Analysis: Is Nanofilm Technologies 2020 IPO a tech turning point for Singapore?
The initial public offer (IPO) of Nanofilm Technologies on the Singapore Exchange (SGX) may represent the same inflection point that the listing of Xero Technologies did for the Australian Securities Exchange (ASX).
The listing of Xero in late 2012 laid the foundation for the ASX to establish its brand as an ‘“Asia-Pacific Nasdaq”. It has positioned itself as a bourse able to support the finance needs of growth-stage technology enterprises.
So will Nanofilm’s listing in October 2020 enable the SGX to burnish itself as a platform for technology enterprises?
In 2020, Singapore saw the number of public companies on Singapore Exchange (SGX) hit a low of 697 following 26 corporate delistings, as per bourse figures. That marked a second year where more businesses left the Singapore public market than joined it.
Even with its efforts to rejuvenate its public markets since the 2013 penny stock crash, 2020 saw the bourse see 5 mainboard listings — less than peer exchanges in the region — with its largest IPO being that of Nanofilm Technologies International which raised SG$510 million.
More recently, the proposed listing of ThaiBev’s brewery unit Beerco on the SGX Mainboard — potentially the largest non-trust IPO in Singapore since 2012 — could catalyse more regional and international stock investors to the Singapore market.
Singapore’s securities market has encountered a number of corporate governance failures in recent times, but the listing of the brewery unit could provide much-needed relief for its equities market.
Meanwhile, its chief Asian financial centre rival, Hong Kong, continues to benefit from “homecoming” listings by Chinese tech majors and stock connects to the bourses of Shenzhen and Shanghai. This is despite the implication of the Chinese Communist Party (CCP) exerting more control on its private sector — exemplified in the recent troubles of Alibaba Groups’ founder Jack Ma and aborted Ant Financial IPO — even as the new national security law erodes Hong Kong’s rule of law and status as a financial centre.
With the ascent of NYSE-listed Sea Ltd through 2020 reshaping Southeast Asia’s technology scene and a wave of special purpose acquisition companies (SPACs) targeting the, 2021 and beyond looks to be a busy period for the SGX’s management team.
2021 SGX Dive
SGX data indicates the last IPO of comparable size was by Malaysian hospital operator IHH Healthcare in 2012, which raised S$2.48 billion at current exchange rates. In 2011, Hutchison Port Holdings Trust, a container port business trust, raised S$5.45 billion. Due to perceptions of deficient liquidity and subpar valuations in Singapore’s stock market — there is no strategic allocation of pension assets to domestic equities by its public sector pension fund — many Singaporean entrepreneurs often choose to list overseas.
For instance, online gaming and e-commerce group Sea Ltd. listed on the New York Stock Exchange (NYSE) in 2017. Homegrown gaming brand Razer also chose to list on the Hong Kong Exchange (HKEx) that same year. It also means that Singapore’s equities market is in a chicken-and-egg situation despite relatively solid fundamentals.
A domestic technology brand of sufficient size that conducts a share sale in Singapore, or pursues a secondary listing on the SGX, could shift the situation and enable more Southeast Asian technology enterprises to explore secondary listings in Singapore and/or their home bourses.
A Financial Times report notes: “ThaiBev is owned by Bangkok-based billionaire Charoen Sirivadhanabhakdi and best known for its Thai beer brand Chang. In 2017 it acquired a majority stake in Vietnam’s biggest beer producer Sabeco for nearly $5bn.”
If the proposed IPO raised just over $2 billion, it would be the largest listing on the SGX in about eight years, according to Refinitiv data. A $2.5 bn deal — a potential size that has been linked to ThaiBev’s listing plans since 2019 — would make it the largest IPO in Singapore since 2011, when Hutchison Port Holdings Trust raised $5.5bn.”
The listing of ThaiBev’s brewery unit could warm up Singapore’s IPO market. But it is very much a traditional company, meaning it will not lift up valuations of technology stocks, as has been the case in the bourses of Hong Kong and Sydney.
