Tech sector to see significant competition in APAC capital markets: Tham Tuck Seng, PWC
Tham Tuck Seng, the Capital Markets Leader of PwC Singapore, believes that the technology sector will continue to be a key area of competition for the foreseeable future in Southeast Asia and the broader Asia Pacific, among other development in regional capital markets.
The growth and maturation of capital markets in the Indo-Asia Pacific (Indo-APAC) — and the rise of China’s equities markets and global technology stocks as increasingly viable investment destinations — has highlighted the contrasts between short-term and long-term investment outlooks.
The market volatility which has grown since January 2018 has also aroused concerns over financial market participants being too short-term in their outlook.
Some observers argue that short-term investing is a major problem, especially in US capital markets. Meanwhile, some research also suggests that a majority of retail investors maintain a longer-term view on stock market investments, holding onto stocks for up to 2 years.
With a broader call for a greater emphasis on long-term investing in stock markets — there are varied ways to respond to perceived short-term investment behaviours — these efforts are implied in efforts by the Singapore bourse to woo back investors as well as its multi-year strategy to transform itself.
With the recently announced partnership between the Tel Aviv Stock Exchange (TASE) and Singapore Exchange (SGX) potentially augmenting the IPO prospects for H1 2019, this suggests that the SGXs’ partnership strategy has apparently focused on hedging against corporate short-termism.
Its CEO, Loh Boon Chye, is arguably adopting an approach that aligns with a focus on delivering long-term value.
With these developments in mind, Venture Views taps the perspectives of Tham, who has close to 30 years of providing audit and advisory services, with a specialisation in the listing of companies in Singapore.
In this in-depth interview, Tham discusses the evolution of regional capital markets and the competitive landscape, technology assets in the securities market, retail investor dynamics and the impact of dual-class shares.
Edited excerpts:
What’s the view on the evolution of Singapore and ASEAN capital markets, as well as their ability to support high valuations of technology enterprises in the region like Go-Jek and Grab?
In terms of regional growth, the capital markets of the wider region have matured as a whole. Singapore calls itself the hub because when people want to raise funds, they naturally think of Singapore as a venue for expanding into the region, especially in the context of entering Southeast Asia.
But now there’s more competition from the other exchanges in the region. Even bourses like Ho Chi Minh have had some major public offers in H1 2018, so the competition is intensifying.
If you look at Malaysia’s IPO market over the last few years, it’s also been giving Singapore much greater competition; most of the public floats by domestic issuers are of a significant size.
So overall, Singapore’s been facing increased regional competition, with many of the stock markets in the region fully capable of raising funds in the range of US$100 million to US$200 million.
Thirdly, due to Singapore having such a small domestic market, to have a big issuer outside of Singapore coming in can be structurally difficult. And because of all the Southeast Asian economies and their capital markets growing, we don’t see a lot of companies, especially the major issuers, coming to Singapore, other than for REITs (real estate investment trusts) or business trust listings, which are a niche space as far as Singapore is concerned.
Then we have the competition from Hong Kong, and the attraction there is because of the better valuations in Hong Kong, which leads people to look at the prospects there. In Hong Kong, if you look at the criteria for the Hong Kong Mainboard and Growth Enterprise Market (GEM), on paper they actually have lower criteria compared to SGX. So people tend to look to Hong Kong first due to this lower qualifying financial criteria.
In a nutshell, Singapore faces more competition and it doesn’t help that people tend to perceive Hong Kong to have higher valuations because of certain companies. But if you look at Hong Kong as a whole, it is probably on par with valuations supported by the SGX.
Now, when it comes to the technology startups, we have to capture that value because its evolving. For Singapore, it just needs one of these disruptive startups to list and from there we should be able to attract more businesses and startups in the space. The question is “How do you do it?”
Hong Kong is very aggressive in pursuing this, and they’re concentrating their efforts on the biotechnology sector. They’re actually discussing permitting pre-revenue companies to list in Hong Kong, based on the new criteria they’ve brought in.
But having said that, Singapore startups need more awareness on capabilities of raising capital in SGX. There should be more promotions and visibility, such as offering more tech startups on the Catalist board, to begin with. There should be a call to action in exploring how much we are doing to attract these startups.
In 2016, the Singapore Business Federation mooted using CPF monies to boost Singapore's securities markets in a position paper. The bourses of Sydney and Tokyo — Australian pension funds are major backers of their domestic securities market and the Bank of Japan injects capital into index funds & ETFs that track their stock market — see their securities market underwritten by pension fund investments. Is it necessary to review this policy and inject CPF funds to support Singapore’s equity capital markets?
