRI, just as we benefited in the 1980s from the Japanese equivalent.
However, our demographics and economic profile are very different compared to 30 years ago. In the early days, with the Japanese, it was manufacturing. The likes of Matsushita and Seiko were into electronics and watchmaking respectively. But it’s different today.
Today, the Chinese cannot enter the areas the Japanese went into because these are all sunset industries, and the Chinese are so competitive it has to be something very different. Now, there are similarities between the Japanese infrastructure push of 30 years ago and what BRI is doing. The big difference is that the Chinese are highly focused on infrastructure.
Back in the 1980s, this part of the world saw a strong demand for consumer products and electronics and the Japanese concentrated on that. You don’t need that today. What is really lacking is infrastructure in Southeast Asia in places like Indonesia, Thailand, and Malaysia. Infrastructure projects like seaports and airports are going to be a major focus; Indonesia is planning to build 16 airports and five seaports over the next 10 years.
You also need to look at GDP growth in recent years. Today, Indonesia has a growth of more than 5% per annum, with most ASEAN countries posting GDP growth averaging 5-6%, and they’re satisfied with their growing income and economic strength, which generates the money they need to afford better infrastructure.
The Chinese will be successful in Southeast Asia because the region is unique and the benefits of this Chinese investment will play out over the next 5-10 years. But beyond that, in terms of the challenges that will be encountered, I’m not sure we’ll face the same problems that the Chinese are facing in Africa, South Asia, Central Asia, or Eastern Europe, which may be due to the significant cultural differences in those countries.
In Southeast Asia, while we also have cultural differences, we at least have Chinese diaspora communities that can help manage the relationship. Many Chinese enterprises and investors try to do it through Singapore or Malaysia, probably because there’s a better resonance there for them. While there are some disputes over geography (i.e. the South China Sea), this is part and parcel of the growing economic connectivity. But by and large, I see more benefits than problems.