However, its suspended its public float, due to ”current uncertain market condition and volatile outlook, aggravated by the worsening COVID-19 pandemic in Thailand and other countries”, creating conditions not conducive to its proposed spin-off. Such a deferment — its listing would have been the biggest non-trust IPO in years — also impacts the Singapore bourse; it could have catalysed greater investment into Singapore equities.
But the stock performance of Sea Ltd through 2020 has shifted the playbook for Southeast Asian technology ventures and could beneficially impact Singapore equities, especially with its potential inclusion into the MSCI Singapore index. According to The Ken: “Despite its current success, Sea made an uncertain start to public market life. It wasn’t until March 2019–18 months after its IPO — that its share price rose above its US$13 listing price to reach US$20.”
The Grab listing could also have knock-on effects and bring more domestic brands to list, as well as drive upgrades at Southeast Asian bourses. Though for 1Q 2021, Singapore trails in IPOs alongside other Southeast Asian exchanges due to the SPAC boom in New York.
The Singapore bourse has committed itself to pursuing a multi-asset strategy and established a locus of strength in equity derivatives, growing its market data and index business. But this does not address its IPO drought, even as it establishes itself as a diversified nexus for trading bonds, foreign exchange, commodities and derivatives following years of lacklustre performance by its equity-trading core and allegations of an illiquid market.
The SGX has sought for many years to establish itself as a global technology hub, leveraging Singapore’s technology ecosystem and the economies of scope, as well as inking partnerships with the Tel Aviv Stock Exchange (TASE) and Nasdaq for dual listings. More recently, it is accelerating plans to position itself as the first major Asian exchange to list special purpose acquisition companies (SPACs).
2020 has seen its multi-asset strategy bear out and liquidity increase as retail investors bought into a cheaper share market suffering from depressed valuations. Its securities daily average value (SDAV) or daily securities turnover stood at S$1.47 billion in January 2021, up 20% year-on-year and expected to normalise at heightened levels.
There are also possible indications of its drive to attract technology companies — ride-hailing service Ryde is exploring a 2022 listing on the Catalist secondary board — may finally be bearing fruit. On the dual listings front, Sarine Technologies is also seeking a dual listing on the Tel Aviv Stock Exchange (TASE), being potentially among the first of many firms to tap both capital markets.
Its acquisitions of independent index provider Scientific Beta and cloud-based FX trading platform BidFX have also materially added to the SGX’s top and bottom lines. Scientific Beta specialises in smart beta strategies and enhances its index business segment while BidFX reinforces its strengths as an Asian leader in FX and FX futures. These acquisitions are reflective of and aligned with current market shifts, with the commoditization of the trading business driving shifts into clearinghouses; indexation and market data.
Analysing SPACs
SPACs tend to be opaque, lacking transparency while enabling greater returns for financial sponsors over shareholders. Industry reports suggest the SGX is proposing amendments to the SPAC model used in the US to render such vehicles more “investor-friendly”. These include changes to incentive structures so sponsors cannot simply exit with outsized financial gains.
The SGX has the ambition to be the first in Asia to list SPACs . A 2010 public consultation yielded negligible investor appetite for such vehicles in Singapore and the broader region at the time. But at this juncture, the US Securities and Exchanges Commissions (SEC) observe:
SPAC sponsors generally purchase equity in the SPAC at more favorable terms than investors in the IPO or subsequent investors on the open market. As a result, investors should be aware that although most of the SPAC’s capital has been provided by IPO investors, the sponsors and potentially other initial investors will benefit more than investors from the SPAC’s completion of an initial business combination and may have an incentive to complete a transaction on terms that may be less favorable to you.
Despite the justified concerns over SPACs being a suitable channel for IPO aspirants, they could even revive investor interest in Singapore’s equities market despite their risks, with London being a similar SPAC aspirant.
With British tech enterprises choosing New York over post-Brexit London — the growth of SPACs, New York’s status as a global financial capital and Brexit uncertainty are major drivers — a segment of senior executives in London still calls for reforms to enable SPAC listings.