It’s certainly something that should be explored, especially if you’re looking at the example of the bourses in Tokyo and Sydney. Unlike Singapore, the amount of foreign funds in Malaysia is actually very small, yet the market’s very active because their own pension funds invest in it.
As for the local exchange-traded funds (ETFs), quantitative funds and the like, while we have them, the question is whether the funds are serving to boost the local market. To gauge that, you have to look at the whole Singapore economy, which is small domestically. If you take this allocation, how much is being injected into the local market to boost the capital market liquidity?
I think it is a question of moderation. Perhaps from the government’s perspective, they wish for the market to find its own equilibrium, rather than relying on being underwritten by public funds.
The fate of the SGX-Bursa Malaysia Stock Connect is now up in the air, with KL exploring an ASEAN-wide trading link. Memories of CLOB in 1999 haunts investors while the ASEAN Trading Link was a missed opportunity. With all of this, what’s your take on the SGX forging alliances, the stock market links and the underlying strategy?
On the matter of the stock connect, there are political and economic considerations in building stock market links. So this makes the situation quite uncertain and politics can blur the economic considerations. So it may not happen — not because economically it’s not viable — but purely due to the political aspect, which I don’t have the background to comment on. rt.
With regards to the Nasdaq and TASE partnerships — particularly the Nasdaq collaboration — those companies there which can be considered small or medium-sized that come to issue shares in Singapore may lack the visibility otherwise and are doing it for specific economic reasons.
But listing in Singapore means they are more visible, as they are relatively larger than many local peers. Beyond being another avenue for fundraising, it augments their investor and public profile. So in the long run that is what could make that collaboration viable.
If you talk about the tie-up with TASE, that’s leveraging the strength of the Israeli startup ecosystem and the strength of the Singapore-Israel relationship.
Israel is known for startups and intellectual capital, as well as other elements related to that. And if they can bring some of the primary or secondary issues here, it serves to provide a jumpstart to the capital markets ecosystem here.
So with those specific reasons in mind, these collaborations are a net positive. Whereas if you launch a stock market link in the form of a stock connect, then it can create complications in the form of political frictions.
With the potential to become a technology centre, what’s the PWC perspective on the growth of the technology sector for the 2019–2025 period?
In 2017, we said that technology sector is one of the growing, growing start, potential sector that will boost up the current market in Singapore.So question is that, right now and going forward, do we have the same view, right?
The view remains unchanged. That means that we definitely look at the technology sector as being among the key sectors for capital market growth in Singapore.
If you look at the operating terrain now, the whole landscape has become more competitive, especially with the bourses in Hong Kong, Thailand and Malaysia building out infrastructure to attract and retain their startups. Technology is a sector that everyone’s fighting for over the next five years.
Capital market observers and entrepreneurs in Singapore have expressed concerns in the past that Singapore’s investment public lack an understanding of the short-term loss strategies that many technology enterprises (e.g. Uber Technologies) employ where they sacrifice profitability to accelerate their growth. Are they familiar with the growth dynamics of digital companies or is this not the case?
Investing in Singapore has no difference to any other country. Most of your retail investors tend to be very short-term in nature, which is seeking out those assets on the stock market with immediate profitability. There’s no difference between the retail investors in Singapore or Hong Kong.
But having said that, you also have investors who are more speculative, which means that they don’t just focus on profit but focus on selecting stocks in companies where they expect growth. So those speculative players exist in any investment community across many different countries. And the profile of their investment behaviour does not have much of a significant difference.
The difference is the knowledge of investors about certain sectors. For example, why is it that in a sector like healthcare, the SGX offers better valuations compared to the Hong Kong Stock Exchange or Bursa Malaysia? That’s because of retail and institutional investors here being more familiar with the healthcare ecosystem here.
They did not just gravitate to healthcare but have been exposed to schemes and policies designed by the government to help citizens gain access to various medical benefits. Additionally, they’re exposed to quite a few major groups of hospitals here with prominent brands.
Because of that mindset, because they are more exposed to healthcare, they are more familiar with it and there is an understanding of the subject matter when investors discuss healthcare investment stuff. Due to this, they are more knowledgeable — or perceive themselves as such — and this makes the valuations more attractive, especially when considering the literacy of other sectors.
