IPOs in 2025 (up till March 24, before the US tariff-induced market turbulence) have performed very poorly. Of the 11 new listings, only one was trading above IPO price (note that all the stock prices in this article are as at the March 24, 2025, cutoff date). For the other 10, losses ranged between 22.8% and 0.8% below their listing price. In fact, gains for many of the IPOs that did well in 2024 have also reversed into losses. Of the 51 IPOs, the price of 35 stocks have now fallen below their first day closing prices and 20 are trading under their IPO price. Why this sharp reversal in fortunes?
Stars were aligned for Bursa in 2024
The environment in 2024 was unique in that there was a confluence of several positive factors. When the ringgit fell to a multi-year low of 4.80 against the US dollar in February, there was a concerted effort by Bank Negara Malaysia, government-linked companies (GLCs) and government-linked investment companies (GLICs) as well as the Employees Provident Fund (EPF) to repatriate funds held overseas to lift the value of the ringgit. As a result, the currency appreciated over the following months - rising to a high of 4.12 at end-September. The ringgit appreciation was further aided by a surge in foreign direct investment as well as stronger export earnings from higher crude oil and crude palm oil prices.
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The appreciating ringgit attracted increased foreign fund inflows, especially between May and August 2024. Foreign holdings of Bursa stocks had already fallen to the lowest level in at least 10 years and the strengthening ringgit was an opportunity to make some quick currency gains. These positive narratives were supported by upbeat economic news flow. Malaysia's 2Q2024 GDP came in strong at 5.9%, up from 4.2% in 1Q2024. And confidence was running high on the back of huge investment flows into data centre projects - thanks in part to cheap land, water and power, and underpinned by the successful 5G rollout by Digital Nasional Bhd (DNB) under the country's Digital Vision (launched in 2021) - and fuelled by the artificial intelligence (AI) hype.
The bulk of the funds repatriated by EPF, GLCs and GLICs were reinvested locally, primarily in Bursa. Chart 2 shows the huge inflows of domestic institutional funds and, for several months in 2024, foreign funds. The increased fund inflows (local institutional and foreign) created additional liquidity and the perception of strengthening investor interest as well as exuberance in the stock market. Naturally, entrepreneurs and investment bankers took the opportunity to list their companies - hence the sudden surge in IPO numbers.
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Ultimately, however, the ringgit gains and the market rally proved unsustainable. The ringgit has since weakened to around 4.43 to the US dollar. And as the currency weakened, foreign funds have been net sellers on the Bursa every month since October 2024. Yes, this weakness is also due in part to the global stock market sell-off as US President Donald Trump's tariffs raised uncertainties for the global economy. But sustained currency strength must stem from underlying economic growth, increased productivity and relative competitiveness in global markets. Higher stock valuations and prices must be supported by sales and earnings growth, and profitability. And investor interest in the IPO and broader market can be sustained only through a pipeline of quality and growth stocks - and, critically, the opportunity to make money. We have highlighted this point in past articles.
IPO prices were overstretched partly because of market exuberance
It goes without saying that the primary objective of all investors is to make money. Here are the facts. Of the 62 IPOs since the start of 2024, 31 are currently trading above IPO price, 28 are trading below and three are unchanged from their IPO price. This means that the odds of making money from an IPO is exactly 50% (if you had subscribed for the shares and held them). In other words, it is no better than a coin toss. Worse, the price of 45 (or 73%) of the 62 IPOs are now below their first day closing prices - meaning if you had bought these shares on their debut, you would be making losses. (Of course, this is the simplistic point-to-point analysis. In reality, stock prices fluctuate, and one could very well have made money by trading during this entire period.)
The point is that people making money was what created and sustained the bull market in the 1990s, when people made money. One of the biggest problems that Bursa is facing now, we believe, is that many of the biggest, high-profile listings are mature companies at or near-peak profits and their shareholders-promoters (pre-IPO) are using the stock exchange primarily to "cash out" rather than raise funds for growth.
Case in point: Table 1 shows the total number of IPO shares for four of the largest and highest profile new listings in recent years. For all four, there were significantly more shares offered for sale by founders/owners/promoters than new issuances. That means the bulk of the IPO money raised goes to these pre-IPO shareholders rather than to the company. In other words, the IPO is an exit strategy rather than a capital-raising exercise to fund future growth. Some companies even took on debts to pay huge dividends to shareholders pre-IPO.
Case in point: Mr DIY paid dividends totalling RM635 million in the two years prior to its IPO and started life as a public-listed company with a net gearing of more than 126%.
