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Wednesday 26

July, 2017 8:41 PM



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IPOs with Great Stories

IPOs with Great Stories

By Bob Kohut 08.05.2017


Techniques for minimising risk in buying brand new stocks, or Initial Public Offerings (IPOs), abound. Some simply caution investors to just stay away. 
 
The following concluding comment from US based investment advisory firm Investor Solutions sums up the case against IPO’s very well.

Approach the IPO market with a giant degree of skepticism. The little guy can get easily crushed on this playground. A broadly diversified portfolio of equity index funds can run circles around and IPO driven investment strategy, especially in terms of risk control.

Yet many investors throw caution to the winds and flock to IPO listings within minutes of the opening bell.  Why?

Traditional investment theory advocates a rational approach to market investing, stressing an objective analysis of current market conditions and the business fundamentals of the target company.  However, a new field –Market Psychology – offers a contrarian view – emotions, not logic, determines stock buying behavior.

How much of an emotional lift does one get from investing in a staid old ASX blue chip like BHP Billiton (BHP) or Telstra (TLS). Contrast that with the prospective thrill of truly finding that “next big thing” before others discover it and watching the share price fly.

Initially the share price of a highly desirable IPO often does fly, only to fall back to earth once performance fundamentals begin to appear. We looked at the listing of recent floats (IPO listings) you can find on the ASX website and found five companies with interesting possibilities, with emphasis on possibilities.

The following table lists the five by market cap.


Four of the five companies have been on the ASX less than one month and the fifth, Chinese Agricultural producer Jiajiafu Modern Agriculture (JJF) Ltd has completely dropped off the radar – the stock hasn’t traded since 30 March – with a trading volume that defies description.  

Hyped IPOs typically get out of the gate with high trading volumes which taper off.  Consider the chart of one of the hottest IPO’s debuting in 2016 – 3D metal printer manufacturer Aurora Labs Ltd (A3D).


Note the high trading volumes following the listing of the stock.  This suggests that except for Wattle Health Australia (WHA) the remaining four are not exactly attracting investors in droves.

Wattle Health has investors’ blood pumping in the belief it could be “the next Bellamy’s” Australia (BAL). Bellamy’s makes organic food and formula for infants and toddlers and was riding high with its Chinese market penetration before that government changed the regulations on that sector.  The share price is recovering and Wattle’s product line of health and wellness food products, specialising in infant formula and dried dairy products may be enticing investors. 
 
The company already has approval of the Chinese government to sell its infant formula there.  Company management also took steps to avoid the problem of dashed expectations plaguing many IPO’s.  In most cases the Investment Prospectus for a new company seeking an ASX listing contains revenue forecasts. Wattle included no forecasts, stating “revenue forecasts relating to early stage businesses are uncertain and there are a number of significant matters outside its control relating to the Company’s future performance.” 

On 18 April Wattle signed a Heads of Agreement – a tentative partnership agreement – to supply its infant formula across mainland China through 100 key stores operated by the Aiyingdao Zuhai Business Chain Ltd.

Visioneering Technologies Inc. (VTI) is a US based company that chose to make its public debut on the ASX. The company has been in business since 2008 and introduced its flagship product – the NaturalVue™ Multifocal (NaturalVue MF) contact lenses in 2015.  The lens is disposable after a single day’s use and is designed for two markets.  First, the lenses enable adults suffering from difficulty related to seeing near objects, a condition called Presbyopia, to correct the condition.  Second, the lenses treat children with near-sightedness.

Visioneering received US FDA (Food & Drug Administration) approval in 2015 followed by a highly successful product launch.  Company management claims the demand for the product outstripped their ability to manufacture the lenses.  At that time Visioneering had only one sales representative.

In 2016 the company expanded its manufacturing infrastructure with the proceeds from a pre-IPO institutional placement that raised $10.3 million and is now in a position for a wide-scale rollout.  Investors who have studied what to look for in an IPO know that how the funds raised will be used is an important consideration.  Ideally, the company already has a successful product or service in place and will use IPO proceeds for marketing and sales force expansion.  That is the next step for Visioneering.

Another critical consideration for IPO investing is market potential.  The greatest product on the planet means little if the target market is miniscule.  Estimates are that 90% of people over the age of 40 suffer from Presbyopia.  Considering the growing number of people in that age group, market potential seems solid.