In the past, if you look at the investment behaviour around the oil & gas sector during the height of the boom, you’ll find that Singaporean investors are basically very sector-driven, rather than being focused on profitability.
The reason behind this was that you had a whole range of stock covering the spectrum of the value chain, all the way from upstream vendors to downstream processors. You had the prospectors, rig builders and refineries, all the way down to offshore engineering players.
You had the whole chain of oil & gas activity, so when an investor wanted to invest, they thought of Singapore as a hub because they could compare all of these economically-linked stocks. And when investors build this literacy and exposure, they can make better, more knowledgeable bets.
In conclusion, Singapore retail investors are more short-term rather than profit-driven and they are more familiar with certain sectors compared to others.
You've highlighted the regional competition and the erosion of the home advantage of the SGX, with domestic Singapore brands like Razer and Sea Group heading abroad to list. Most recently, MyRepublic has chosen to list in Hong Kong. With the SGX’s partnership strategy and other developments meant to strengthen the capital markets ecosystem around it, can it remain competitive?
Well, I don’t know. The decision for these companies to list in Hong Kong are definitely missed opportunities for the capital markets in Singapore. Why would they go to Hong Kong? There are various reasons for that and primarily it’s because China is the place they want to expand their business.
Due to this, the perception is that a listing in Hong Kong will increase their visibility and enhance their public and investor profile, which makes it easier to pursue their business plans and grow their operations there.
The question for Singapore is what it can do better to attract and retain the more iconic listings. Notably, the SGX has been very aggressive in their business development recently, especially over the last 12 months.
As mentioned before, many of the listing candidates are foreign companies, and the SGX is actually quite aggressive in conducting business development outside Singapore. So hopefully some of this effort will bear fruit. And even if it’s not a primary listing, there will certainly be options for a dual listing or secondary listing available to issuers that can be capitalised upon.
Trading in the Singapore equities market increasingly dominated by large listed firms as of March 2018. what can be done to meaningfully engage and assure local retail investors and to better distribute this liquidity?
Investor education is crucial. And when we say that, we mean that the focus should be on growing companies. The bigger issuers would already have their coverage by the media and analysts, so they don’t need further attention. Those that do need more attention from investors are the medium-sized enterprises whose quality is actually very good.
The business quality and growth prospects are robust, so its a question of whether there is an adequate focus in the realm of investor education and in-depth coverage and analysis of companies.
It’s a matter of whether the analysts and journalists are evaluating the company and the veracity of its quality, as well as if the company is sufficiently promoting itself to institutional and retail investors. So there needs to be a solution for enhancing the coverage of companies and distributing the liquidity on the bourse more equally.
The SGX operates in dual commercial and regulatory roles, meaning there is a fundamental conflict of interest. With dual-class shares being introduced, as well as the need to enhance offerings and safeguards, is the current regulatory regime sufficient?
They’ve been putting in some effort to make sure that RegCo is seen to be independent of the SGX. They have established SGX RegCo on the record as the separate entity and have a whole team working separately..
And I think that’s the best it can do for now. It’s the same for the Hong Kong Stock Exchange and even the ASX. They’re all listed companies and yet they also regulate the issuers for listing. So there’s a limit to how independent it can be.
As for dual-class shares impacting investor protections? It’s not solely down to whether the SGX is policing this. A lot depends on the steps taken by the issue managers to ensure that their companies have effective policies and practices in place in order to ensure sufficient stakeholder protection.
The only input is that while dual-class shares have been pushed through, now the task is to enforce the rules. The questions now are whether these rules are sufficiently effective to protect the interest of the multiple shareholders. And if you compare the difference in the dual-class share structure rules between Hong Kong and Singapore, as a whole Singapore is actually more flexible.
Hong Kong requires more permissions and is a lot more prescriptive. For example, Hong Kong requires the appointment of a corporate governance committee independent directors and a committed compliance adviser from the date of listing specifically to address this issue.
In Singapore, you only need specific provisions in place in the corporate constitution and independent directors on the relevant committees, which should be sufficient for policing matters related to dual-class share structures in a company.
Hong Kong also needs companies to meet specific pre-investment criteria before they can qualify for dual-class shares. With Singapore, it’s on a case-by-case basis, so it offers more flexible structures.
But ultimately, even with all these safeguards, you have to go by experience. things may go wrong, and then you’ll have to raise the questions that ask, looking back, whether the protections were sufficient, or whether it was due to the business not being of sufficient quality or a lack of judgement by investors and management.
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