Investors Blame Bankers for Japan Display Flop

Investors Blame Bankers for Japan Display Flop
Jittery Markets Also Seen as Factor in Weak Debut
KANA INAGAKI
March 19, 2014 10:02 a.m. ET

Shuichi Otsuka, chief executive officer of Japan Display Inc., left, holds a listing notice with Akira Kiyota, president of Tokyo Stock Exchange Inc., as they pose for a photograph during an initial public offering ceremony for the company’s listing at the Tokyo Stock Exchange. Bloomberg News

TOKYO—The $3.1 billion listing of Japan Display Inc.—one of the few comeback stories in the country’s struggling technology sector—appeared to be a government-backed deal that bankers couldn’t afford to fumble.
And yet, the maker of Apple Inc. AAPL -0.28% ‘s iPhone screens met a resounding thud as it made its trading debut in Tokyo.
Shares in Japan Display fell 15% Wednesday, going against a mild rise in the broader market. Angry investors blamed bankers for overpricing the deal and allocating too many shares to finicky individual investors. The listing is the world’s second-biggest initial public offering so far this year, after the $3.11 billion that HK Electric Investments Ltd.2638.HK +0.21% raised in Hong Kong in January.
Bankers say overall market conditions were unfavorable, with investors jittery about the crisis in Ukraine and worries about the Chinese economy. Japan Display’s dramatic fall, a day after shares of lithium-ion battery maker Hitachi Maxell Ltd. declined during their inaugural session on the Tokyo Stock Exchange, puts the spotlight on a slew of domestic deals set for this year, including a float that would value major rail operator Seibu Holdings Inc. at more than $7 billion next month.
“It was a disaster. There’s no other word that comes to mind,” said David Baran, co-chief executive at Tokyo-based fund Symphony Financial Partners Co., who opted not to take part in the IPO although bankers came to him with a pitch.
Combining the display units of Sony Corp. 6758.TO +1.50% , Toshiba Corp.6502.TO -1.35% and Hitachi Ltd. 6501.TO -1.36% two years ago with a $2 billion investment from a government-backed fund, Japan Display is the world’s No. 1 maker of smartphone and tablet-computer screens. Japanese government officials touted the company’s success as evidence that the country’s tech industry can still remain competitive with the right combination of cutting-edge technologies and financing.
Last week the company priced its IPO at the bottom of its proposed range after demand was weaker-than-expected among foreign investors. Valuation figures indicate Japan Display’s price wasn’t cheap even at the low end of the range in relation to the share prices of its rivals, although company officials said such comparisons wouldn’t be accurate because Japan Display specializes in small and midsize screens, while its rivals make other products.
At its offering price, Japan Display’s multiple of enterprise value, which includes debt, is 3.4 times its expected earnings before interest, taxes, depreciation and amortization for the fiscal year ending in March 2015. That compares with 2.24 times for LG Display Co.034220.SE +0.98% , based on its earnings estimate for the year ending in December, according to Advanced Research Japan.
Japan Display also allocated 37.5% of its new shares to foreign investors, with the rest going to domestic investors. The majority of the domestic tranche was distributed to Japan’s mom-and-pop investors amid weak institutional demand, according to people involved in the deal. In Japan, individual investors, such as day traders, typically play a bigger role in IPOs than in many other countries, where institutional investors generally take up the bulk of the shares.
Japan Display shares closed at ¥763 ($7.52) and fell to as low as ¥706 on the Tokyo Stock Exchange, compared with its IPO price of ¥900 a share. It was the second-most heavily traded stock on the Tokyo market.
“We need to take this seriously and manage the company firmly,” said Shuichi Otsuka, the company’s chief executive, after the market closed, referring to the plunge in the share price.
“The ¥900 was based on an understanding that it was reasonably priced. It was neither too expensive nor cheap,” he added.
In an interview, Mr. Otsuka said foreign investors asked him most about the risks that other rivals will catch up in display technologies and bring down prices. Company officials have long argued that its display strengths cannot be copied easily, especially its touch panel and power-saving technologies.
While Japan Display has so far focused on high-end smartphones, the company is also looking to expand sales to lower-priced markets and has invested in a Taiwanese company, hoping to learn the speediness and aggressive cost-cutting ways of its Asian rivals.
Still, many foreign investors—including U.S. investment manager T. Rowe PriceTROW +0.37% —remain skeptical and opted to stay out of the deal.
Chris McGuire, CEO of Chicago-based hedge fund Phalanx Capital Management, said he received 70% of the shares his company had asked for in the Japan Display IPO, compared with no more than 50% in other deals—a signal of extra shares that needed to be allocated.
“The deal is probably sitting in a lot of hedge-fund hands, and hedge funds are normally looking for fast-money returns,” Mr. McGuire said. On the first day, his fund sold all the Japan Display shares it bought during the IPO.
A banker involved in the process denied the deal was disproportionately allocated to funds with short-term investment horizons. “Sales at home were steady, but demand didn’t grow overseas. It was just market conditions weren’t great.”
The Nikkei Stock Average is down 11% so far this year, with foreign investors less enthusiastic about Japanese stocks given uncertainty about the impact of a sales-tax increase that takes effect in April. The benchmark index rose 57% last year amid enthusiasm for Prime Minister Shinzo Abe’s policies to bolster the economy.
Nomura Holdings Inc., 8604.TO -1.23% Morgan Stanley MS +1.37% and Goldman Sachs Group Inc. GS +0.36% were the lead underwriters on the Japan Display IPO.
Japanese bankers expect there to be as many as 80 domestic IPOs this year, up 38% from last year.