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An Initial Public Offering Offering (IPO) Prospectus - What Every Smart Investor Should Know CONTENTS Introduction What Is A Prospectus? Why You Must Read The Prospectus What A Prospectus Contains How To Use The Prospectus What to Look for Where to Look Cover Page Basic Information - Who Is Selling What? Key Information Summary - Is this for Real? Business Information - What does the Company do? Financial Information - Public In, Profits Out? Shareholders, Directors and Management - Who are the People Running the Show? Risk Considerations - Is the River Safe to Swim in? A Last Word Glossary

Disclaimer This booklet does not constitute a recommendation to buy or sell shares under Initial Public Offerings (IPOs). It is intended solely for your general information. It does not claim to contain all advice or information on the subject matter, nor is it a substitute for legal or investment advice. If in doubt, you are strongly recommended to seek professional advice with regard to the risks associated with investing in IPOs before you make that investment. While care has been taken in the preparation of this booklet, the Securities Commission (SC) does not take any responsibility for any inaccuracy or incompleteness of the information contained in this booklet. The information given in this booklet is for reference only and is not a substitute for professional advice, which you should seek when making investment decisions.

Introduction Investing in the stock market should not be a "heart and gut" affair based on hunches, guesswork, hot tips, rumours or speculation. This is true for investments in securities of companies already listed on the stock exchange; it is also true for investments in securities of companies seeking listing for the first time. Seeking listing on a stock exchange is also called 'going public' or 'flotation'. The purpose of seeking listing is generally to raise funds for the company's business expansion or growth. The company seeking listing will therefore offer part of its securities to be subscribed by the public, as part of the listing exercise. This offer is called an Initial Public Offering (IPO). Currently, any company wishing to undertake an IPO would have to get the approval from the Securities Commission before the IPO can be carried out. The Securities Commission, in considering an IPO proposal, would take into account the overall suitability of the company undertaking the IPO. Once approved, the company is required to issue a prospectus that tells about the company, what it does, how it has fared and how it expects to perform in the future. The purchase of securities offered by the IPO company constitutes, in effect, a contract between the company and you, the investor. As with any contract, it is important that you fully understand your rights and the terms and conditions as set out in the prospectus. You cannot cry "foul" later. This publication by the Securities Commission is intended to help you make the best use of the IPO prospectus.

What Is A Prospectus? A prospectus is essentially an invitation or offer to the public to subscribe for or buy the securities of a company. A prospectus must contain all relevant information about the company making the IPO, and must be filed with the relevant authorities. Therefore the information that is disclosed in the prospectus relates to the terms on which the invitation or offer is made. It is important for an investor to read and understand these terms in the prospectus in order to be able to assess for himself / herself the risks or merits in investing in the company. There are three steps involved for the issue, circulation or distribution of the IPO prospectus. Firstly, the company seeking listing on Kuala Lumpur Stock Exchange (KLSE) or Malaysian Exchange of Securities Dealing and Automated Quotation (MESDAQ) must have its prospectus cleared by the exchanges concerned; secondly, the prospectus must be submitted to the Securities Commission for vetting and clearance; and thirdly, the prospectus must be sent to the Registrar of Companies (ROC) for lodgment and registration.

Steps involved for the Issue, Circulation or Distribution of the IPO Prospectus

Why You Must Read The Prospectus The prospectus is a very important document. For you, as an investor, the prospectus is the means by which you can judge how profitable and viable the company is before you decide whether or not to part with your money. An uninformed decision may cost you dearly. You must therefore go through the prospectus very carefully and understand what is really at stake before you make your decision. You should carefully assess the fundamentals of the company seeking listing by studying the information in the prospectus. Though IPOs appear to be a good investment option because of the general expectation of earning high initial returns, called premiums, risks do exist and there is no guarantee of premiums or that the premiums would be what you had hoped for.

What A Prospectus Contains What should go into a prospectus is currently governed by the following rules and regulations: Companies Act 1965; Listing Rules of the stock exchanges; and Securities Commission's "Policies and Guidelines on Issue/Offer of Securities."

However, while the contents are generally the same, the standard of disclosure and presentation may vary from one IPO prospectus to another.

