Reading Prospectus

One of our reader has raised a question about which key factors of the listed prospectus of IPOs investors should pay attention to. I have to admit that with so many Chinese companies get listed in Hong Kong Stock Exchange, it is quite difficult for investors to study all thoroughly. However, I would like to stress on the point that investment is not an easy task. Remember earning money is very difficult and losing money is very easy. Therefore, investors should at least have a basic idea of the company before investing money in it.

In actual situations, it is very difficult to use one single method to analyse different companies because different companies and industries have their own characteristics. Anyway, I would like to share some brief reading skills of prospectus here. Normally a standard prospectus should consist of the following sections :

1. Expected Timetable

2. Summary

3. Risk Factors

4. Corporate Information

5. Industry Overview

6. Future Plans and Use of Proceeds

7. Financial Information including accountants' report and detailed financial statements.

If you have limited time, the most important section you should look at is the "Summary" section. In this section, the company will give a brief introduction of the other sections of the prospectus such as risk factors, industry and company overview and consolidated financial statements. With these information, you can have a brief idea of what the company are doing and performing. Furthermore, while you are reading the summary information, you may have further questions which you would like the company to answer. Generally, these questions can be answered in the following sections of the prospectus and you can just flip to the related section to find the answer. For example, you may find the expenses of certain category has dropped significantly before getting listed. You can flip to the "Financial Information" section which is well indexed for different expenses and you can find it out for yourself. In this way, you can read the prospectus more effectively and efficiently.

Normally, I will have certain questions to be answered before reading a prospectus and these questions help me to analysis whether the IPO is valuable to be invested :

1. Is the industry has a growing demand? What is the relationship between demand and supply in the industry?

2. Is the company profitable over a period of time and what are their average revenue and profit growth rates?

3. What is the company raising money for? Paying debts? Future development? etc

4. What are the major risk factors when investing in this company?

5. Are there any odd numbers in their financial statements?

6. Is the IPO price reasonable when compared to its expected profits and dividends? Is it valuable when compared to those companies already get listed?

7. Find out some key ratios for study such as ROE, ROA, PE, PB, Debt to Equity ratio etc.

8. Any strategic investors? Which investment bank is the underwriter?

If you can answer all the above questions, you will have a thorough idea of whether to invest in the IPO or not.

In the coming blogs, I will give some real examples for further explanations.