IPO Luncheon

One of the advantages of being an analyst is that you are invited to attend those IPO luncheon. Some luncheon are being held in large hotel’s conference room with more than 20 tables, some in a private (expensive) dining room in restaurants. I’m not a big foodie, but some of the food is really quite nice, so there’s an added incentive to attend the luncheon.

More importantly, you get to meet the Chairman or CEO of the firms. Some companies may have bad businesses or management, but still, these CEOs are entrepreneurs (or rich 2nd or 3rd generation of the family) who are sitting down with you over lunch table to pitch you their business and answer your questions in order for you to write a good report or invest in their companies. You may question their corporate governance, their business model, their accounting irregularity, their cash flow, but at the end of day, who is more successful? Nearly all the time, you’ll see those analysts earnings fixed amount of salary questioning/criticizing those CEOs earnings millions of dollars running their multi-millions/billions businesses. Sometimes I find it amusing when the analysts get rude and offensive when criticizing the business and management. Sometimes I find myself irriated by the management who are being defensive and evasive, and keep avoiding the questions by giving vague answers.

Ultimately, everyone is doing their job. Being an analyst, I’ll also question certain accounting numbers and their assumptions. This is how the market works and has been working since the early days. An independant and knowledgeable analysts write a good report on the company to highlight the strength, weakness, opportunity and risk. General market is fed through the information from these reports. They make their own decision whether to invest or not. However, the quality of analyst ranges from lousy to talented, just like any occupation does. Therefore, if you are to make investment decisions based on the assumptions and recommendations of the analyst, make sure you know the quality and the independance of the analyst.

During IPO luncheon, I always try to understand the business and hear what the CEO has to say. Most of the time, the CEO is very optimistic about the business and underplay the risk. Remember, it’s IPO. They want you to buy. Pre-IPO reported numbers also tend to be very good, projecting high growth going forward. Revenue is growing by double digit percentage. Volume is increasing with higher consumption per capita. Price is rising. Margin is expanding. Sell-side analyst reports assume high growth rate and assign high P/E multiple. Every report calls BUY. They justify their high P/E multiple by saying that earnings will grow very quickly to make current high P/E look reasonable in a short few years. The analysts are writing the reports under the pressure to make the company a good BUY. The banks want the IPO to be successful. It’s difficult under such situation to make independant judgment. So, you can’t expect to read a very fair and balance review of the company from their assumptions and recommendations.

What you can do with IPO prospectus is reading the facts. Usually, the business operations are described in more details in the IPO prospectus. All major sources of risks are stated. Use of IPO proceeds are also stated. If you have the chance, the meeting with management provides you an opportunity to see the character of the management. Are they being evasive, conservative/aggressive, know their business well, know the industry well, over confident, hands-on managerial style or delegate to others, passionate about the business,  etc. It’s not easy to form a judgment on character. You need experience and talent. So, don’t feel bad if you don’t have that skill yet. Just get from that meeting certain impression of the management. After 6 months to 1 year, read the interim/annual report on the performance and see if it matches with the impression you got during your first meeting. They will help you form a judgment on whether you can trust the management or not.

I’ve met CEOs who know their business very well and talk to the key points and CEOs who spent 20 minutes talking about irrelevant things until the banker asked him to cut short the answer as time was running out. If your first impression is that the CEO is evasive and cares more about asking you to buy than running the business, you are probably right. If your first impression is the CEO and his team are very competent to run the business, re-check your impression with performance and what they say 6-12 months later.

In finance and business, they are many who can bullshit extremely well. You can’t tell what is the truth and what is BS unless you have that talent and experience to judge character. One way to overcome this is to check periodically if they walk the walk and talk the talk. When you see them changing their words easily more than one time without seeming to remember what they said earlier or doing something differently from what they say, they have given you the hint, and you must take it.

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