Introduction

As Indonesia’s stock market keeps growing, Initial Public Offerings (IPOs) often grab a lot of attention. For many retail investors, IPOs seem like a quick way to make money. But behind the hype, there are many risks that are easy to miss. This blog series will help you better understand how to analyze IPOs properly and avoid common mistakes. (This post builds upon my previous reflections in "Why I Stopped Buying IPO Stocks, Even After 3 Years of Profits")

Why IPOs Seem Exciting (and Risky)

IPOs often feel like a golden opportunity. The idea of getting in early, right before a stock takes off, is very appealing. When I started, it felt like easy money. For example, I bought PT Formosa Ingredient Factory Tbk (BOBA) at Rp 280, and within two days, the price jumped by 55%. Another one, PT WIR ASIA Tbk (WIRG), gave almost 1,000% profit in just a few weeks. Those early wins made me overconfident. But as I later shared in "Why I Stopped Buying IPO Stocks", those early gains were misleading. The data showed me the full picture:

• 7-Day Performance: On average, IPOs rose 12.08% in the first week. But if you remove the top 10% of performers, the average return drops to just 0.26%.

• 3-Month Performance: Most IPOs actually went down. Without the top 10%, the average return was negative 9.72%.

• 1-Year Performance: About 68% of IPOs traded below their offer price after one year. Around 36% lost more than half their value. Only 8% more than doubled.

• Volatility: In the first week, price swings were high, with average volatility around 10.77%. This made outcomes very unpredictable for early investors.

In many cases, the risk was simply not worth it. Many IPOs did not seem built for long-term investors. Instead, they looked more like a chance for insiders to sell and move on, not for regular investors to grow their wealth.

Common Pitfalls for Retail Investors in IDX IPOs

A. Blindly Following the Crowd

The Mistake

Many retail investors buy IPO shares simply because they see others doing it. Whether it's trending on Instagram, TikTok, being hyped by influencers, or flooding Telegram groups, it’s easy to get caught in the excitement. I’ve made this mistake myself. At the time, I didn’t even know how IPOs worked. I didn’t read the prospectus, I didn’t understand the company’s business, and I definitely didn’t have a plan.

The Reality

Social media can be a powerful but dangerous source of information. Influencers often share screenshots of big orders, show off early gains, or use flashy captions like to stir up fear of missing out (FOMO). This can make people think that everyone is buying, and if they don’t join now, they’ll lose the chance forever.

But what happens next is often disappointing. After the first day or two of strong price action, many of these stocks start to fall once the hype fades. In some cases, those big orders shown online were never intended to be held long-term, they were just there to help early buyers sell at a profit. Without strong business fundamentals, price movements after the first few days are often unpredictable or even brutal. You could end up stuck with a stock that drops all the way to 50 Rupiah.

What’s worse, this herd mentality leads to a cycle: IPOs keep getting rushed out, not because the businesses are ready, but because there’s still strong demand from uninformed buyers, and this only benefits the insiders, not the public.

The Solution

If you’re thinking about investing in an IPO, stop and ask yourself:

• Do I actually understand what this company does?

• Have I read the prospectus?

• Am I buying this because I believe in the business, or just because everyone else seems to be?

The prospectus is your most important tool. It’s not always easy to read, but it tells you what the company is selling, how it makes money, who’s running it, and what the risks are. Even just reading the summary sections can give you a much better understanding than scrolling through comments on social media. After you get the hang of it, try to develop your own checklist before buying any IPO.

B. Ignoring the Prospectus and Business Model

The Mistake

One of the most common and costly mistakes in IPO investing is neglecting to study the company’s core fundamentals. Many investors skip the prospectus entirely, assuming it is too complex or irrelevant, and end up buying shares in companies they don’t truly understand. This includes not knowing what the company actually does, how it makes money, or whether it even turns a profit. It also means missing red flags like a confusing business model, over-reliance on hype, or weak financial health.

In my early days of investing, I fell into this trap. I assumed that if a company was going public, it must already be successful and vetted. I failed to ask simple but critical questions: Does this company have a clear business model? Is it profitable? Is it growing sustainably? Without that understanding, I was essentially speculating, not investing.

The Reality

Many IPOs, especially on the Indonesian market in recent years, involve relatively small companies that may not have a proven track record, a clear market niche, or sustainable profitability. Some of them seem to rush to go public simply to take advantage of hot market sentiment or trending sectors, rather than being truly ready to operate as a listed company. Others present diversified business lines that may appear innovative at first glance, but on closer inspection reveal a lack of strategic focus or unclear synergies between subsidiaries.

Take PT Multi Garam Utama Tbk (FOLK) as a case in point. At first glance, the company presents itself as a creative economy builder, leveraging brand, media, and intellectual property across various consumer segments. However, its subsidiaries span across highly diverse industries: Including fashion (AIM), home and personal care (DGI), financial media (FMN), beauty (SKI), and even e-sports (WIS/Genesis Dogma). While diversification can be a strength, in FOLK’s case, this wide reach may cause confusion regarding what its core business actually is.