This comes amidst Amsterdam ousting London as Europe’s premier securities trading hub and contending with it in other financial service segments.
However, a blog post by the CFA Institute shares an an SEC observation: “SPAC sponsors generally purchase equity in the SPAC at more favorable terms than investors in the IPO or subsequent investors on the open market”.
With British tech enterprises choosing New York over post-Brexit London — the growth of SPACs and New York’s status as a global financial capital is a major pull — a segment of senior executives in London calls for reforms to enable SPAC listings. This comes amidst Amsterdam ousting London as Europe’s premier securities trading hub and contending with it in other financial service segments.
Segments of the British financial industry remain hesitant and skeptical of SPACs, given the seeming mania and potential for the SPAC bubble to collapse. With public markets in mature economies suffering de-equitization and public equities contracting, SPACS are a vehicle that can channel volumes of ready growth capital into the economy.
This is concurrent with asset managers worldwide possessing significant capital pools they need to invest for returns in a low interest rate environment. SPACs offer the potential for high returns in a short time horizon for investors, coupled with low listing fees. But they lack compliance with traditional IPO disclosure requirements.
The FT observes that most SPACs “…arranged between 2015 and 2019 were trading below the $10 standard Spac listing price”. Furthermore, though SPACs are unlikely to pose a systemic risk, it exposes retail investors to the possibility of significant losses and a reputational risk for regulators and bourse operators.
“A Sober Look at SPACs”, published in November 2020, notes that in the US market, though SPACs issue shares for ~$10 and value their shares at $10 when they merge, at merger the “the median SPAC holds cash of just $6.67 per share”.
While a SPAC may be a “cheap way to go public”, this embedded dilution means that SPAC investors are subsidising the costs and are inherently unsustainable. As such, a failed SPAC in London or Singapore can come with reputation costs. The study in a cohort of issuers going public through 2019 and 2020 in New York found that by “six and twelve months post-merger” SPACs generated mean returns of negative 12.3% and negative 34.9%, respectively, with median returns are even worse compared to the
IPO index for the same cohort.
But the SGX is seeking to implement such SPAC floats with safeguards in place. According to a Reuters report, this involves “targeting high quality institutional investors even though this makes it a smaller market” and warrants not being detached from underling shares, unlike the US.
In the US market, SPACs tend to offer shares with warrants attached that title the purchase of shares at specific prices, which grow in value if the underlying stock price goes up due to the embedded discount.said Another measure is minimum equity participation by founding shareholders, as well as permitng SPAC mergers to be completed within 3 years versus 2 years in the US.
“Our observations showed that the SPACs that were most successful were the ones which managed two main risks well: first, free-riding by investors and excessive dilution of long-term investors, and second: the rush to do a business combination also known as a de-SPAC,” Tan Boon Gin, CEO of Singapore Exchange Regulation, shared in a media statement.
Tech Listing Wave
But more recently, what may benefit the Singapore market and Southeast Asian equities in general is the booming stock market. Spurred by by low interest rates, undervalued equities in 2020 and waves of government stimulus, this has added momentum to private companies looking to tap public markets.
The breakout success of Sea Ltd. which listed in 2017 and has since reached a market capitalisation of ~US$120 billion — it is now the largest listed company in Southeast Asia — has drawn attention to the region’s growth potential. The growth of Sea Ltd’s footprint in the region, particularly its forays into digital financial services and e-commerce, spurred Indonesia’s GoJek and e-commerce major Tokopedia to consider merging and going to public markets via a SPAC merger in the US.
More recently, this same pressure has led Grab to list in the US through a US$40 billion SPAC deal. Backed by SoftBank Group, Toyota Motor, Uber Technologies and Microsoft, Grab will merge with Nasdaq-listed Altimeter Growth Corp., an acquisition vehicle under Silicon Valley-based investment firm Altimeter Capital.
