FIRST impressions matter a lot. The curtains rose on the long-planned for Malaysian Exchange of Securities Dealing & Automated Quotation (Mesdaq) in 1999 as the country, like many others in Asia, was reeling over the crushing impact of the financial crisis.
Making a sales pitch about Mesdaq to investors who were still licking their wounds was practically impossible. Years later, although investors’ aloofness is not as accentuated, Mesdaq has yet to overcome the perception hurdle.
Hence the numerous nation-wide road shows conducted by Kuala Lumpur Stock Exchange (KLSE) since the Mesdaq merged with the exchange to create a single trading platform last year.
KLSE’s task to raise the appeal of the technology and high growth exchange is littered with misperceptions.
A dark spot, which the Mesdaq has found difficult to shake off, is the rise and fall of the dotcoms that the exchange is somewhat closely linked to, given that it’s a platform for technology companies (most forget, it is also meant for other high growth businesses).
And here’s another one – some parties have even tagged the Mesdaq as a “third board”.
Mesdaq was meant to be a special-purpose equity market, one that would emulate the success of the United States' Nasdaq. It was also meant to act as an incubator that would provide early stage financing for small- and medium-scale industries (SMIs).
The potential seemed huge.
After all, SMIs constituted over 80 per cent of 300,000 manufacturing concerns.
Five years since conceptualisation and three years after inception, the response towards Mesdaq has not been as encouraging as its anticipation and the aspirations, though somewhat ambitious, not any different.
KLSE's deputy president for policy and development, Abdul Hamid Sheikh Mohamed feels that the merger of Mesdaq and KLSE last year had instantly widened the access to the Mesdaq market.
Since the merger, all 7,000 over registered remisiers and dealers trade Mesdaq stocks through all KLSE member companies, on a common trading platform.
“There is nothing holding the Mesdaq market back. From trading volume, it is evident that the enhanced access has attracted higher investor participation in the Mesdaq market,” continues Hamid.
The Mesdaq merger came to be on March 18 last year following a merger between Mesdaq – which comprised just five stocks then – and the KLSE.
The five stocks – Disccomp Bhd, Intelligent Edge Technologies Bhd, KOTRA INDUSTRIES BHD, Palette Multimedia Bhd and Supercomal Technologies Bhd – were given a new lease of life after the merger, in terms of liquidity.
Prior to the merger, some of the companies' shares were barely traded.
Currently, Mesdaq is targeting 50 listings by the end of the year.
So far, it already has 19 listed companies. There are eight companies which have already been approved and whose listings are pending with eleven companies in various stages of processing.
Of the 19 listed companies, only six were last traded above their initial public offer prices.
Noteworthy is that some companies on Mesdaq witness active trading and more often than not appear in the top ten active counters on the KLSE every single day. They include KarenSoft, Symphony House and IRIS CORP.
Mesdaq’s lack of appeal largely stems from general investors’ mindset or obsession with profit track record. (Companies seeking a listing on Mesdaq need not have a profit track record.) But that, in the larger picture may be misdirected, says former chairman of Mesdaq Industry Action Committee and former director of the Mesdaq Nazir Razak.
“I personally think that our regulation places far too much emphasis on historical earnings,” says Nazir.
In this light, he lauds the recent move to allow listing of large companies without profit track record.
In fact, Nazir, who is chief executive officer (CEO) of Commerce International Merchant Bankers Bhd, says the absence of historical earnings should be regarded as a plus point as it means investors can now share in the future high growth or early stages of profitability of a company.
“Some of these companies will do very well and investors are gaining exposures at an early stage where exponential earnings growth are possible. I also think that some of them will fail, so investors must select carefully,” he adds.
In contrast, a large number of second board companies made their debut on the exchange as they reached the peak of their earnings and this meant investors were only given the opportunity to share in the company’s consolidation phase, and in some cases, profit decline.
KLSE's Hamid echoes these sentiments on the opportunities investors can avail themselves of Mesdaq. “The market provides opportunities for start-ups, businesses in the new economy and companies with high growth potential.
“It also provides opportunities for investors with a higher risk appetite and longer-term outlook, to invest in companies at a more exciting stage of their development.”
Typically, it would be difficult for a company without much operating history or profit record to obtain financing from financial institutions.
Without financing, companies cannot grow and develop their business. Therein lies the intention behind the birth of Mesdaq.
