Hup Seng was established in 1958 as Hup Seng Co, a partnership by the four founding directors of the group who are brothers. The principal activity of Hup Seng is the manufacturing of quality biscuits and snacks and trading of various food products. Hup Seng was incorporated in Malaysia under Companies Act, 1965 as a public limited company on 4 October 1991 and received its certificate of commencement of business on 23 April 1997.
Hup Seng incorporated as the holding company of Hup Seng Group. The principal activities of its subsidiary companies, which are incorporated in Malaysia, are Hup Seng Perusahaan Makanan (M) Sdn. Bhd. (HSPM) and Hup Seng Hoon Yong Brothers Sdn. Bhd. (HSHY).
Hup Seng Perusahaan Makanan (M) Sdn. Bhd. (HSPM), established in 1958, major principal activity is manufacture and sale of biscuits and coffee mix, it has been a household name synonymous with quality biscuit manufacturing. Today, it is one of Malaysia's leading biscuit manufacturers with many accumulated outstanding achievements. Through continuous upgrading, our products have been honored with numerous awards worldwide, marking important milestones for the company's history. In recognition of Hup Seng's stringent quality management system, the company was awarded the prestigious MS ISO 9002 Quality System Certification from SIRIM in 1995 and upgraded to MS ISO 9001:2000 Quality System Certification in 2003. The production of HSPM is sold to HSHY for the group's local distribution.
Hup Seng Hoon Yong Brothers Sdn. Bhd. (HSHY) principal activity is sales and distribution of biscuits, confectionery and other food stuff. HSHY has its own nation-wide sales network covering regions in Peninsular Malaysia. The Group operates in Malaysia, Asia, United States of America, Africa and Russia; Hup Seng's products have captured the hearts of consumers, young and old in many corners of the world. Hup Seng Industries Berhad has grown to establish itself as one of the leading domestic biscuits manufacturer in Malaysia based on an independent survey on the local branded biscuits market conducted in October 1999.
The major competitor for Hup Seng Industries Berhad is Hwa Tai Industries Berhad (HTIB). Hwa Tai Industries Berhad is one of the premier and long established biscuit manufacturers in Malaysia. It established in 1962 and listed on the Stock Exchange Malaysia in 1992. This fast expanding company has grown to be one of the largest players in the biscuits industry in the country and produce a fine, wide range of superior quality biscuits. It has been successfully marketed domestically and internationally through HTIB's own vast and comprehensive distribution network. It biscuits are marketed under the brand name or trademark of "HWA TAI" and "LUXURY". Besides that, Hwa Tai Industries Berhad takes pride in it excellent innovation and high quality products which have firmly entrenched not only in Malaysia but also in over 56 countries around the world. They are keenly involved in the integrated supply chain of our products, from manufacture to sales to distribution throughout the entire trade channels. Due to their extensive and comprehensive distribution network, they are also carrying products and brands by other principals for the Malaysian market.
According to Independent Market Report by ACNielsen (M) Sdn. Bhd., Hup Seng Industries Berhad has the second largest markets share in the biscuit market in West Malaysia based on total sales value between August 1998 and July 1999 for West Malaysia and employs over a thousand employees.
One of the critical drivers of business success is having a unique competitive advantage. From my point of view, Hup Seng Industries Berhad has some competitive advantages in order to maintain the market share in West Malaysia. One of the competitive advantages is Hup Seng Industries Berhad seeks to improve its products' quality and expand its product range to meet the requirements of its customers. It has a slogan "Quality is Our Promise" and from this slogan shows its commitment to quality. From the business overview of Hup Seng Industries Berhad, it has a quality control team, which is primarily responsible for formulating and implementing the Group Quality Management System according to ISO 9002. These systems would ensure high quality standards in Hup Seng's products prior to these products being transported out of the factory. Quality means products or services made as per customers' requirements and satisfaction. Producing quality products can increase company reputation, customer satisfaction and revenue. Hup Seng Industries Berhad only deal with famous brands which is also market leaders, especially: "Kerk" & "Ping Pong" brands variety biscuits, "In-Comix" branch 3 in 1 Instant Beverage Drink ,"Ong San Yong" chinese tea and "Wang wang" series products. Hup Seng Industries Berhad is managed by workforce of qualified, competent and experienced staff. Under the leadership of the innovative Board of Directors, it has recorded an average of 21% annual growth over the past 5 years. The outstanding performance reflects it strong market share and effective marketing strategy.
