- Gray market trading suggests boost to shares on debut
- Line counting on smooth IPO as it seeks to expand globally
Day traders in Tokyo are famous for their love of technology companies, new listings and volatility. So many expect fireworks when messaging app Line Corp. -- the biggest tech initial public offering of the year -- makes its Japan trading debut on Friday.
Accounting for about a fifth of the nation’s daily turnover, the traders have a tendency to favor stocks popular with the general public. That’s leading many to expect a feeding frenzy -- at least initially -- for shares in a service that’s become intertwined with the daily lives of Japan’s population.
“Given its popularity, it feels like it could fly out of the gate,” said Naoki Murakami, who has been day-trading for 11 years and is a minor celebrity among the community, paid by brokerages to speak at investor conferences. “It’s a stock everyone is looking at. Since the IPO is so popular, I think there’s no shortage of people who will want to buy a piece of it at the outset.”
That interest has already had some impact, with Line citing strong demand as a reason for lifting the price of the $1.3 billion IPO by 18 percent from an initial estimate and exercising an option to sell more stock. Major retail brokerages -- Nomura Holdings Inc., Daiwa Securities Group Inc., and SBI Holdings Inc. -- have all said demand from retail investors has been robust while the stock this week traded in the gray market at 15 percent above its Japanese IP0 price of 3,300 yen.
The U.S. shares, which were sold for $32.84, will debut in New York on Thursday before commencing trade in Tokyo a day later.
Retail investors in Japan are often drawn to the IPOs of companies whose services they use. Japan Post Holdings Co. surged 26 percent when it debuted in November. With 61 million monthly active users in Japan, Line reaches almost half the people in the country.
“Line has raised the offering price already and that’s a signal, among other things, that it’s a popular stock with the retail crowd,” said Yoshihiro Okumura, general manager at Chiba-Gin Asset Management Co. “Pretty much every person in Japan uses Line, so at least as far as Japanese investors, that probably means more people than not see it in a positive light.”
The decision by Line’s parent Naver Corp. to sell less than a fifth of its total shares in the IPO means competition to snap up a piece will be high. With the majority of the IPO allocated to the U.S. listing, investors in Japan will have to fight over about 7 percent of the company, a $480 million slice in a market where retail traders have about $4 billion a day of activity.
The group’s often fickle nature and reliance on volatility-inducing margin trading is leaving some wary. The TSE Mothers index, a small-cap gauge of biotech and internet stocks popular with retail traders, has been twice as volatile as the broader market over the past year.
“With a name like Line, you’re going to have to watch them,” said Nicholas Smith, a strategist at CLSA Ltd. in Tokyo. “They think very, very differently from foreign investors. They’re very, very fanatical.”
Day traders have been at the heart of some of Japan’s biggest market scandals, including Livedoor Inc., a once high-flying web portal that benefited from fervent buying by retail investors. After its accounting practices came under scrutiny in early 2006, panic selling wiped more than $4 billion from its market value in about a week. Line bought Livedoor in 2010 and absorbed many of its executives, including its current head Takeshi Idezawa.
In 2005, during the IPO of J-Com Co., a trading error at a bank made instant millionaires out of a handful of traders.
What happens in Tokyo on Friday is likely to be on the minds of U.S. investors Thursday, when Line makes its New York debut. While most are buoyed by the company’s earnings prospects in Japan, uncertainty over potential volatility in Tokyo may cause some investors to adopt a wait-and-see approach at the outset.
“It’s going to take off at a higher rate on the Japanese stock exchange than here," said Brendan Connaughton, chief investment officer of ClearPath Capital Partners in San Francisco, a boutique wealth management firm whose clients are primarily in the tech industry. In New York, "if it’s an up day, it can catch a bid and drum up,” otherwise it may trade flat of up six to seven percent.
Line is counting on a smooth IPO to spearhead an expansion across Asia and, eventually, the U.S. The company is looking to add users beyond its core markets of Japan, Taiwan, Indonesia and Thailand, which account for almost three-quarters of its total monthly active users. The company has mostly struggled in this regard, growing its membership in 2015 by just 13 million to 218 million.
The focus on user growth has come at the expense of profitability. The company has lost money in two of the past three years, making it difficult to directly compare against profitable larger rivals such as Facebook Inc. and Tencent Holdings Ltd.
The current implied value of each of its monthly active users is $32, according to Bloomberg Intelligence analyst Anthea Lai. Facebook paid more than $40 for each of WhatsApp’s users in 2014 while Snapchat’s recent reading valued each customer at $62. Rakuten Inc. paid $9 a user when it bought Viber in 2014.
Murakami, the day trader, says early trading could mimic moves of Japan Post, which surged early before coming back down.
“I’ll probably do a lot of short-term trading over one, two or three days, he said. “But if you ask me if I’ll buy and hold it for months, I just don’t see myself doing that.”