Nigel Chong 庄证评 wrote a post · Aug 24 23:17

99Speedmart IPO: Five Reasons Why I'm Not Participating

**99Speedmart IPO: Five Reasons Why I'm Not Participating**

**Some Information:**
- Initial Public Offering (IPO) Price (RM): Retail price at RM1.65 per share
- Institutional price will be determined through the book-building process
- Use of funds (from the new issuance of RM660 million)

**Funds Raised Based on Retail Price of RM1.65 (RM 'mil):**
- New issuance: RM660 million
- Sale of shares could raise up to: RM1,696.20 million

**Planned Use of Funds (RM 'mil):**
- Store and Distribution Center (DC) expenditures
- Expansion of store network: RM389.0 million
- Establishment of new distribution centers: RM100.0 million
- Purchase of delivery trucks: RM55.0 million
- Upgrading of existing stores: RM47.6 million
- Repayment of existing bank borrowings: RM45.0 million
- Estimated listing expenses: RM23.4 million
- Total: RM660.0 million

**Total: Up to RM2,356.20 million**
- Enlarged issued share capital upon listing: 8,400.00 million shares
- IPO Market Capitalization (RM 'mil): RM13,860.00 million
- Price Earnings Ratio (PER): 34.70x based on FY2023 net profit, 26.02x based on annualized FY2024 projected net profit

**Five Reasons Why I'm Not Participating:**
1. **High Offer for Sale (OFS) Proportion** - A high OFS in an IPO usually indicates that the company's owners are looking to cash out by selling their shares. In 99Speedmart's IPO, the public issuance (Public Issues) only accounts for 38% of the total shares offered. There are 400 million shares issued publicly, while the OFS accounts for 1,028 million shares. Just through the OFS, the owners can cash out RM1.7 billion.

2. **Large Share Base** - 99Speedmart is touted as the largest IPO in the last 7 years, with the largest share base in recent years. From a technical analysis perspective, the number of shares issued represents "supply" to some extent. Companies with a large share base typically find it harder to see their stock prices rise, as it requires more demand. Of course, 99Speedmart may have substantial support from funds, which leads to the next point.

3. **Low Gross Margin and Net Profit Margin** - As a retail business operating at a low price point, 99Speedmart's gross margin is only 9%, and its net profit margin is just 4.3%. To maintain current profitability, the company heavily relies on business growth. Additionally, if the government introduces any wage policies (such as raising the minimum wage), this could significantly impact 99Speedmart's profitability, which is highly dependent on its workforce. Low-margin businesses are at higher risk, as even minor strategic errors can lead to losses, leaving little room for error.

4. **Main Market Listing Performance** - In the past five years, stocks listed on the Main Market have generally underperformed, lacking the explosive growth seen in companies listed on the ACE Market. Specifically, in the retail sector's IPOs like MRDIY, SENHENG, MSTGOLF, DXN, and INNATURE, there has been little significant growth since listing, with only MRDIY showing a 90%+ price increase since listing, but even MRDIY's performance was flat on the first day of trading.

5. **Limited Growth Potential** - Although 99Speedmart plans to expand its business to more regions, the number of stores in certain states remains very limited. For example, there are only 7 stores in Terengganu, 3 in Perlis, and 5 in Sarawak. From a business perspective, there is still some room for growth, and the company plans to increase the number of stores to 3,000 by 2025 (currently 2,651 stores). However, for investors, this growth will take 36 months to materialize, and the overall growth potential is limited.

**Personal Prediction**: The oversubscription rate for 99Speedmart's IPO is likely to be in the single digits, estimated between 5-9%, with the large share base being a significant factor. I predict that the stock price will likely remain flat or experience a slight decline after listing.