On 8 March Jiajiafu Modern Agriculture Limited (JJF) announced its earnings results for the Half Year 2017, audited by respected accounting firm BDO. Revenues rose 41% and profit before tax was up 122%.  The company began operating in 2011 as Qingzhou Jiajiafu Modern Agriculture Group Co. and was incorporated in Australia as Jiajiafu Modern Agriculture Limited, a holding company, in 2015.  Prior to the incorporation Jiajiafu boasted a compound annual revenue growth rate of 17.6%

The following day – on 9 March -- company management rang the opening bell at the ASX and the stock commenced trading, only to disappear by the end of the month.  Here is the amazing price movement chart.


The ASX website has no trading halt announcements for the company and a search for information yielded nothing.  Apparently, this stock is so far off the radar screens of ASX investors not even the tiniest blip has been seen for more than a month.

While that does not inspire much confidence, what the company does and its performance history suggests it is worth a look, providing there is nothing amiss here.

Jiajiafu has a major agricultural operation in Shandong Province in China comprising 400 greenhouses and growing sites spread across a plantation spanning 305 hectares.  They grow fresh organic produce, which is increasing in demand with the expansion of China’s middle class, and processed food products such as dandelion tea, pumpkin powder and dried persimmons.  In a country rocked by food scandals Jiajiafu has the distinction of holding EU (European Union) organic food certification for 17 product varieties, as well as Chinese national organic food certification for 11 varieties and “green food” certification for another 23 product varieties.

The company plans to use the proceeds from the IPO to expand its farming acreage and its processed food offerings.  Traditional Chinese Agriculture relied heavily on pesticides and fertilisers, giving Jiajiafu a considerable competitive advantage from its organic growing methods.  This is a high-tech agricultural company with a relationship with China Agriculture University.  The company’s revolutionary production method for producing dandelion green tea is patented.

It remains a mystery why this stock has stopped trading, but it certainly seems to deserve a spot on an investing watch list.

Investors searching for the elusive “next big thing” have heard the phrase water is the new gold before.  De Mem Ltd (DEM) is based in Singapore but like many start-ups around the world chose to come to the ASX for its IPO.  The company provides wastewater treatment for industrial, municipal, and residential companies.  De Mem comes to market with an impressive system and an impressive pedigree as a spin-off company from the Water Research Institute at Singapore’s Nanyang Technological University.

The company builds, owns, and operates water treatment systems for its customers, with multiple projects currently underway.  This business model is based on long-term contracts with revenue generation coming from recurring monthly fees.  In addition, the company plans to augment the Build, Own, and Operate (BOO) business model with system and equipment sales direct to customers.

Currently the company offers a water monitoring system called de.live and membrane filtration systems under the de.pure banner.  However, the De Mem’s flagship hollow fiber nanofiltration membrane technology is still under development with IPO proceeds to go towards establishing a pilot manufacturing facility for the membrane.  This puts De Mem in the class of IPO’s with great stories to tell that are still at the beginning and potentially a long way from the end.

UUV Aquabotix Limited (UUV) is yet another US company choosing to introduce its stock via the ASX.  The company’s high tech story is compelling – underwater drones in a variety of flavors currently operating in 45 countries around the world, per the company’s website.

Aquabotix began in 2011 manufacturing unmanned underwater vehicles (UUV). In addition, the company makes commercial grade networked underwater cameras and accessories.  The IPO Prospectus states Aquabotix generated $1.1 billion in sales during the calendar year 2016, an 80% increase over 2015.

The company’s products are supported by its proprietary software.  Aquabotix claims to be one of the few companies in the world offering hybrid UUV’s capable of remote or manned operation. 

Sales revenue is augmented by software upgrades, customer training, and data analysis tools as well as extended warranties.  The market for UUV’s ranges from the military to the oil and gas sector as well as the aquaculture and marine construction 

The commercial market for these vehicles is relatively new and Aquabotix has chosen to focus on middle market customers needing cost effective vehicles for what management describes as “everyday workhorse” applications.

Funds from the IPO will address a key risk identified in the Prospectus – the rapid change of UUV technology – by increasing R&D expenditures as well as expanding its sales force. 

It remains to be seen what share of the middle market Aquabotix can grab, but the overall market demand has an impressive growth forecast.




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