How To Use The Prospectus What to Look for Your analysis of an IPO company should start with the prospectus. As you go along, it would be helpful to ask yourself some key questions. For example, you may want to know whether or not the business will grow. Bigger sales generally mean bigger profits and therefore should lead to enhanced share prices. But numbers do not tell the whole story. Go over the prospectus with a fine toothcomb for hints on the company's growth prospects. You would also want to know who manages the IPO company, what products the IPO company sells, who buys the products, and whether or not the products would continue to sell. Key information on these aspects can be found in various sections of the IPO prospectus. A flow chart of how you should go about in reading the prospectus is below An Initial Public Offering Offering (IPO) Prospectus What Every Smart Investor Should Know Flow Chart of the IPO Prospectus Review Process

Where to Look Seek advice and all other information you need about the IPO company from the following sections of the prospectus: cover page (front and overleaf); indicative offering timetable; definitions; corporate directory; table of contents; summary information; summary of share capital, issue/offer statistics, indebtedness and intended use of the proceeds; details of the public offering; business information; financial information; shareholders, directors and management information; other information; risk considerations associated with business and prospects of company; appendices; and procedures for application and acceptance.

Although companies are given the flexibility in organising and presenting their information and need not follow the sequence as outlined, a well-prepared IPO prospectus would, nevertheless, contain the following key areas of disclosure: cover page basic information; key information summary; business information; financial information; shareholders, directors and management; and risk considerations.

Cover Page Basic Information - Who Is Selling What? It is always good to start from the beginning. The cover page will tell you: what securities are being sold; how many securities are being sold; at what price are the securities being sold; and who is doing the selling of the securities.

Key Information Summary - Is this for Real? This section gives you a quick look at the fundamentals, such as the company's business lines and the need for new funds. It serves as an information snapshot of the company. Key information includes the following: a general description of the IPO company, its business activities, promoters and substantial shareholders, and key management; a summary of the IPO company's financial information, including its prospects and outlook;

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a summary of risk factors affecting or which may affect the business and financial performance of the IPO company; and a summary of share capital, issue or offer statistics, indebtedness and proceeds to be raised from the public.

You should refer to the other sections of the prospectus for more comprehensive information on the topics featured in the summary section. Business Information - What does the Company do? The key to determining how successful the IPO company is going to be is by finding out about what it does and who its competitors are. You might also ask whether the IPO company has patented products or niche products, as this would give it an edge over its rivals. Is the IPO company technology-driven? Can it control pricing? Or is it just another name in an already-crowded field? These and other questions should be answered in the Business Information section. But be prepared for some heavy reading. Preparers of an IPO prospectus would assume the reader is finding out about the company for the first time and may just pour out all the facts about the company's history, corporate structure, activities and operations so as to give a big picture of what the company is all about. The information given would include the following: background of the industry or sector(s) including the characteristics of the industry or sector(s) in which the IPO company operates; prospects of the industry or sector(s) concerned; type of products/services sold; customers and suppliers of the IPO company; technology, production methods and distribution channels adopted; and commercial aspects such as retail network, agencies, distributorship, brand names, franchises, licences, patents and research and development capabilities.

For companies seeking listing on MESDAQ, given the nature of such companies which is very much technology-driven, this section of the prospectus would also disclose in elaborate detail technology-related issues of such companies. Financial Information - Public In, Profits Out? Here, we are getting to the real heart of the matter. The pertinent question to ask is whether or not the profits will go out through the window once the public comes in through the door as partners. Among the things you may want to know is how the company's sales translate to net profit and whether or not the profit margins are consistent. Analysing and assessing financial data are basically to find out the company's share worth, financial strength and the quality of its management. The findings will give you an indication of whether or not it is wise to put your money into the company. It is a sad and sorry investor who ignores this part of his duty.

The Financial Information section is a key part of the prospectus and is generally divided into: historical financial information; and future financial information.

Historical financial information usually comprises a summary of the audited or proforma profit and loss account and balance sheet of the company (on a consolidated basis), as extracted from the Accountant's Report in the appendices of the prospectus. For some businesses, information on cashflows may be required. Disclosure of historical financial information would usually be for the past five financial years unless the company is seeking listing on MESDAQ where the company may not have any financial history at all. The information should come with explanatory text and analysis of past financial performance. From the text and analysis provided, you should try to spot any weaknesses in the past financial performance as this may have an affect on future performance. The IPO company is obliged to disclose any past trend or special circumstances that may distort figures for a particular financial year, with an explanation as to the reasons. Take note that the important data to refer to is "profit after taxation but before extraordinary items." The profits derived after taking into account extraordinary items can sometimes be misleading as they can disguise a bad year. For example, the company may have disposed of assets like land, buildings or shares to realise an extraordinary gain so as to boost a lowprofit year performance. Future financial information usually covers forecasts on the following: turnover; pre-tax profit before minority interest; pre-tax profit after minority interest; after-tax profit; and gross and net dividend rates/amount.