For more stories about where money flows, click here for Capital Section
There is nothing wrong with using IPOs as an exit strategy. It is one of the functions of the equity market. The issue is that they are cashing out at fair, and even above fair, valuations at a stage where the companies are, or are close to being, mature and at peak profits. When you leave no money on the table for post-IPO investors, coupled with slow growth prospects, it is extremely hard to sustain interest and prices. This is not hard to understand.
In the 1990s, financial institutions underwrote the IPOs. So, they tended to push valuations lower to reduce their risks. Today, the listing/placement of IPO shares are done through book running and, consequently, valuations are already at or higher than market - basically, what investors are prepared to pay. Case in point: The market capitalisation weighted average price-earnings (PE) multiple for the 62 companies at their IPO price is 23.6 times whereas the simple average is 16.2 times. By comparison, the average PE for the FBM KLCI and FBM Emas Index was 15.2 and 16.5 times respectively over this period. This means that all the IPOs, on average, were already priced at fair valuations, at least - and the larger-cap IPOs were priced at premium valuations (we summarise the statistics in Table 2).
Take, for example, the largest - in terms of total monies raised since Lotte Chemical Titan in 2017 - and most richly valued IPO during this period, 99 Speed Mart Retail Holdings (listed in September 2024). Its IPO was priced at nearly 35 times PE, well above the prevailing market average valuations.
We do believe that 99 Speed Mart is a genuine business, and the founders have executed very well to leverage changing consumer preferences, from big-store format to the convenience of neighbourhood shopping for daily necessities. The company's average transaction value of RM21.40 suggests that most customers purchase only a handful of items per visit. Its strategy to focus on fast-moving products - curated to consist primarily of the most popular brands - at low prices for the mass market has been very successful, underpinning its rapid store expansion. Scale is an economic moat, for instance, giving the company significant bargaining power in purchasing and enabling it to charge suppliers additional fees such as product display fees, target incentives and distribution centre fees. We think of 99 Speed Mart as the "PAC-MAN" of the mini-market industry, eating the market share of relatively less cost-efficient, small-scale mini-markets and sundry shops.
But is the stock worth 35 times multiples of profits? We estimate the company's annual earnings growth at 10% for the next three years - based on its projected outlet expansion and same-store sales growth (SSSG). Assuming a 50% dividend payout and yield of 1.4% at the current share price, that would give investors total annual returns of about 11%. That means investors will be paying more than three times the company's expected earnings growth plus yields. That is certainly not cheap, by most yardsticks,particularly if growth starts to slow over the coming years.
It reminds us of another large IPO, that of home improvement retailer Mr DIY in 2020. That IPO, at RM1.60 per share, was valued at 31.6 times trailing earnings - sold on the premise of its considerable growth potential. As we wrote back then, however, its rapid store expansion must come at a cost of lower sales per store, given the relatively small size of Malaysia's population and addressable market. Notably, the number of home improvement stores per million population in the country was already well ahead of that in Indonesia and the Philippines, just slightly below that in Thailand, and on a par with some developed economies such as the UK. As the number of stores continues to rise, it is inevitable that the quality of this source of growth will deteriorate. Retailers will always pick the best locations for the first few stores, with the largest catchment areas. Subsequent outlets will push further into less lucrative locations and/or new outlets will start to cannibalise earlier, nearby stores. Sure enough, Mr DIY's SSSG has turned negative since 2023 - lowering the company's earnings growth potential. Total annual returns for the stock, including dividends, are now projected at only 10%. Accordingly, its valuations have been de-rated - its share price falling from a high of RM2.70 (adjusted for dividends) to RM1.41 currently. At this price, Mr DIY is still priced at almost 25 times trailing earnings and more than double its projected total returns (see Table 3).
Conclusion
IPOs that are priced at or above fair valuations leave little to nothing on the table for retail investors - and, therefore, little incentive for their participation. It is worse still when these companies pay out all the cash and even borrow to pay dividends - on the basis that unsophisticated investors look only at earnings and not the balance sheet. If the Securities Commission Malaysia wants to protect small investors, at least stop such practices. And this is what we have been witnessing - declining retail participation in the local bourse and, conversely, an increasingly dominant presence of local institutional funds. Cumulative fund inflows from retail investors were flat from 2014 to 2019. Interests spiked sharply higher during the Covid-19 pandemic lockdown (a unique environment that is not repeatable) in 2020 and 2021 - but retail participation has since declined from the pandemic peak (see Chart 3).