Hup Seng's head office is located in Batu Pahat, Johor, Malaysia. At the same time, it has set up its branches at six strategy places at Kelantan, Kuala Lumpur, Ipoh, Butterworth, Kedah and Kuantan. It current sales network represented by ten sales division to service over 10,000 customers. Most of their customers are from the various categories of Hypermarkets, Supermarkets, Wholesalers, Minimarkets, Medical Halls, Sundry Shops, etc. Another competitive advantage that can derive from this that is channels of distribution. To provide prompt delivery and efficient services, Hup Seng Industries Berhad is proud to develop its own sales network which includes 51 units of delivery trucks and 130 personnels. It continues to concentrate on fast moving consumer products. Through it company's effective sale strategy and slogan "Quality is Our Promise" in mind, together with sales of high potential products, they are able to improve it market share.
Discuss the possible reasons for the company to go public.
Most private companies start out by raising equity capital from a small number of investors (usually are the partners or relatives); with no liquid market existing if these investors wish to sell their stock. The biggest drawback as a private company is that company cannot advertise and can only raise capital from friends, family and colleagues or acquaintances. Going public marks an important watershed in the life of a young company. It provides access to public equity capital and so may lower the cost of funding the company's operations and investments.
It is an important decision for successful private company goes for public. Going public provide attractive opportunities to a growing company. However, going public involve many issues which must be carefully considered. (B., Ingersoll & R., PC, nd.) In particular, there are certain ongoing costs associated with the need to supply information on a regular basis to investors and regulators for publicly-traded firms. Furthermore, there are substantial one-time costs associated with initial public offerings that can be categorized as direct (legal, auditing, and underwriting fees) and indirect costs (the management time and effort devoted to conducting the offering, and the dilution associated with selling shares at an offering price). These direct and indirect costs affect the cost of capital for firms going public (Ritter J. R., 1998.) Managers are requiring a thoughtful balancing of the relative benefits and burdens in each situation to make a decision.
From my point of view, there are numerous reasons for a company to go public. But somehow rather, there are some drawbacks as well. Hup Seng Industries Berhad choose go for public is because, it would like to widen his investors base as well as access to a widespread shareholder base. It provides an opportunity for the Malaysian investors, institutions and the eligible employees of the group to participate in the equity of Hup Seng and the continuing growth of the Hup Seng Industries Berhad. The stock exchange puts forward companies a right of entry to a wide-ranging and mounting investor base, which contains both entity investors and plentiful local and international institutional investors.
In addition, a public company can often attract and retain better employees after going public by offering stock to such employees that will likely be significantly more valuable upon an offering. Likewise, in the period after the public offering, various types of employee benefit plans using the company's common stock are generally used to attract and motivate employees at different levels. Besides offering stock, companies can provides stock purchase plans, stock bonus plans, restricted stock plans, non-statutory stock options plans and incentive stock option plans to retain the better employees.
Besides that, going public enables Hup Seng Industries Berhad to gain access to the capital market in order to tap external sources of equity funds and non-bank borrowings for its future expansion and continued growth.
A company's ability to raise additional capital is enhanced after going public. The Stock Exchange makes available access to a collection of institutional and retail investors and to the capital market. A registration on the exchange allows a company to raise capital and use it to sponsor investment and expansion. Even after a company is listed, it can boost up capital from the market, through the issue of fresh securities such as rights issues or through the issue of a new nature of securities. Since the sale of securities, companies would able to reduce it leverage level, thus the company is often able to increase its borrowings and obtain terms more favorable than before the offering. Furthermore, if the company and its stock have performed well, the company can return to the market at a later time and sell additional shares to the public.