Again, unlike companies seeking listing on KLSE, companies headed for MESDAQ are not obliged to disclose forecast financial results. For listing on KLSE, the IPO company will usually supply bases/assumptions or justifications for the forecast figures. Examine this closely to determine whether the forecast is reasonable or merely a daydream. And always bear in mind that forecasts are not prophecies of how well the company would be performing in the future. So, do not get too carried away by optimism. From the forecast profit, and the offer price of the shares of the IPO company, you would be able to compute the prospective price-earnings multiple of the IPO company. The priceearnings multiple, together with a qualitative analysis of the IPO company, can be used to assess whether or not the issue/offer of the shares of the IPO company is comparable to the share prices of already listed companies of similar business or nature. You should also look out for a segment analysis of turnover and profits by subsidiary/associated companies, products/services and markets/geographical locations for both the historical and forecast financial information.

Shareholders, Directors and Management - Who are the People Running the Show? The prospectus should provide adequate information on the following groups: substantial shareholders and promoters of the IPO company, including the names and shareholdings of individuals behind the IPO company; board of directors including their representation and details of each director's qualification, experience and area of responsibility, and whether they are executive or non-executive directors; and key management staff below the level of directors, detailing their qualification, experience, and areas of responsibility.

Go through the list of shareholders, directors and management. Although the profiles given are by no means a 'SIRIM' stamp of the quality of their management skills, you can still get an idea of the level of their management expertise and experience. Market involvement and interests of principal shareholders, directors and key management staff in similar or competing business activities would be fully disclosed and discussed in the prospectus, as with any past or intended transactions with any related companies. It is the latter that you should be wary of. Risk Considerations - Is the River Safe to Swim in? By its very definition, this part of the prospectus may scare off some investors for it warns about past, present or potential company problems. But take heart, for it serves a useful purpose by letting you know about the dangers before you jump into the water; moreover, some of the risks are standard risks. Risk factors relevant to the business, industry and financial performance of the IPO company can be of a general nature or specific to the company. General risks include: the fall and rise in prices of securities depending on stock market conditions generally, and the state of the Malaysian and the world economies; changes in government policies; foreign exchange risks; climatic conditions; and movements in interest rates.

Risk considerations which are specific to the company may include the following: dependency on key personnel; dependency on a few customers, suppliers or in-house projects; changes in prices of raw materials; emergence of new competitors or players in the industry; and specific litigation that has started or brought before the court.

It should be enlightening to read how the directors of the company propose to deal with or reduce the impact of the risk factors identified.

A Last Word An IPO prospectus may be a lengthy and even boring document to read. However, it can help you to better understand the company in which you may decide to put your money. At the very least, you should read the key information summary section of the IPO prospectus if you do not have the time or inclination to go through the whole document. As for any document that is contractual in nature, do not forget to read all the fine print. This means the footnotes, small print and "Notes to the Accounts" in the prospectus. This guide is meant as a general introduction. You can obtain further information from KLSE, MESDAQ, financial industry organisations, and from your broker or financial adviser. Risks are inherent in any form of investment. Neither the Securities Commission, the stock exchange nor any other authority can protect an investor from Iosses associated with normal investment risks, such as changes in the value of an investment resulting from market volatility. It is extremely important that you exercise vigilance yourself.

Glossary Balance Sheet : A statement showing the nature and amount of a company's assets, liabilities, and shareholders' equity as at a given date : A process where a company seeks listing for, or floats, its shares for the first time on a stock exchange : Same meaning as "flotation" : Same meaning as "flotation" : Kuala Lumpur Stock Exchange, which was established on 2 July 1973 : Malaysian Exchange of Securities Dealing and Automated Quotation, which was established on 6 October 1997 as a stock exchange for high growth and technology-driven companies : A method of offering securities where an offer is made to the public by, or on behalf of, the existing substantial shareholders of the IPO company

Flotation

Going Public Initial Public Offering KLSE MESDAQ

Offer For Sale

Ordinary Shares : Securities representing an ownership interest in a company. If the company also has issued preference shares, both ordinary and preference shareholders have ownership rights, but preference shares normally have prior claims on dividends and, in the event of liquidation, assets Premiums : Excess of share prices over their initial offer prices

Price-Earnings : Derived by computing the following: Multiple Price Per Share / Earnings Per Share In the context of an IPO, the prospective price-earnings multiple can be computed as follows: Offer Price Per Share / Forecast Profit Per Share Profit and Loss : A statement showing the operating performance of a company for a specified time period Account Prospectus Public Issue : An invitation document inviting people to invest in the shares of a company : A method of offering securities where an offer of new securities is made to the public for subscription or purchase by, or on behalf of, a company of its own securities

ROC SC

: Registrar of Companies : Securities Commission, which was established on 1 March 1993 as a regulator of the securities industry : Debentures, stocks and shares in a company including any rights or options in respect of the debentures, stocks and shares, and any interests in unit trust schemes

Securities

Information

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