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IT stocks
(Read Part 1: IT stocks desperately needing attention.) 
Recent news on specific segments of the Philippine information technology (IT) industry have been largely encouraging.
After the bubble burst from under the dot-com boom in 2001, markets analysts say corporate IT spending in the Philippines will post an upswing this year (read "RP to lead IT business spending boom in Asia"), with IT firms expected to reap a windfall. Consider:
IT spending worldwide will grow about eight percent between this year and April 2006 on enterprise use of IT to drive revenues, create market-appealing products, and enhance productivity; and
Closer to home, IT spending among companies in the Philippines is expected to leap 12.5% to $1.2 billion this year on robust growth for the telecoms sector, small- and medium-scale enterprises (SMEs), and the economy in general, industry research firm International Data Corp. (IDC) had said.
These rosy prospects now beg the question: will the projected IT spending rebound be enough to prod more IT companies to list at the Philippine Stock Exchange (PSE) as a way of boosting capital to expand operations?
IT SPENDING REBOUND = IPO?
XMG Global Inc. senior analyst Cesar S. Tolentino said that climb in IT spending may not be enough to trigger a wave of listing of IT firms.
He noted that PSE requirements can already prove prohibitive for high-tech firms that enjoy neither the backing of a conglomerate nor a long enough history of profitability.
For one, he said, the bourse requires a track record of three years of profitability prior to listing and a market capitalization or net tangible assets of at least P500 million.
With these requirements, only 15 IT companies were able to list in the industrial and commercial indices of the PSE. And all of them are not as actively traded as the companies listed under the indices of banking, property, and mining.
It should be noted that these companies found their way to the PSE through business restructuring and backdoor listing, suggesting that they were able to meet the requirement of the bourse through the merits of their parent firms. For instance, Vivant Corporation (stock code: VVT) was originally Selecta Dairy Products, Inc. before it diversified in 2001 into internet, information technology and electronic commerce business. Fil-Hispano Holdings Corporation (FH) was into ceramics before it branched out to contact centers through All Asia Customer Service Holdings Ltd.
Mr. Tolentino said that public listing is a privilege of the few big Philippine-based IT companies that have presence both here and abroad. He explained that these companies had dominated IT business with large-scale contracts in the enterprise, telecom, government and manufacturing sectors.
NOT THE PREFERRED BOURSE FOR IT
But even the few IT companies that are capable of launching initial public offerings (IPOs) do not seem too keen either in listing with the PSE.
Integrated Microelectronics Inc. (IMI), an electronics joint venture between Ayala Corporation and Resins Inc., said PSE’s limited exposure for technology companies and possible low dividend yield make bourses abroad more attractive. Hence, IMI is now looking at the Singapore Stock Exchange (SGX) and the Hong Kong Stock Exchange for a 2006 IPO that will help raise funds for its European and Asian expansion.
Arthur R. Tan, chief executive officer of IMI, said that while it would be more expensive to list at the SGX or the US Nasdaq than PSE, a regional listing would give an export-oriented electronics firm the long-term market exposure it needs.
SGX requires companies a cumulative consolidated pre-tax profit of $7.5 million for the last three years of operations and a market capitalization of at least $80 million.
Nasdaq, on the other hand, requires companies eyeing maiden offerings to post a stock holders’ equity of $15 million to $30 million. Income from continuing operations before taxes in the latest year, or in two of three fiscal years prior to listing should be at least $1 million.
Compared to SGX and Nasdaq, PSE is a bargain for IT companies since it requires a capitalization of less than $10 million.
"If we list with the PSE, the advantage would be it would be cheap. But getting a cheap listing may not serve our purposes in the long run. We need tech exposure," Mr. Tan said in an interview.
"PSE [earnings] multiples also fall at eight. That would be 12 at SGX. In Nasdaq, that is 14," he noted.
Earnings multiple gauges how much the market is willing to pay for each dollar of annual earnings by a listed company. Computed by dividing a stock’s market capitalization with its after-tax earnings over a 12-month period, earnings multiple is the most common measure of the value of a stock.
To be sure, the goal of IMI to list in foreign bourses would not be the first for a Philippine-based IT company. To cite a few examples: Philippine business process outsourcing company eTelecare International Inc. is looking at listing in Nasdaq in the next few months; a path already treaded by rival call center People Support Inc. PSi Technologies Inc. is listed with Nasdaq while the stocks of export-oriented Ionics EMS Inc. is now traded at the SGX.
STEPPING STONE FOR START-UPS
But not all is lost for IT companies which can’t meet stringent requirements of foreign bourses, but still need a market to finance their otherwise expanding businesses.
For one, the PSE will be a good bet for IT firms that are not export-oriented -- and, therefore, don’t need regional or global exposure -- and serve local IT needs, especially at a time when Philippine companies are reportedly on the verge of beefing up their IT budgets.
Intellectual Property Ventures Group Inc. (IPVG), for instance, said that while regional bourses may serve as launching pads for expanding businesses overseas, the PSE enables start-up Filipino IT companies gain a foothold in the local market at relatively low cost.
IPVG, established as Adobo Interactive Inc., is now engaged in outsourcing, online gaming content, converged internet and mobile phone applications. It does businesses with the government, local media organizations, and content providers.
IPVG chief executive officer Enrique Y. Gonzales said his company wants to ride on the growth of internet penetration in the country. "We have stayed under the radar because, admittedly, people tend to look at stocks in telcos, mining, manufacturing five times as much as they do in IT. But the landscape is starting to change. We have the BPO, the call centers ... IT is starting to look great in the Philippines," Mr. Gonzales said.
IDC managing director for the Philippines, Malaysia and Indonesia Selinna S.L. Chin agreed, noting that the growth of the SME and and telecom sectors will set an environment that could nourish local IT companies:
Telco spending in the Philippines this year is projected at around $4.4 billion, an 18% climb from last year;
Asia-Pacific SMEs will sink in $40 billion in IT by 2008, double from only $20 billion in 2002.
Ms. Chin also said that local IT firms should be able to benefit from the expected increase in IT pending if gross domestic product (GDP) growth for this year hits at least five percent and is sustained thereafter. The government forecasts GDP growth rates of 5.3%-6.3% for 2005 to a range of seven percent to eight percent by 2010. The Asian Development Bank, however, said growth for the next three years would hover at a more realistic 5%. -- Kerlyn G. Bautista
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