Apart from, companies are able to raise fund with low borrowing cost, the primary gain of raising capital from the market is that it eschews a number of the intermediation expenses apparent in the other forms of capital raising. Consequently, the market endows companies with capital at a cheaper cost.
Besides the benefits that I mentioned above, additionally, going for public is a value-added method. A listing could press forward brand awareness of company products and can augment a company's corporate standing. Furthermore, the superior profile, tied with larger lucidity, could add to the company's capacity to have access to traditional sources of capital.
Moreover, going public can help firm to determine it value, as it has the function of detecting price of the firm. Through the Stock exchange, firm will able to get know that it traded price and able to know, is there any overvalued or undervalued of it share prices.
A public company may gain a significant amount of prestige and positive publicity which will benefit the business operations of the company. A company's going public is a mark of success. Also, publicly held companies and their disclosures of information are followed by industry analysts and others in a position to publicize the company. However, while a private company facing financial distress may be able to avoid public knowledge of it and improve its position without negative publicity eroding customer and supplier confidence, a public company must continuously reveal to the public its true condition.
Discuss the timing issue of the IPO (5%)
From the listing statistic that provided by Bursa Malaysia, as at 7th July 2010, there are:
Number of new listings (as at 7th July 2010)
Total number of new listing =913
Number of years = 19
From this diagram we realized that, the average number of IPOs for these 19 years is 48 IPOs (Total number of new listing companies/number of years). Hup Seng Industries Berhad was listed on 25th September, 2000, and from the listing statistics that provided by Bursa Malaysia, there are 39 companies that are listed on year 2000. This year new listing companies was slightly lower 39/48*100%=81.25% of the average number of IPOs.
From this we can conclude, Hup Seng was listed on the year where is lower than expected IPOs from this long period. But, somehow rather, year 2000 was the year that recovers from previous financial crisis.
In Malaysia, the economic recovery that began in 1999 has continued to both widen and deepen. Faster restructuring of heavily indebted corporate entities will enhance medium-term growth prospects. Besides that, many countries have made good progress in its economic recovery after year 1999. Such as, Hong Kong, the economic forecast during 1999 expected a GDP growth of 10% in real terms for 2000. Moreover, labour market conditions continued to improve with the sustained pick-up in overall economic activity. The unemployment rate showed a further decline in 2000. The Malaysia stock and futures markets experienced a volatile year during 2000 compare with the year before. It was driven by the global technology stock boom and the expected admission of China into the World Trade Organisation.
From my point of view, 2000 is the good timing for company to listing compare to previous few years. The figure shown that, there are 39 new listing companies in year 2000 and this reflect that companies have a good prospective for the future and were recover from the financial crisis.
There some possible reasons for Hup Seng Industries Berhad to list on this year, the timing decision for a company go for public is very important. Time decision is the decision that when the company to issue equity. According to, Ross et al, if managers believe that their stock is overpriced, they are likely to issue equity immediate. They will create more value for their current stock price. When the manager believed the market is good, private company that hope to expand their business will grab the chance to go public, this is because the price of the stock, can be higher. Investors have a good future perspective and thus they are willing to invest in the stock market.
From the above diagram, shown that year 1999 and 2001 were the lowest point. This means that these 2 years was not a good timing for companies. Firms choose not to list in 1999 may due to still in recovery stage of the previous financial crisis. Firms never go public in a down market because the value of waiting is too great.
According to Benninga, S., Helmantel,M. and Sarig,O., they explain hot issue markets (the observation that many firms go public at about the same time.) via the cross-sectional correlation in the profitability of firms. Since changes in macroeconomic conditions simultaneously affect multiple industries and companies, firm profitability tends to be positively correlated. In particular, good economic circumstances positively affect the cash flows of many firms. Their model predicts that firms go public when their cash flows are high, which means that when one firm finds it optimal to issue stock, so do other firms. Therefore, their model predicts that IPOs will come in waves. Furthermore, since the correlation between the cash flows of firms within the same industry is likely to be greater than the cross sectional correlations at large, it results are consistent with the industry concentration that characterizes waves in IPOs. Finally, good economic conditions affect the cash flows of both publicly traded and privately held firms. Hence, the waves in IPOs, which occur when the cash flows of the issuing firms are high, happen when the cash flows of publicly traded firms are high as well.
