Japanese IPOs Explained

Unique Characteristics of Japanese IPOs and Screening Criteria

Japanese IPO Discounts

IPO pop (Initial advance of an IPO) of 15-20% is considered to be reasonable in US. but in Japan IPO pop of 100% is quite common. Why?  This is because that the public offering prices of IPOs are generally set at a discount of 20% to 40% from the fair price.

1. One of the reasons why the price will be set low is because the IPOs are attached “obscurity risk ” i.e. “less information = high risk”. Since the companies that carry out IPOs are not yet listed by definition, the amount of financial information to be disclosed is less than that of listed companies. 

2. Another reason is for securities firms to motivate investors to buy shares and sell out IPOs  which they have underwritten. However, if you sell at a reasonable price at the time of public offering and investors may not be able to sell it at a higher price in the market immediately after listing, then investors may not bother to participate in the lottery and buy shares at the public offering price. 

3. For example, if a company with a fair price of 2000 yen per share gives a 30% IPO discount when conducting an IPO, the public offering price will be 1400 yen. If the initial price returns to a reasonable price after listing, the investors who win the public offering lottery will earn a profit of 60,000 yen (note: a minimum trade requires a trade of 100 shares/trade). 

4. In actual IPOs, the initial price soaring rate is often 100% or more, which is the reason why IPO stocks have become a very popular investment product. Let’s take a look at the actual public offering price and initial price of the IPO. As an example, I would like to use “RareJob (a ticker symbol 6096)

5. RareJob which offers online English conversational lessons was listed in June 2014, and traded at 3155 yen, while the public offering price was 1170 yen. If you bought 100 shares (ie, lucky enough to get an allocation in lottery) 100 and sold them at the initial price, you had an instant gains of 198,500 yen. 

6. As such, IPO shares can be very profitable just by buying them at the public offering price and selling them at the initial price. The price does not always rise, but considering the fact that there are many records of price increases in the past, it may be a good idea to take on the challenge.

7. I am ware that IPO POP means that there is money left on the table for the issuing companies.  This custom needs to be corrected.  However, as with everything else in Japan, “changes” take time.  In the meantime, there s nothing wrong to “carefully”* take advantage of a current system.

*This year (2021), enthused by the past IPO pops, many retail investors have flocked to IPOs on the first trading days and pushed shares rapidly higher. which attracted securities firms’ AI which are programed to sell shares into IPO pops.  As a result, there have been few occasions in which the shares ended their debut days with lower prices than their fair values.  This gives us, foreign investors, who don’t have access to pre-IPO lottery a great opportunity to participate in “IPO Secondary(see the right column)”.  Thus, many stocks in the “Blog” section of this site are the ones in the next phase of IPO trading cycle. 

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Screening Criteria (the below criteria are gathered and evaluated from registration documents/prospectus available at TSE site)

1. Corporate culture/Management: The below list is the items for which we would like to get for the company’s culture

*At the time of IPO, ownership of founders/managers needs to be high so that their interests in growing their businesses and share prices are in line with shareholders’. The risk of high VC (Venture Capital) ratio after IPO is that VCs hold shares in venture companies for capital gains. Thus, there is always a selling pressure called “overhang concerns”.

*In the IPO documents, the founders describe their motives/reasons for founding the companies. Do they make sense for us?

*Age and average annual income of employees are available in the filing documents. The average income will tell us that experience level of labor force. 

2. Business Model/Process of monetization -who pays, how they pay and when they pay for the companies’ products/services. It is important to know the concentration ratio of the major customers.  If a company generates an 80% of their sales from one customer, it can create a life or death situation, if this customer decides to take their business somewhere else. Also, it is important to pay attention to seasonality of the sales/profits.  The subscription based sales is recurring, thus, the sales volatility is low. 

3. Look at TAM (total addressable markets). What is the current penetration rate and how much of the future growth left for the company? 

4. Capital policy: if only 10% of issued shares is made available to the public, supply and demand is very much unbalanced. This often leads to IPO Goal/IPO Pob (share price gaps up and the stock declines afterward). Liquidity refers to % of shares that can be bought and sold in the stock market. Target liquidity is 30% of issued shares. 

5. In the early stage of its life cycle as a stock, IPO shares often move in two phases. Initial move of an IPOed stock tend to experience a large  jump up, but after huge price appreciation, investors start to sell to capture  gains. This will often lead to large drawdowns.   If a particular company really possess a growth potential, rather than a stock with a hype, the stocks will attract the second wave of investors who are specialized in trading in the second phase of stock move called “IPO secondary” or a growth phase which comes after IPO base (a consolidation stage). 

6. Industry/Segment: Most importantly, IPO shares need to be backed by a transformative growth story. A transformative growth in Japan can come in many form, a) due to  unique Japanese conditions and b)a break out technology on a global scene. 

a) Unique Japanese conditions include aging population, general lack of English proficiency and a snail pace transition from manual to digital economy. b) emerging technology includes 5G, AI, All solid battery (use in pacemakers, RFID and wearable devices)