For example, AIM is a direct-to-consumer footwear brand, while FMN produces financial content for Gen Z. At the same time, the company also invests in a beauty brand with environmental awareness values (SKI), and owns an e-sports team started by a gaming influencer. Although each subsidiary may have a viable market on its own, the overarching strategic direction for the holding company is not clearly defined. Investors may struggle to understand how these different parts come together to create long-term value for shareholders, and whether the management has the bandwidth or expertise to grow each of them sustainably.

From a financial standpoint, FOLK's fundamentals raise additional questions. The company reported a net profit of IDR 5.2 billion in FY2022, but nearly 75% of that came from non-operational income (primarily investment gains). Operational cash flow has been inconsistent and declined to only IDR 1 billion in FY2022. Although equity rose due to additional capital injections, recurring profitability and cash flow generation remain weak, which is crucial for sustainable growth.

The Solution

The single most effective way to avoid this mistake is to read the prospectus thoroughly, not just the summary, but the full document. While it might seem long and complex at first, the prospectus contains everything you need to make an informed decision:

• What the company actually does

• Who leads the business and what experience they have

• How the company makes money

• What risks it faces

• Where the IPO funds will go

• The company’s financial performance and trends

• Its competitors and growth outlook

When reading, ask yourself:

• Does this business model make sense to me?

• Are the company’s earnings and cash flows consistent and sustainable?

• Is the company genuinely profitable?

• How does the company’s strategy align with market trends, and is it realistic?

C. Ignoring Financial Red Flags

The Mistake

Many investors overlook questionable patterns in a company’s financial statements, especially when the numbers seem overly positive or the performance appears to have improved too suddenly just before the IPO. I’ve seen this myself. Some companies reported a sharp spike in profits, aggressive growth, or included vague and complex items in their financial reports that raised eyebrows. In several cases, large capital injections or one-time gains occurred right before the IPO period, which should have been clear warning signs.

The Reality

In preparation for an IPO, companies may use accounting techniques to enhance how their financials appear. This is sometimes called “financial engineering,” where the numbers are technically compliant with accounting standards but may not reflect the actual economic reality. These practices can include revaluing assets, selling off fixed assets, recognizing profits from related parties, or reporting strong earnings without backing them with real cash flow. While these adjustments may not be illegal, they can distort the company's underlying performance and mislead investors about its true profitability and financial health.

Example 1: Profits Driven by Non-Operational Gains

One of the most misleading signals in a company's pre-IPO financials is a sudden spike in profitability, especially when this increase is not driven by improvements in core operations. In many cases, these reported profits come from non-operational or one-off accounting events rather than from the company’s main business activities.

For instance, a company that has struggled with losses for years may suddenly report a substantial profit in the year leading up to the IPO. At first glance, this may appear to be a turnaround story. However, a closer look often reveals that the profit came not from actual sales or improved efficiency, but from activities such as:

• Asset revaluations: Reassessing the market value of properties or other long-term assets can create large paper gains that boost the income statement, even though no real cash is generated.

• Disposal of fixed assets: Selling off buildings, land, or equipment at a profit can temporarily inflate earnings, but this is not a repeatable business activity.

• Accounting adjustments related to mergers or acquisitions: Sometimes, revaluing assets acquired during a merger can result in large one-time gains that make the company look more profitable than it actually is.

While these accounting practices are often legitimate under financial reporting standards, they can distort a company’s true financial health. Investors who are not paying attention may assume the business is thriving, when in fact, the operational performance has not improved or may even be deteriorating.

The key risk is sustainability. Profits driven by non-operational gains usually cannot be repeated year after year. Once the IPO is complete and those one-time gains have run their course, the company may revert to low profitability or even losses, which can disappoint shareholders and lead to rapid declines in stock value. When reviewing a company’s pre-IPO financials, it is essential to:

• Focus on operating income rather than net income alone.

• Examine the Statement of Cash Flows to verify whether the business is generating cash from its core operations.

• Be skeptical of large and sudden profits that are not backed by strong, recurring revenues and cost control.

Study Case 1: PT Wulandari Bangun Laksana Tbk (BSBK)

BSBK is a textbook case. The company reported losses in both 2019 and 2020. Then suddenly, in 2021 (the year before its IPO) it posted a net profit of 863 billion Rupiah. At first glance, this might seem like a major turnaround, but when examined further, the story changes.

The majority of the 2021 profit came not from increased sales or operational improvements, but from a one-time gain classified as “other income,” which totaled 929 billion Rupiah. Of this amount, a staggering 935 billion Rupiah came specifically from a fixed asset revaluation surplus. This means the company reassessed the value of its properties and recognized a large accounting gain based on this higher valuation.

The fair value of these investment properties was estimated at 1.4 trillion Rupiah by a public appraisal firm in September 2022. While this valuation process is legally acceptable, it is important to understand that such revaluations do not generate real cash. They are simply adjustments on paper that increase the reported asset base and boost short-term profit figures.

In essence, the impressive 2021 profit was largely cosmetic. It did not reflect a real increase in sales, operational efficiency, or long-term earning power. For investors who only skimmed the profit number without checking its source, this could have created a misleading sense of financial strength right before the IPO.