Hup Seng Industries Berhad listed as public company on 2000, there is a good economic condition for them to do so, and this had given the investors a good perspective that Malaysia was recovery. Moreover, company believed that the investors are willing to pay for their share. 2000, is a good timing for company going public, according to the information that provided by Bursa Malaysia, most companies are went to public on 2000 after the financial crisis. Thus, I believed this is the reason for Hup Seng chooses this year to go public.
Discuss the selection issue of the underwriter (5%)
The underwriter is the organization that is responsible for pricing, selling, and organizing the issue, and sometimes will provide additional services. With direct public offerings, there is no need for an underwriter. The underwriter is the most visible and familiar element of the initial public offering process, so with an underwriter, it can help company in the process of issuing stocks.
An underwriter may be independent or part of a securities firm or bank. Often, securities firms and banks have municipal securities departments that carry out functions such as underwriting, marketing or trading municipal securities. Investment banks (IB) will normally take up the job as underwriters.
Selection of a good underwriter is of the utmost importance, but it is important to understand that many underwriters are equally selective of their clients. An underwriter's reputation depends on successful issues, few underwrites will be willing to stake their reputation on questionable companies. The decision may also depend on the kind of agreement the underwriter is willing to make regarding the sale of shares.
For profitable and established private companies, it should not be difficult to locate an underwriter willing to make a firm commitment arrangement. Under such an agreement, the underwriter agrees to buy all issues securities, regardless of ability to sell them at a particular price. In contrary, for riskier or less established companies, an underwriter may offer a best effort arrangement for the initial public offering. A best efforts contract requires the underwriter to buy only enough shares to fill investor demand. Under this arrangement, the underwriter accepts no responsibility for unsold shares.
It is important to have a good understanding of what to expect from an underwriter as initial public offering is so complex and expensive. Without knowing what to expect, it is impossible to make a wise and informed selection.
The two most common ways of issuing securities are by negotiated sales or by competitive bidding. In both kinds of sales, the underwriters work closely with traders and sales persons to determine the price of a new issue.
In a negotiated sale, the issuer selects the underwriter (or underwriters in the case of a syndicate) prior to the public sale date. Firm will negotiate directly with a particular underwriter about the fees and sales arrangements of underwriting such as the fees, the pricing and how to allocate the IPOs. (Ross. )The primary role of the underwriter in a negotiated sale is to market the issuer's securities to investors. In addition, negotiated sale underwriters are likely to provide ideas and suggestions with respect to structure, timing and marketing of the securities being sold. This method is more common and more prefer by firms.
In contrary, in competitive bid, firms will have a tender offer to invite all underwriters to bid for the underwriting. Underwriters who are interested will submit a sealed bid for purchasing the securities to the issuer at a specific time on a specified date. In this system, there will normally be more than one bidder. The bidder offering the lowest true interest cost to the issuer (i.e., interest cost that takes into account the time value of money) will be awarded the bid. This is the less common methodologist. But firms in certain industries such as utility industry are required by the government to use this method to reduce the costs of issuing IPO to avoid firms from transferring the issuing costs to consumers.
However, there are some issues in the selection of underwriters. Aside from issues of cost, there are political considerations. Negotiated sales create a possibility for underwriters to use campaign contributions and connections to obtain deals on terms that may not be in the best interest of the public. (Public Securities, nd.)
In the early 1990s, Securities and Exchange Commission has conducted an investigation of the securities market which concerns about influence-peddling. The investigations involved a range of issues, including:
Pay-to-play which mean through which underwriting firms make political contributions to get underwriting deals. In other words, it is someone using his political stature for financial gains.
Conflict of interest is whether persons associated with municipal issuers have relations with underwriting firms. For Hup Seng Industries Berhad, I felt that there are conflicts of interest between RHB Sakura Merchant Bankers Berhad. Where, it has underwritten its share for more than 100 %( 1st day closing price-offering price/offering price*100%).
