E-commerce firm Tiki tables proposal to loosen IPO rules

Earlier this month, Tran Ngoc Thai Son, founder and CEO of Tiki, proposed a few relief measures to support e-commerce and tech firms over the coronavirus crisis.

Among them, e-commerce and tech companies are looking to access public capital markets to accelerate capital raising and finance key investments. Therefore, he proposed the state to loosen the IPO rules for local firms.

According to the current rules, companies need to meet three-year profitability requirements to file for an IPO. This makes Tiki and other e-commerce players ineligible for listing on the Vietnamese stock market given that they have been wilfully suffering mounting losses to scale up presence.

Lowering IPO criteria could help e-commerce firms like Tiki access the Vietnamese equity market

Tiki’s CEO suggested the state to launch a pilot to remove the profitability requirement. As a result, e-commerce and tech companies could conduct IPOs to raise capital, improve operating capacity, and build a reputation in the market.

However, the proposal has been questioned as e-commerce companies have always been in the red due to the “money burning" race to capture market share. The 2019 annual report of gaming firm VNG showed that Tiki wiped out a total of VND1.76 trillion ($75.4 million) last year, much higher than in previous years. Other e-commerce operators like Lazada, Shopee, and Sendo are also running losses.

Matthew Smith, head of research at Yuanta Securities told VIR the requirement of three years of profitability is a major impediment to the ability of e-commerce companies to tap into domestic equity capital markets.

At least in the initial stages, these companies tend to burn cash as they build up market share. However, if they can offer a roadmap to eventual profitability, then they may be creating value despite temporarily negative bottom line results. In theory, the equity markets should reward that, Smith emphasised.

Across the ocean, the case of Amazon’s IPO on NASDAQ perfectly epitomises this situation. The global e-commerce giant went public in May 1997 – exactly 23 years ago. Back then, Amazon was generating revenue but had never turned profit, yet it was able to list under NASDAQ’s very liberal rules, and investors were convinced by the story that Jeff Bezos had to tell.

The stock traded for 4.5 years before Amazon finally reported a profit in the fourth quarter of 2001, and even then its profit was only 1 US cent per share. Amazon’s ability to tap into the US equity market for capital in the 1990s was crucial for its ability to grow into what it is today – the world’s most highly-valued listed company with a market capitalisation of $1.2 trillion.

“Of course, for every Amazon, there were also hundreds of US internet companies that listed in the 1990s (and later) but that never turned a profit and eventually failed. Some of them were not only poorly managed, but many were also fraudulent. Investors who bought these stocks hoping to get rich lost all of their investment in aggregate,” noted Smith.

The case of Amazon’s IPO on NASDAQ is an example e-commerce firms in Vietnam are looking to follow

“So allowing startups that are losing money but have a great-sounding story to tap into the stock market is a high-risk endeavor. In my opinion, this is not necessarily suitable for a market at Vietnam’s stage of development,” Smith added.

A possible alternative might be to set up a separate trading board similar to Hong Kong’s Growth Enterprise Market (GEM), where listing rules are less stringent than they are on the Hong Kong mainboard.

This allows tech and other startups to seek equity financing in public markets, but also clearly differentiates the high-risk-high reward opportunities on the GEM from the typically lower-growth but more stable names on the Hong Kong mainboard.

Setting up a similar system here would allow companies that do not have three years of profit to connect with investors who are cognizant of the relatively high investment risks.

Echoing this view, Hoang Thach Lan, head of the Individual Investors division at Viet Dragon Securities also agreed on setting up a separate bourse for startups who suffer from huge losses.

In the short term, the chances of unlisted e-commerce firms raising money directly in the domestic equity markets are slim, but it is certainly possible in the longer term.

“Regulations might be changed to allow them to do so. Alternatively, given sufficient time, they may actually reach profitability and become compliant with the existing rules on equity market listing. I am quite certain that a profitable e-commerce business with a high share of the Vietnamese market would have no trouble attracting investors,” noted Smith.