It values Grab at $39.6 billion and will raise US$4.5 billion in proceeds for Grab, with much of this capital from an investor consortium that includes BlackRock and Singapore state investment fund Temasek Holdings, which also maintains a stake in GoJek.
These proceeds are expected to fund further growth in digital financial service and other verticals in the region. But a Financial Times report also notes that it has not ruled out tapping Southeast Asian capital markets via a secondary listing. It also opens a channel for international investors to tap Southeast Asia’s rapidly growing digital economy.
So attracting a secondary listing or the issue of a global depositary receipt (GDR) from any of these technology majors that are now tapping US capital markets will be key to the SGX in remaining competitive. This is a strategy the SGX will have to double down on, given the influx of technology corporates into Singapore.
Singapore’s strong fundamentals, business-friendly reputation, and its strategic location as an Indo-APAC commercial centre mean its an attractive location for tech companies looking to access opportunities in Asia.
In 2020, the Singapore bourse secured the secondary listing of AMTD International, a Hong Kong-based investment bank and asset manager listed on the NYSE, in the midst of the pandemic. While this creates precedents in terms of other potential listings— the SGX maintains a co-listing pact with NASDAQ — there is substantial competition for such share sales, coupled with factors such as home market domestic bias.
A number of global financial centres and regional commercial hubs — Jakarta and Bangkok are natural rivals to Singapore as the leading Southeast Asian hub — can leverage large domestic economies to attract share sales. Domestic brands can capitalise on the substantial domestic bias in investor behaviour, with local investors preferring to back such firms.This has underpinned the success of the Thai stock market through the 2010s to now.
Singapore’s Econoic Development Board (EDB) successfully attracted Dyson to relocate its global corporate HQ to Singapore in 2019, as part of plans to establish itself as a high-tech hub. So if it is to attract share sales, an alliance between the EDB and SGX is the most sensible way to build and sustain the city-state’s tech push.
2021: Ecosystem Matters & Increased Competition
Singapore’s equity capital markets face significant competition in the years ahead, with the Australian Securities Exchange (ASX) being the obvious choice for most technology enterprises.
Moreover, domestic equity markets in countries like Indonesia and Vietnam are being buoyed by the overall economic growth narrative at home. The capital market ecosystems of Hong Kong, Tokyo, New York, Seoul, Sydney, London, Amsterdam and other global cities have a cointegrating relationship between equity capital market development and economic growth.
Capital market sub-components involving mutual/pension funds, corporate bond, stock and government bond markets support capital market development, which drives economic growth. Moreover, this underwrites robust entrepreneur-enterprise ecosystems, with investors, early staff and entrepreneurs able to benefit from the strong liquidity of equity markets.
The historical economic development of Taiwan, Japan, South Korea and Germany highlights how pension assets in capital markets stimulate economic growth; support the growth of globally competitive domestic multinational corporations (MNCs); and establish a positive feedback loop between capital markets and the real economy.
The case is made most clearly in Hong Kong, whose economic development coincides with the growth of its stock market. In fact, as at end-2019, a third of its Mandatory Pension Fund (MPF) assets were invested in domestic equities. In February 2021, its trading turnover reached levels quadruple that of the London bourse.
Pension assets and other large institutional investors underwrite and sustain market liquidity on a long-run basis. Healthy public equity capital flows enable robust enterprise financing for businesses and facilitate healthy exits for investors, with post-IPO firms driving employment growth and expanding the overall tax base.
Such scale-up enterprises are engines of job creation. This virtuous capital cycle facilitates a capital market-economic growth nexus, with a major indicator of such growth being a robust market for initial public offers (IPOs), a domain where Singapore lags Hong Kong, Sydney, Bangkok and others.
Singapore lacks this finance-growth nexus, inhibiting it severely. And this is state is the outcome of policy choices by its Ministry of Finance, the Monetary Authority of Singapore (MAS) and other public sector stakeholders.
ASX’s Tech Charm
Since the early 2010s, the ASX has made a committed effort to attract domestic and international listings of its technology sector via long-term initiatives.