To be sure, there are institutions (such as insurance) that invest primarily in lower-risk, mature companies that pay steady dividends. For an equity market to thrive and retain vibrancy, however, there needs to be a wide range of participants, retail and institutional. And, yes, a degree of volatility plus a healthy dose of speculative activities, which is not the same as market manipulation. Obviously, an IPO pipeline of quality - and growing - companies will add to diversity and depth in the market that will attract more investors, improve liquidity and sustain higher valuations that will, in turn, attract even more quality companies to list here. Given the ease of cross-border capital flows and increasingly cost-competitive stock trading platforms, there is intense competition for investor money. The exchanges with the largest investment choices - in terms of mix of mature, high-yield and high-growth companies from diversified sectors and businesses - will attract the most funds, creating liquidity and higher valuations. As a result, smaller stock exchanges will be increasingly marginalised by global - and perhaps even domestic - investors.
IPOs that are consistently priced to perfection also means there is minimal buffer to negative developments and news flow. That is what we are now seeing, the sharp sell-off as market sentiment sours. Again, not hard to understand. The thing is, when you burn your investors, it would be that much harder to get them back. Fool me once, shame on you; fool me twice, shame on me. It works only if everyone wins, not just the promoters, the big funds and investment banks.
Box Article: USD and UST are falling when they should have risen - an ominous sign?
The US stock market sell-off in the past two weeks - which saw the Dow Jones Industrial Average and Standard & Poor's 500 index recording some of the worst single-day point drops ever - may have got the most attention, especially of global retail investors. But it was the rout in the US Treasury (UST) market that is most concerning.
Indeed, even President Donald Trump conceded that it was the steep rise in UST yields that influenced his decision to announce a temporary (90 days) reprieve on reciprocal tariffs. Why? While falling stock prices will have a negative wealth effect on stock investors, the distribution of ownership is relatively narrow and very much skewed towards the rich. Higher UST yields, on the other hand, have broad repercussions across the real economy, and are directly related to borrowing costs for the government. The 10-year UST yield is the key benchmark for most corporate and consumer loans, including credit card and student loans, and mortgages.
UST and the US dollar are the traditional financial safe havens. They are the assets investors run to in times of crises. That is, historically, increased demand from the flight to safety will drive UST yields lower and the US dollar stronger. This was what we had expected, in our previous articulations of Trumpianomics - that Trump's America First policies (tariffs, deregulation and tax cuts) will lead to a stronger US economic growth vis--vis the rest of the world, at least in the short-medium term. The relative strength of the US economy and corporate earnings growth will, in turn, underpin capital inflows to US dollar assets, resulting in a stronger US dollar. A stronger currency would provide some degree of offset for tariffs, though inflation and interest rates will be higher for longer. There would, however, be longterm consequences for the US and the global economy.
What we have seen happen, however, since Trump unleashed his Liberation Day tariffs on the rest of the world is the opposite - a sharp sell-off in both the UST (yields rose) and US dollar (weakened). Notably, yields on the longer-dated UST have risen sharply even as yields for the short-dated bills fell. Chart 1 compares the current UST yield curve against that on March 31 (before reciprocal tariffs) and Dec 31, 2024. The 10-year UST yield rose from below 4% on April 7 to as high as 4.6% on April 11; the 60-basis-point rise within a week was the largest since the days of the global financial crisis. In other words, the UST yield curve has steepened. The term premium - the risk premium to hold longer-maturity Treasuries - jumped to the highest in a decade (see Chart 2).
At the same time, the US dollar index fell to its lowest since early 2022, weakening against the basket of major currencies, including the euro and yen. Yields for the 10-year German and Japanese sovereign bonds fell on the back of capital inflows over the same period (see Chart 3). Gold hit yet another fresh all-time high last week. In short, investors were selling off US dollar assets and the US dollar for other perceived safer assets, the reverse of what one would expect based on historical norms.
UST and US dollar sell-off - suggests loss of investor confidence
Plenty has been written about the possible reasons for the unexpected UST sell-off, the rapid and substantial yields surge - from higher inflation expectations due to the significantly larger-than-expected tariffs to margin calls and capital outflows resulting from the stock market sell-off, the unwinding of hedge fund leveraged basis trades, and even some speculation that China may be selling its UST holdings as retaliation against Trump's tariffs. All these factors probably did play a part in the sell-off. But we suspect there are reasons beyond the usual US Federal Reserve policy rate, growth and inflation expectations.
Recent comments by former US Fed chair and Treasury Secretary, Janet Yellen, we think, are particularly insightful. "I don't think we're seeing dysfunction in the sense of liquidity completely drying up in the markets, but a pattern suggestive of a loss of confidence in US economic policy and the safety of bedrock financial assets is really very worrisome," she had said.