Although young or small, if the company is able to demonstrate its growth potential, it has the opportunity to list on Mesdaq.
Says Hamid: What is important to appreciate is that the Mesdaq market completes that all-important missing link, which bridges the gap between financiers and venture capitalists and the end-investors.
“Without a structured exit, it is difficult for these companies to have access to capital and to grow. Financiers and venture capitalists would also be reluctant to fund if they do not have a clear exit route,”
Of check and balance
In any case, the CEO of a Mesdaq listed company points out:
“The KLSE/ Mesdaq is not crazy to approve a counter with no potential. The United States' Nasdaq has the same rules.
“Main board and second board have its fair share of non-profitable counters. Mesdaq should not be treated as any different,” says an understandably peeved CEO of Pallete Multimedia Bhd Eg Kah Yee.
CEO and director of Asseambankers Malaysia Bhd Agil Natt, says : “The Mesdaq market is operating on a full disclosure-based regulation that requires the listed companies to make continuous disclosures in an accurate and timely manner,” says Agil.
In fact, it is believed that the KLSE/ Mesdaq market has high standards of due diligence in vetting applications and has been known to reject applications even when these companies were very profitable.
In other words, although the Mesdaq market is fully disclosure-based, the KLSE still applies merit-based criteria in their due diligence.
In addition, the Securities Commission is particularly stringent on the accuracy of information as disclosed in the prospectus.
Fund managers have not skewed their attention towards Mesdaq stocks largely because they are relatively small in the broader universe and their resilience to adverse market conditions not quite a convincing story.
But Eg shrugs this off: “Tech savvy fund managers would not be put off. Only fund managers from the old economy will be.”
He points out that Singapore’s Sesdaq (Singapore Exchange of Securities Dealing and Automated Quotation) has been facing problems to a greater degree as some 60 per cent of its counters are not traded.
If there is anything that should change, KLSE's Hamid feels it's the perception that Mesdaq market caters to small companies.
While the minimum paid-up capital requirement for listing on the market is RM2million, there is no ceiling to the paid-up capital requirement.
There are large companies listed on the Mesdaq, a few that will qualify for a main board listing, just based on paid-up capital requirement, but choose instead to list on the Mesdaq market, for the profiling that it accords them.
The proof is all in the pudding. And imperative for Mesdaq’s future growth is the quality of stocks it attracts. Towards this end, the recent listings of Symphony House and UBS Bhd have stirred some interest in the Mesdaq market.
A dealer from Mayban Securities says that the two recently listed companies have emerged as some of the value companies in the Mesdaq market.
UBS is a dominant player in Malaysia's small-sized enterprises accounting software market with a 45.4 per cent market share while Symphony house, listed on Feb 14, 2003, is an investment holding company with two main business activities – provision of information technology and corporate services.
Another attraction is Iris Corp Bhd which provides smart-card technology, something that has been implemented ages ago in developed countries.
This smart-card technology integrator is now eyeing opportunities in the export market, particularly in Asean (Association of South East Asian Nations) countries, Africa and the Organisation of Islamic Conference countries.
While investors may not yet be highly attuned to the Mesdaq market a great number of retail investors swoop in at the IPO stage, hoping to get out with a quick gain.
As a result, most Mesdaq counters were noted for active trading on their debut, which fizzled out shortly after.
For a Mesdaq company, up to 80 per cent of the shares allotted to the public might have already been taken up by investors in the private placement exercise.
''The result is that subscribers for Mesdaq companies are usually institutional investors with better holding power and a longer horizon, hence they would be unlikely to unload their holdings in the market during minor fluctuations in prices,'' says a dealer who has helped in the private placement of these shares.
Also, because most of the Mesdaq counters are relatively small in terms of revenue, they are actually emerging from a lower base line.
Another positive factor is that the shares are also placed with the business associates of Mesdaq companies.
As these associates have better understanding of the businesses, they are inclined to hold on to the shares even during periods of volatility in price.
Hamid feels that there is a need for investors to focus their attention on Mesdaq market stocks and identify the value in them.
“There are certainly 'diamonds in the rough' there, which have the potential to go to bigger things,” says Hamid.
New markets like Mesdaq also take time to achieve full market acceptance and reach optimum level, where it represents a good mix of portfolios.
Diversity creates excitement and generates liquidity, which in turn translates into more efficient price discovery. When exactly that will happen, is anybody's guess.
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