Inadequate disclosure (asymmetric information), which mean that the investors do not have full information about the issuers.
Lack of price transparency and excessive markups in securities prices, this mean that the underwriters especially those have more dominate power that the issuers will tend to underpriced the securities in order to show their good ability.
Questionable sales practices
In its initial information seeking efforts, the SEC found that most firms made significant political contributions and that those that were making contributions were usually the same ones that were seeking municipal business. (Public Securities, nd.) In October 1993, 17 Wall Street firms were called for a voluntary ban on political contributions by their municipal bond departments due to scandals over political contributions and influence peddling involving high-level officials at leading securities firm led executives. These 17 firms were represented 75% of the municipal underwriting business.
Municipal Securities Rulemaking Board (MSRB), the municipal market's main self-regulatory group, proposed a rule to limit the growth of business-related contributions by Wall Street firms. In April 1994, the MSRB passed Rule G-37, which barred municipal dealers that made political contributions to clients from doing business with those clients for the next two years. MSRB's Rule G-37 was, however, less strict than the voluntary ban. (Public Securities, nd.)
From my research, RHB Sakura Merchant Bankers Berhad has been awarded Malaysia's 'Best Domestic Equity House 2003' by Asiamoney magazine. (Asiamoney, 2003) This merchant bank, was adviser and joint lead manager and underwriter to two of the country's largest initial public offerings (IPOs) in recent times, Maxis Communications Berhad's RM3.1 billion offering and PLUS Expressways Berhad's RM2.3 billion offering. RHB Sakura managed IPOs totaling RM5.41 billion in value which accounted for about 75% of the total value of IPOs during the year. (Microsoft, 2004)
Hup Seng Industries Berhad choose RHB Sakura Merchant Bankers Berhad as it underwriter, it is a reputable underwriter and might has dominate power compare with Hup Seng Industries Berhad.
Discuss the long run performance of the IPO. (10%)
(Please refer to the information that is provided - Table 1)
From Table1, it shows the performance of IPO had dropped after it issued the shares on November 2001.The first day closing price for this IPO is RM 4.60, and it was dropped after it has issued.
This shown that the share was underpriced around RM2.60 on the first day issued, and the table shown that the share price was dropped after it issued and this mean transaction of this IPO has dropped. While on 2001, the share price has maintain for 4 months and the share price has slightly increased.
The issued price of this IPO was RM 2.00 and it has a closing price on the 1st day issued, which means that this IPO is underpriced a lot. Besides that, the share price of this stock is volatile. Aside of Table 1, data that provided by Yahoo Finance.com, shown that in longer period, the performance of Hup Seng Industries Berhad was not good. This is due to the share price today is around RM1.71 where the first day trading price was RM4.60.
Furthermore, in the 3 years after going public most of the firms significantly underperformed a set of comparable firms matched by size and industry. In the long run, IPOs underperformed.
Some possible explanations of underperformance of IPOs:
Some firms might have 'lockup' period that insiders are prohibited to sell their IPO for the first few months (i.e.: 6 months) after listing. This is to prevent price to drop too much soon after IPO if insiders sell for capital gain. Underperformance is partly due to stock price drop after the lockup period is over. From the trend on Table 1, we can suspicious that Hup Seng Industries Berhad has a 'lockup' period for it insider, it is because the share price was dropped after a month it has been issued.
Firm tends to over-invest (over-optimistic) after going public. This over-investment results in some funds being invested in negative NPV projects and result in firm's value to destroy and share price to fall.
First day closing price is overvalued. As time passes, more information is available and the stock price will be adjusted towards the fair price based on these information. The first day closing price of Hup Seng Industries Berhad was overvalued compare with today share price.