As we wrote a couple of weeks back, Trump's big blunder was not the tariffs per se, but the size of the reciprocal tariffs and the subsequent flip-flops. His attempts to upend global trade created extreme uncertainties that are giving businesses and consumers pause, sure. But the most damaging long-term effects would be the loss of investor confidence, and not just in his economic policies. His willingness to indiscriminately wield America's market power against both friends and foes alike, along with his Art of Coercion to force concessions from other nations, is generating a wave of anti-American sentiment in the world. Trump's latest criticism levelled at Fed chair Jerome Powell and threats to remove him before his term ends and, worse, to be replaced by another Trump loyalist will further hurt the credibility of US monetary policy - and the value of the US dollar. It would further heighten the risks for financial markets.
When investors expect the US dollar to depreciate, they will demand higher yields as compensation, to preserve purchasing power (as explained in our article "Explaining the maths behind 'terming out'", The Edge, April 7, 2025). And this was what we saw in recent UST auctions. Major central bank buyers, such as the People's Bank of China, are likely to have pulled back on their purchases (as was the trend in recent years), given the geopolitics; and while there is still solid demand from non-central bank investors, they are a lot more risk/reward-driven. That is to say, there are buyers, but only at higher yields (see Chart 4). And this is problematic for the US government, given its huge refinancing needs.
The US must refinance US$8.6 trillion of debts within the next 12 months, and another US$6.6 trillion within three years - or more than half of its publicly held outstanding debt of US$29.4 trillion (see Chart 5). For some perspective, the US issued more than US$109 trillion of UST between 2020 and 2024, to fund the government budget deficits (US$11.2 trillion), as well as debt servicing (US$98 trillion). Higher UST yields (interest rates) mean a higher cost of debt servicing and more UST to be issued - unless the government can rein in its budget deficit.
It remains to be seen whether Trump can, in fact, cut the US budget deficit. His other key economic agenda is to make his 2017 tax cuts permanent as well as exempt various incomes - as promised during his presidential campaign - as well as further reduce corporate tax rate to 15%, all of which will cost. While the Department of Government Efficiency has triggered much controversy for its budget-slashing measures, the actual amount of savings thus far has fallen well short of the US$1 trillion target, as initially claimed by Elon Musk. Indeed, Trump's muchhigher-than-expected reciprocal tariffs are likely driven, at least in part, by his need to raise US$1 trillion in additional revenue.
How will the US raise the trillions of dollars it needs AND keep interest rates from rising?
One probable way is to "term out" the UST - getting nations to buy (and/or switch from short-duration UST holdings) much-longerterm UST (100 years or even perpetual). Some of the largest holders of UST are Japan, South Korea, Taiwan and Singapore - nations that are heavily dependent on the US military security shield. Will terming out be part of the concessions that Trump is seeking from these countries? And if so, would they concede? Here's the thing. Can nations trust that Trump will in fact come to their aid if called upon? His very public humiliation of President Volodymyr Zelenskyy and wavering support for Ukraine must surely be foremost in everybody's minds. What is clear to all is that it is every country for its own, financially and security-wise, in this new Trump global order. If so, the alternative of suffering the pain for the next four years, the (presumed) limit of Trump's term, might well be the more viable option. And if that is the case, then there would be more volatility and downside risks for US dollar assets.
As such, we have disposed more of our US equity exposure. Our preference would be to hold cash in the Singapore dollar, for now, and gradually raise our exposure in China.
- End of Box Article -
The Malaysian Portfolio was up marginally, by 0.1% for the week ended April 23. Kim Loong Resources (+2.2%) and United Plantations (+1.5%) ended higher, while Insas Bhd - Warrants C (-18.2%) closed lower. Total portfolio returns now stand at 185.7% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 18.0% over the same period, by a long, long way.
Stocks in the Absolute Returns Portfolio also traded mostly higher for the week under review. Total portfolio value was up 1.5%, lifting total returns since inception to 19.9%. The top three gainers were Goldman Sachs (+6.1%), Tencent (+5.9%) and JPMorgan Chase (+4.9%). The SPDR Gold (-1.2%) was the only loser last week, giving back some recent gains. We disposed of all our holdings in CRH and Nucor Corp. As explained in the sidebar article above, "USD and UST are falling when they should have risen - an ominous sign?", we are reducing our exposure to US assets and will keep to cash (in Singapore dollar) for now.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor's particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
