Tech stocks still not investors' darlings

Singapore

MENTION tech stocks, and chances are Singapore stocks will not immediately spring to mind. World No 1 Apple's market cap alone is easily 45 times that of the Singapore Exchange's 85 actively-traded IT stocks combined.

Market watchers say that the tech ecosystem here is still very much in its growth stage, so it probably isn't fair to expect a behemoth that is the equivalent of Apple, Google or Microsoft just yet.

These observers caution, however, that if the IT landscape continues to be centred around manufacturing-related stocks, it is a sign that Singapore is a tad slow off the blocks in embracing the new wave of IT companies.

IT stocks (see infographic: Tech, you're IT) now make up 12 per cent of all 739 Singapore Exchange-listed, actively-traded stocks - which, to Kevin Lim, co-founder of homegrown crowd-lending platform Capital Match, is a healthy indication of Singapore's tech-hub status.

"Most exchanges in Asia are dominated by banks and the larger industries in the country, as there is only one national stock exchange, unlike in the US, where there are multiple exchanges, and some among them have developed a reputation for a particular industry," said Mr Lim, a former banker who advised on IPOs.

The Nasdaq and New York Stock Exchange, for instance, attract tech companies due to their headline tech listings, said TSMP Law Corporation, in a reference to Internet firms Alibaba, Google and Facebook.

In Singapore, social networking stocks such as YuuZoo are in play, though it is tech hardware and equipment stocks that take centrestage, making up some 70 per cent of IT stocks (in terms of numbers) and featuring thrice in the country's top five IT plays (in terms of market cap).

Of this, TSMP said: "The IT landscape in Singapore is still very much focused on manufacturing-related services. There has been no major shift towards the new wave of tech such as big data, cloud-related services and e-commerce. While what Singapore has at this time is still relevant, there is a real risk that it isn't embracing the new wave of technology companies quickly enough."

To Mr Lim, the focus on manufacturing and electronics points to the supportive role played by local tech companies in other industries' ecosystems or supply chains.

"For example, Samsung may use a Singapore-invested chip in all its phones, and no one will ever know. While we are investing a lot in R&D through grants and tech parks, a lot of it is in back-end areas, and we don't have an end-product that consumers can touch and feel."

Creative Technology, whose critically-acclaimed series of sound cards, Sound Blaster, placed Singapore on the tech world map in the 1990s, was one of the few IT companies to have survived the early 2000s dot-com bust. In 2014, it was ranked No 15 on Singapore's list of 20 largest IT stocks, with a market cap of S$145.2 million and total return of negative 7.5 per cent, igniting concerns that existing tech companies may be struggling to stay relevant in light of disruptors and their increasingly innovative products.

Daniel Chia, co-founder of Call Levels, reportedly the world's first app offering real-time stock monitoring and notification services, said: "The pace of these disruptions in major sectors like banking, pharmaceuticals, services and media has been astonishing over the last five years.

"Singapore has to be ready to value these disruptions, and be prepared to fund them and grow them to full potential for the economy's sake."

Working to bridge that gap is the law firm TSMP, which said: "Tech companies being listed today are valued based on metrics such as revenue and market share, ignoring the traditional profit-and-loss valuation." An example is the proposed US$250 million listing of cloud-storage startup Box on the NYSE - its US$169 million loss in 2014 and affirmed lack of profitability prospects in the foreseeable future notwithstanding.

TSMP said: "Singapore investors still look at price-earnings ratios in valuing companies, which is vastly different from the expectations of investors and tech companies. By the time these companies are profitable, they may already be listed on another exchange."

Entrepreneur Patrick Grove names Nasdaq and the Australia Stock Exchange (ASX) as being among the more attractive exchanges, for their wealth of institutions, analysts and retail investors who are "comfortable in investing in Internet companies, especially during their growth phases when profits are not occurring yet".

Mr Grove is founder of investment firm Catcha Group, whose three (of at least four) portfolio companies are listed on the ASX; his newly-backed video-streaming site iflix is reportedly eyeing a Nasdaq listing.

Shirley Wong, chairman of the Singapore Infocomm Technology Federation, said: "The valuation of tech companies here is lagging behind and less bullish than that in the Western world. We are (also) seeing a dichotomy of big and very small companies, in which the big will actively reinvent by assimilating new and emerging tech. If new tech companies don't go for an IPO, they exit by selling to or merging with other companies. Thus it is a tech re-invention marathon, in keeping up with the trends in IT."

Stuart O'Gorman, tech investment director at Henderson Global Investors was quoted as having said in BT's Wealth magazine that, with tech making an impact on and improving an ever-growing part of the economy, to avoid investing in the tech sector is to ignore one of the most dynamic and fastest-growing sectors. He said at a recent roundtable on tech stocks: "One caveat is that investors often forget that investing is full of pitfalls, and it is easy to get carried away with the excitement of the tech sector. Tech, like any investment, needs to be part of a balanced portfolio. Beware the siren song of getting rich quick - it rarely ends well."

Interestingly, some of Singapore's tech stocks, especially those involved in B2B manufacturing such as Venture Corporation, pay "pretty decent" dividends yearly as they generate strong operating cash-flows, said OCBC investment analyst Carey Wong at the roundtable.

"Investors seeking high returns can look at tech companies with strong growth potential, either driven by new tech or products.

"However, the risk is significantly higher, as some of these companies may not be profitable yet or are marginally profitable, but may still need to spend a lot of money to develop their products or markets. Investors must be nimble enough to get off once the growth slows - usually when the hype is over or when valuations get out of hand - and move on to the next big thing," he said.