From 2015 to 2019, the ASX-listed tech sector emerged as “the fastest-growing sector in respect of new listings” developing its perception as a ‘new NASDAQ’. 2020 was also a record year for capital raising and secondary offerings, with the ASX outpacing global leaders like the LSE and Nasdaq by significant margins.
A number of factors have contributed to this, acting as a strong draw to US technology firms as well, according to professional services firm BDO and driving strong profits in the 2020/2021 period. Australia’s funds management industry also claims to be the largest in the Asia-Pacific region, underwritten partially by a compulsory superannuation system. By 2035, this asset pool is forecast to reach A$9.5 trillion.
But a key factor, according to a 2017 report, was the listing of Xero, a New Zealand-based online accounting service, in late 2012, which was the ASX’s first software-as-a-service (SAAS) business of significant scale. Moreover, as the first rapidly scaling SaaS business of size — sales multiples were employed over more traditional earnings multiples — it also secured backing from US billionaire investor Peter Thiel and a US$100 million investment from Silicon Valley major Accel Partners in 2015.
In 2013, most technology firms in the S&P/ASX 300 index were mostly online marketplaces. Meanwhile, other comparables included a small pool of information technology (IT) services and financial technology (fintech) companies.
But at the time, sub-sectors like software were under-represented. Xero’s listing on the ASX induced a shift in the paradigm that coincided with the reopening of the IPO window for technology reopening in Australia and the US in the early 2010s.
This spurred heightened Australian investor activity in the technology sector, following the robust performance of the US technology sector and the end of the commodities supercycle in mid-2013.
According to analysis from multiple sources — this saw a slew of cancelled projects in Australia’s mining sector — investors channelled risk capital to growth opportunities outside Australia’s resources sector to the new opportunities emerging in the technology space as the supercycle ended. However, it may be able to leverage the start of a new commodities supercycle, though a HSBC note argues this is unlikely or not as pronounced as the 2000s supercycle.
Valuation requirements for public listing also help foster a permissive environment compared to major US public listings which are prone to significant regulatory, registration and legal costs.
An ASX float offers an attractive market for tech companies valued under US$1 billion. Requirements are a minimum number of 300 non-affiliated investors (totalling A$2,000), a free float of 20% and can satisfy either the profit test (having A$1 million) or the asset test (having A$4 million net tangible assets or A$15 million market capitalisation).
This converges to support a market with a robust appetite for tech stocks, as well as being home to an investor segment that recognises the conflict between driving growth vs profitability and the different priorities during a company’s business cycle. This is best exemplified in the case of Uber Technologies’ own growth.
Finally, Australia maintains a robust technology innovation ecosystem. New technologies like WiFi, ultrasound, and pacemakers originated from it, and in more recent decades has been reinforced with the emergence of domestic technology brands such as Atlassian, Xero and Canva that scale globally.
But it should also be remembered that its lack of a secondary board like London’s Alternative Investment Market (AIM) or the Catalist board in Singapore may have also contributed to the disappointing market performance of Israeli technology firms.
Israeli technology media brand Calcalist observes: “Even before the global pandemic shook stock exchanges around the world, most Israeli ASX-listed companies presented negative returns. About half of these companies are now traded at a market capitalization of around 50% from the one they had during their IPOs.”
Drawn by accessible capital and high liquidity, filing requirements are also less stringent than on the Tel Aviv Stock Exchange But what has emerged is that the companies listing on the ASX need market capitalisations between A$100 million and A$1 billion to deliver credible results.
Singapore’s Tech Finale?
With this in mind, has the Nanofilm share sale shifted sentiments and perceptions in favour of Singapore as a viable place for technology share sales? A single technology IPO does not necessarily affect a market, but it can build confidence, attract more technology enterprises and highlights points of strength in the Singapore market. But attracting
For instance, the SGX Catalist growth board remains more liquid than the HKEX GEM. Though both remain dwarfed by the liquidity of the TSE Mothers board in Tokyo, which has revived ambitions to lure Asian IPOs.
