SkyeChip’s wonky IPO price discovery

IS there a weakness in the price discovery process for pricing certain new listings? Here’s why I think so.

Everyone in the investment community I spoke with months before SkyeChip Bhd’s listing knew that the initial public offering (IPO) was gonna be euphoric and that there would not be enough shares to be had.

Many of them participated in the book-building process that the advisors had carried out.

The IPO’s public portion was oversubscribed by 95.03 times while the remaining institutional tranche, excluding shares taken up by cornerstone investors, was oversubscribed by about 38.76 times

And as expected the share price went berserk on its listing on Thursday, hitting an intraday high of RM3.80.

That means, there was an investor willing to pay RM3.80 for SkyeChip’s shares. And yet, the company got only 88 sen for the 400 million shares it sold, giving it proceeds of RM352mil. (SkyeChip’s IPO only involved the issuance of new shares, another plus point for the company.)

My argument is that this gap is just too wide. An issue price of a mere 10 sen higher would have raked in another RM40mil for SkyeChip, which could have gone towards boosting its research and development work and paying its engineers more.

SkyeChip closed at RM2.23 on Thursday (up 153%), no doubt with a load of profit-taking being achieved by IPO investors.

If the IPO was priced at even half those gains, at RM1.55 a piece, it would have brought in a massive RM268mil extra in listing proceeds for SkyeChip.

And yet, the big winners here seem to be all the IPO investors, especially the close to 20 cornerstone investors, who immediately would have been sitting on massive gains.

What exactly has their contribution been to SkyeChip’s progress? And yet many of these investors – high net worth individuals and institutional investors – have been banging tables saying they have been shortchanged for being allocated only a small number of the IPO shares.

They should know that they are lucky to get any shares of this much sought-after company, considering they have not lifted a finger in helping this company grow thus far.

The IPO price of new listings are decided by a long established (albeit opaque to the man in the street) book-building process, which began in Wall Street in the United States in the 1980s.

In short, it involves the advising bankers sussing out demand, inviting bids and in the end pricing the issuance with the agreement of the issuer.

Another way to explain it is the process in which the issuer and its advisers try to determine the highest price at which enough investors will still buy the shares and support trading after listing.

Some say it is part finance, part psychology, part negotiation, and part marketing.

In SkyeChip’s case, the 88 sen IPO price was based on a price-to-earnings (PE) ratio of 44 times its earnings for the financial year ended March 31, 2025.

Going by analyst reports, the 88 sen also worked out to a forward PE of between 20 times and 27 times FY27 earnings forecasts.

And yet, Malaysian fund managers are buying some locally listed tech stocks priced at more than 70 times times historical earnings, on the basis that their growth is phenomenal.

I would cite companies like UWC Bhd, Unisem (M) Bhd, Greatech Technology Bhd and ViTrox Corp Bhd.

So if SkyeChip is as phenomenal as people believe – the analysts consensus target price for SkyeChip is RM1.69 based on Bloomberg data – why were the funds only willing to pay 88 sen for the shares?

Also, at least the experience of the listing of Oppstar Bhd on Bursa Malaysia three years ago should have been considered more.

The stock price surged 286% on its first day of listing.

That said, its offering was priced at 24 times historical earnings, lower than SkyeChip’s 44 times.

That of course accounts for the fact that despite both companies being involved in chip design, their business models are quite different.

Oppstar provides design services while SkyeChip lays claim to developing cutting-edge semiconductor IP, with some of its designs having been successfully fabricated into actual chips.

Bankers though insist that there is absolutely nothing wrong with their book-building process.

According to them, book-building is an art that ensures that the cornerstone investors are comfortable with the price they are paying.

Cornerstones after all take up the bulk of the offering – without them, the IPO cannot happen.

And within this group of investors are a varied bunch, some with longer-term horizons, others with a shorter-term view of their investment.

Also, cornerstone investors participating in a book-building process take a small market risk – their money gets tied up for around two months after placing their order, before the actual listing date.

Furthermore, tech stocks can be volatile. Just this week, the run up of memory-chip stocks experienced pullbacks and selloffs due to profit-taking and investor overvaluation concerns following a massive, multi-month rally.

And much sought after IPOs can also fail to perform, some rather catastrophically.

Remember the 2012 IPO of FGV Holdings Bhd (then called Felda Global Ventures)?

Despite being the largest IPO in Asia that year, it was extremely sought after – its institutional portion was oversubscribed by 15 times.

The share price did surge on the first day, but not long after it fizzled out into one of the worst listings on Bursa Malaysia.

But SkyeChip, with all its intellectual properties, engineering talent and high margins, is no FGV.

It is smack dab in the middle of the artificial intelligence (AI) boom, building the most complex blocks in the supply chain.

The euphoria was so clearly present prior to the IPO.

Its advisors should have been more adept at pricing that euphoria into SkyeChip’s IPO price, so as to create maximum value for the issuer.