Besides that, according to Khurshed A., Mudambi R. and Goergen M., small firms the higher the costs of flotation, the more are the under-performance. This lends support their earlier proposition that underwriters know of the risk involved with an IPO firm and hence charge higher underwriting costs to risky firms. For large firms this effect is absent thereby indicating the underwriters' perception of firms. They categorise small firms as risky and large firms comparatively less risky though it is difficult to comment on an underwriter's definition of small and large firms. In order to reduce the risk of unsubscribe, underwriter will underpricing the price of those risky firm. Table 1 shown the share of Hup Seng has been underpriced; the possible reason is the underwriter felt that investors have not recovered from the financial crisis, and might fear to invest. In order to reduce the risk of unsubscribe, and encourage investor to invest, thus RHB Sakura has underpriced this IPO.
Accordingly, they have found a negative relationship between the profitability of a firm prior to going public and its long-run performance. The result is stronger for larger firms. The more profitable a firm is prior to going public, the worse is the long-run performance. It suggests that firms go public at the height of their performance thus seizing their window of opportunity. Similar conclusions were reported by Mikkelson and Shah (1994) who showed that long-run share price performance and the change in operating performance from before to after flotation are negatively related: when operating performance fails to sustain pre-listing levels of profitability, share prices fall, indicating that investors were surprised by the change in operating performance.
In addition, Khurshed A., Mudambi R. and Goergen M., have found a significant relationship between the degree of multi-nationality of a firm and its long-run performance. This effect was strong for both the small and large firms alike. The more multinational a firm the better is the long-run performance. This could be the result of diversification of the risk of a firm and the positive effect this has on investors' sentiments. This result validates hypothesis 6 and suggests that investors value multinational firms more than domestic firms. Multi-nationality signals quality and reputation of a firm.
However, there is a negative relation between initial returns and long-run returns for large firms. The higher the return on the first trading day the worse is the performance in the long-run.
In conclusion, most of the firms are significantly underperformed in the 3 years after going public. But none of the research shown that the firms are still underperforming after these three years, so, we can conclude that the firms after three years went for public are in a stable performance (normal performance). Thus, it would be saver for investor to invest to those companies after a period of time it has been listed. From Jay R.R., he stated that there are several reasons why the long-run performance of initial public offerings is of interest. First, from an investor's view point, the existence of price patterns may present opportunities for active trading strategies to produce superior returns. Second, a finding of nonzero aftermarket performance calls into question informational efficiency of the IPO market. It provides evidence that equity markets in general and the IPO market in particular are subject to fads that affect market price. Third, the volume of IPOs displays large variations over time. If the high volume periods are associated with poor long-run performance, this would indicate that issuers are successfully timing new issues to take the advantages of 'windows of opportunity'. Fourth, the cost of external equity capital for companies going public depends not only upon the transaction costs incurred in going public but also upon the returns are earned in the aftermarket, the cost of external equity capital is lowered for these firms.
https://www.microsoft.com/malaysia/business/casestudies/linkpage4177.mspx
RHB Merchant Bank Runs Windows Server 2003 Directory Services, https://www.microsoft.com/malaysia/business/casestudies/linkpage4177.mspx Last Updated: Tuesday, December 14, 2004
Domestic bank awards 2003-Asia's finest: the honours rolls, 1 May 2003. http://www.asiamoney.com/Article/2056990/Search/Results/DOMESTIC-BANK-AWARDS-2003-Asias-finest-the-honours-roll.html?Keywords=RHB+Sakura+Malaysia%e2%80%99s+%e2%80%98Best+Domestic+Equity+House+2003%e2%80%99&OrderType=1
http://www.publicsecuritiess.org/major_players/underbasics.htm
A Guide for Selecting Financial Advisors and Underwriters: Writing RFPs and Evaluating Proposals, Patricia Tigue, GFOA, 1997.
(Ross. )
http://library.findlaw.com/1998/Jan/1/127511.html The Major Benefits And Burdens Of Going Public By Buchanan Ingersoll & Rooney PC
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Ross, S.T., Westerfield, R.W. and Jaffe,J., 2005, Corporate Finance, 7th Ed, New York, McGraw-Hill Companies.
Benninga, S., Helmantel,M. and Sarig,O.,2002, the timing of initial public offerings, Journal of Financial Economics 75 (2005) 115-132, Available from: www.sciencedirect.com
