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The largest Japanese IPO becomes a Disappointment

On Wednesday 19th December, new shares issued by Softbank's mobile phone business stumbled on its debut day, dropping 10 per cent soon after starting trading and almost 15 per cent at the end of the day. As the largest IPO in Japan, this deal is another historical moment for Softbank in the stock market, raising a recording $23.50 billion, while the first major IPO was Alibaba’s in 2014, the largest in the history, which it owes 30% stake in.

So, what is Softbank? Softbank Technology Corp is a Japan-based juggernaut focusing on information and communication technology (ICT) business, the largest investors in the tech industry. Except for Softbank Japanese mobile, the corporate also holds 30 per cent shares of Alibaba, who has a market value of $100 billion, and significant shares in Vision fund, Arm, Sprint in the UK, and Yahoo Japan among others. Masayoshi Son established the company from scratch and became a legend by investing $20 million in Alibaba in 2000, but total investments today value $30 billion. His investing style is similar to Warren Buffett, and is an iconoclast in Japan with numerous followers. Softbank Japanese Mobile is the third telecom player in the Japanese market and the second largest asset held by Softbank Technology.

It is unusual for share prices to fall in the first day of IPO, even more so for a blockbuster offering like this one. The oversubscribed shares are double of the issuing amount, and the company promises 5 per cent dividend payment, much higher than Japanese peers. Despite this, the stock price fell from the initial 1,500 JPY ($13.20) per share to 1,282 JPY in the first trading day. The share price of parent company has decreased as well from October 5th, indicating the waning of belief in Mr Son's investment skills.

The close relationship between Softbank and Huawei could be to blame, as Huawei has been involved in scandals in several countries. Softbank Japanese mobile is the top partner of Huawei in Japan, and the two companies worked together on developing 5G user experience in Japan. Huawei is a China-based technology company, operating information and communications technology (ICT) infrastructure and smart devices. The company surpassed Apple and became the second largest smartphone producer in the second quarter this year, after Samsung. Its detention in Canada, the US, Australia, as well as New Zealand, is a result of the political confliction, namely the trade war between China and the US. Those governments also suspect that Huawei may become a tool of Chinese spying. The attitude of the Japanese government towards Huawei is still obscure, increasing the uncertainty of the Softbank mobile outlook.

Besides, the advanced 5G technology embraced by Huawei also poses a threat to the US because there is no comparable technology provided by American companies, while the top two competitors in this area are Swedish Ericsson and Finnish Nokia. Unlike its competitors, Huawei is still a private company with huge potentials if it goes for an IPO. As a prominent tech investor, Mr Son is likely to be interested in this group. However, over the past few days, it is said that Softbank would replace the 5G infrastructure provided by Huawei, and instead partner with Ericsson and Nokia, however this is yet to be confirmed. Ironically, the share price did not reflect the confidence of the public in such action.

The competitive environment in the tech industry and the outage of services can also explain part of the discount. Considering Softbank Mobile is the third telecom operator in Japan where the telecom industry is mature, it is hard to enlarge the customer bases to some extent. The technology sector is losing its momentum, manifested by the disappointing performance of big tech companies in NASDAQ since September, and no exception in Japan. Additionally, the outage of service last week due to the expired certification provided by Ericsson fuelled the drop as well. It is clear that the value of the company was overpriced, with a dubious high promised dividend to maintain the company's earning level as the payout ratio will be up to 85%. Moreover, the issued stocks have 90 per cent retail investors with probable crowd effect, and the Greenshoe contract seems exhausted, further increasing the fluctuation.

The performance of the parent company is even worse, whose market value has evaporated almost a half from October after Saudi Arabia, the largest sponsor of Vision Fund, suffered from the scandal that its agents murdered journalist Jamal Khashoggi. According to FT, the total value of Softbank Group is about $235 billion, while its market worth is just $85 billion, betokening a high leverage ratio behind the group. Its P/E ratio is among the highest in the tech industry. Son keeps on investing mainly in tech companies, while a lot of people doubt that the sector might suffer a shaky period. All these factors indicate an overvalued share price.

In conclusion, the disappointing performance in the first public trading day did shed some light on the weakening confidence over Mr Son’s decisions and the overall tech industry, and Huawei event seems like a principal reason behind the plumb. In the second trading day, the price of Softbank Japanese mobile rose a little from the previous day, but the holding company's share kept on downward. Hopefully, the legendary investor will not fall in such shaky times.




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