Enhancing the Mesdaq market BizWeek, Saturday, May 29, 2004 FIVE months into the year and the Mesdaq market has already seen 10 new companies, listed. Some 40 applications are currently being assessed for admission into the new market. Although not all will make the grade, this year is expected to see more than the total of 20 companies that were listed on the market last year. Mesdaq got its long awaited break last year after almost five years of being snubbed by potential issuers and investors wary of technology-related stocks after the dotcom bubble fiasco of the late 1990s. The fact that access to the market widened instantly following the merger of Mesdaq and Kuala Lumpur Stock Exchange (now Bursa Malaysia) in 2002 has a lot to do with its newfound popularity. Revamping rules Now plans are afoot to further enhance the attractiveness of the Mesdaq market to potential issuers. Over the week, Bursa Malaysia announced that it has issued a consultation paper to Mesdaq market listed companies and other relevant industry participants to seek their feedback on the revamp of the listing requirements for the Mesdaq market. The revamp is not only meant to enhance the appeal of the market to potential issuers but also to benchmark Mesdaq against other similar markets and to further promote the integrity and credibility of the market. A quick check with several heads of Mesdaq listed companies and industry observers shows that many of them feel that the move to revamp the listing requirements is timely especially now that the market is generating more interest among potential issuers and investors, alike. "The listing requirements for main- and second-board listed companies were revamped several years ago. But the Mesdaq requirements have not changed to take into account those amendments. Of course, not all of the changes are applicable to Mesdaq companies but there are areas that can be looked into," Symphony House Bhd executive director Abdul Hamid Sheikh Mohamed comments. For example, he says that because Mesdaq companies are generally service-based companies, most of them do not have big net tangible assets. "When these companies make acquisitions, they tend to acquire other service based companies and as a result have huge goodwill elements arising from the acquisitions. Current accounting standards makes goodwill a taxing issue to address so this is one area that should be looked into," he says. Tweaking required Others like KarenSoft Technology Bhd executive chairman and chief executive officer Chee Chong Hwa reckon that the ruling that requires applicants to secure and maintain the services of a sponsor for five years after admission should be applied on a case-by-case basis rather than across the board. "It should at least take into account the company's business model as well as the experience of the management team," he says. The fact is that investing in Mesdaq market counters poses a higher risk to investors because of the small, start-up nature of the companies to be listed, emerging nature of their businesses and lack of a profitability record of operations. Thus the requirements, some of which are thought to be more stringent compared with other new markets like Sesdaq, were put in place to reduce some of the risks of investing in these companies. As a head of research with a local brokerage says, "The quality of the firms listed on the Mesdaq market is as important as the qualities of the market itself. Bursa Malaysia has to strike a balance between enhancing the attractiveness of Mesdaq to potential issuers and putting in place listing requirements that are stringent enough so that it gets to separate the wheat from the chaff." He adds that there is little point in making the market attractive to run­of-the-mill companies, which ultimately could destroy the value of the market. To draw an example from US' Nasdaq, the research head remarks that Intel was one of the first few firms to get listed on the Nasdaq. Subsequently, lntel's success and the demonstrative effect attracted other high-quality Silicon Valley firms to seek a listing on the market. Nasdaq, the largest electronic stock market in the US, began operations in 1971 with median quotes for more than 2,500 over-the-counter securities. Since then, it has steadily outpaced the other major markets to become the fastest-growing stock market in the US. By 1994, the annual share volume of Nasdaq surpassed that of the New York Stock Exchange. The market now has some 3,300 companies listed and is itself divided into two tiers, namely the national market (for larger companies with higher capitalisation) and the smallcap market (for medium-sized companies). "It is necessary to encourage high-quality firms to list on the market because the absence of high-quality firms could lead to low liquidity and little attention from analysts," the research head says. Room to improve Technology analyst with OSK Securities, Shin Kao jack, could not agree more. "The Mesdaq market does have some quality listed firms with either unique business models or high profile client bases. But there is still room for improvement to make the market more attractive not just to potential issuers but also investors." For example, Shin says it would go a long way if potential issuers are required to include at least one-year net profit and dividend forecasts in their prospectuses. "Some claim that the volatility of their businesses makes forecasting a futile effort. But what about those main- and second-board potential issuers that are also involved in volatile businesses but are still required to provide forecast because the listing requirements make it compulsory?" he poses. In pursuit of more information Currently, Mesdaq listing rules require potential issuers to include profit and cash flow projections in a five-year business plan to be submitted to the exchange but its inclusion in the prospectus is optional. "Apart from being more transparent, forecast will also show the kind of commitment the management is willing to put in," Shin says. Another tech analyst with a local broking house says that it would also help analysts with their numbers crunching if potential issuers provide details of the size of their order books in their prospectuses. "For software solutions companies, for instance, the length of their contracts are usually very short. So, it is hard for us to gauge the kind of earnings growth we can expect of the companies if we do not know the actual amount of contracts they have in hand". "How do we come up with a recommendation if we are not able to tell our clients what sort of revenue they can expect from a particular company," he remarks. Still, there are others who remark that the rules may be tweaked here and there but a lot more has to be done to alter the misconceptions about Mesdaq listed companies. "There is just a general lack of support from financial institutions when it comes to providing financing for shares of Mesdaq-listed companies. Most of them do not consider Mesdaq shares as suitable collateral," KarenSoft's Chee says. BY DARSHINI M. NATHAN