Moreover, technology enterprise are critical to economic growth, being central to driving and sustaining productivity. So the IPO drought and a moribund equities market — though its liquidity has improved significantly in 2020 — remains a matter of perennial concern. In a 2015 media interaction, SGX’s incumbent CEO Loh Boon Chye said, “Liquidity begets liquidity. Liquidity will bring us, with the right market conditions, IPOs.”
This has not come to pass. Since the penny stock crash of 2013, the SGX has invested to reestablish itself as a fundamentally robust platform. It has built a locus of strength in the equity and forex derivatives space, if its financial performance in 2020 is used as a barometer of success.
Its acquisitions of index provider Scientific Beta and FX trading platform BidFX are intelligent investments to establish strong points in indexation and market data. But the bourse remains hobbled by a lack of ecosystem support despite being globally competitive in domains like real estate and equity derivatives and engaging in all the appropriate move.
The capital market ecosystem sub-components involving mutual/pension funds continue to remain a gap not meaningfully addressed by either Singapore’s central bank nor finance ministry. And it is not a lack of financial capital either. Figures from the Sovereign Wealth Fund Institute suggest that Singapore’s central bank (MAS), pension fund (CPF), state investment fund (Temasek Holdings) and sovereign fund (GIC) collectivily hold US$1.535 trillion in assets as of end-2020.
In the case of the Tokyo Stock Exchange, despite its liquidity, few foreign companies wish to tap its equity capital markets. The hollowing out of foreign issuers — many US firms have delisted from Tokyo in the intervening years — reflects Tokyo’s own fading importance as a financial centre .
This is despite a strong pipeline of domestic companies listing there. There is little benefit to a Tokyo listing unless one has a significant business footprint in Japan itself. Domestic bias, language and cultural barriers meaning foreign issuers rarely if ever can capitalise on its deep liquidity underwritten by the Bank of Japan and domestic pension majors.
Tokyo has since been superseded by Singapore, Beijing and other Asian financial centres, driven by a constellation of factors, not the least of which is the grow. This continued IPO drought (i.e. de-equitisation) creates both political and socioeconomic risks.
The continued share sale deficit imperils Singapore’s entrepreneurial hub ambitions and stature as a global financial centre. Excess corporate delistings can also eventually give rise to anti-business sentiments, according to a 2016 study by Alexander Ljungqvist of the Stern School of Business.
Declining stock market participation and privatisations affects incentives for the general public to support parties that commit to business-friendly policies. Delistings reduce public exposure to their share of corporate wealth creation, worsening the wealth gap.
These profits accrue to professional, accredited and institutional investors in the private equity domain, not the broader public. This drives reductions in aggregate investment, productivity and job creation, impacting the household, public and private/corporate sectors in the long run.
In Singapore’s case, these corporate profits are concentrated among a smaller pool of listed corporates, many of them government-linked corporations (GLCs). This is a net negative to the city-state, as enterprises with such market power often have outputs below the social optimum. They can extract additional profits by raising prices; suppress wage growth; and inhibit competition. This also reduces investment and productivity, as there are limited incentives to improve systems or products.
In summary? One successful tech IPO needs to be followed up with another until a pool of comparables exist, much like how Singapore has emerged as a global REIT hub. Momentum needs to be built and then sustained to build upon the success. The Nanofilm Technologies IPO is a liquidity event that represents a tactical win that highlights the appetite for tech stocks in Singapore’s equities market and capacity to support fundraising. But a single share is insufficient.
The long-run socioeconomic risks and structural issues in Singapore’s capital markets ecosystem not the fault of the SGX will remain a drag on its tech ambitions. Public sector bodies like the Ministry of Finance’s refusal to build and sustain a finance-growth nexus; a maladaptive information reality; and lack of strategic allocation to domestic equities means that even with small wins, unless there are changes to the ecosystem, it remains an uphill battle.