Study Case 2: PT Puri Sentul Permai Tbk (KDTN)

KDTN is another example of a company showing unusually high profitability before its IPO, but not from its core business activities. In 2021, the company reported an exceptionally high Net Profit Margin of 81%, which at first glance appears impressive.

However, the majority of this profit came from a Rp 14.4 billion gain from the disposal of fixed assets, which was booked under “Other Income” in the income statement.

This was not income generated by selling products or providing services. It was a one-time gain from selling company assets, essentially cashing out part of its balance sheet. While such transactions are not illegal and may be part of a broader business strategy, they are not a sustainable or repeatable source of profit. Once those assets are sold, they cannot generate future income, and the company has fewer resources going forward.

Study Case 3: PT Vastland Indonesia Tbk (VAST)

VAST also showed an unusually large profit just before its IPO, which was driven almost entirely by an accounting revaluation of investment property. In FY2021, the company reported net income of Rp 114.65 billion, which represented a nearly 114x increase compared to the previous year. However, Rp 103.33 billion of that profit came from an increase in the fair value of investment property.

This revaluation boost contributed to almost all of the company’s net profit. While the company also saw a healthy improvement in gross profit, nearly doubling to Rp 20.46 billion in the same period, that operational gain was small in comparison to the valuation adjustment. Revaluations like this can be justified using standard appraisal techniques, but they rely heavily on assumptions and market conditions. If the property market declines or if the company stops revaluing its assets, these gains will vanish. They do not reflect actual cash flow, sales growth, or market competitiveness.

Example 2: Excessive Related-Party Transactions

A common red flag in pre-IPO financials is when a company earns most of its revenue from related parties. Related parties are entities that are owned or controlled by the same individuals or corporate group. This setup creates a potential conflict of interest, as transactions may not occur at fair market value, and reported revenues may not reflect true market demand.

However, not all related-party transactions are inherently problematic. In some cases, especially within vertically integrated business models, such arrangements are expected. For instance, a manufacturing company might sell exclusively to a distribution arm within the same corporate group. As long as these transactions are conducted transparently, priced fairly, and disclosed properly, they can be a legitimate and even efficient part of the business structure. The concern arises when:

• There is a lack of transparency about how pricing and terms are determined.

• A significant portion of receivables remains unpaid over long periods, suggesting that the sales may not be cash-generating.

• The company’s performance depends heavily on just one or two related entities.

• No clear explanation is provided for why third-party customers are not being developed.

In such situations, it becomes difficult to assess whether the company could sustain its revenue if it were separated from the group. Investors need to consider whether these sales are based on actual market demand or simply internal arrangements designed to make the company appear profitable prior to an IPO. When analyzing a company with significant related-party transactions, you should be able to answer questions such as:

• Are the related parties critical to the value chain (e.g. manufacturing, distribution, logistics)?

• Are transaction terms disclosed and consistent with market standards?

• Is there a diversification strategy in place to reduce dependence over time?

Study Case 4: PT Cerestar Indonesia Tbk (TRGU)

TRGU is the first case of financial dependence on related parties.

In 2021, most of the company’s revenue was generated through sales to affiliated companies. While intra-group transactions are not inherently illegal, such high reliance raises questions about the company’s ability to compete in an open market.

Another concerning issues is that a related party, KJ, owed TRGU Rp 225 billion. This receivable alone represented a large portion of the company's current assets. When a company's largest buyer is essentially itself or an affiliated entity, it becomes unclear whether the demand is real or simply created on paper to make the financials appear healthier ahead of an IPO.

Looking at the company’s financial position, the current assets increased by 42% in 2021, mostly due to a sharp 89% rise in receivables from related parties. These receivables made up 11.6% of the company’s total assets, which is unusually high for transactions that are not with independent third parties. Another concern is a portion of these receivables amounting to Rp 126 billion was pledged as collateral for bank loans. This means that the company is relying on funds it may not even collect in full to secure financing.

There were also other signs of financial engineering. For instance, the company performed a land revaluation worth Rp 237 billion in 2021, boosting non-current assets and overall equity.

Coincidentally, this revaluation figure closely matched the bank loans the company secured, suggesting that the revaluation may have been used to improve borrowing capacity rather than reflect actual value appreciation.

Study Case 5: PT Jobubu Jarum Minahasa Tbk (BEER)

BEER offers another case of concerning financial patterns involving related parties, particularly through unusually large receivables tied to a group affiliate. In this case, the main source of receivables was PT Jobubu Suksesraya Distribusi, a distribution company owned by the same corporate group.

From 2019 to 2021, the company’s total assets tripled. However, this growth was driven not by expansion in sales or operations, but by the consistent increase in related-party receivables. By FY2021, total assets had reached Rp 48 billion, growing to Rp 55 billion by May 2022. Yet a significant portion of this asset base was tied up in receivables from an entity under the same ownership structure.

Because these receivables came from a related distributor, it becomes difficult to assess whether the sales were made under market conditions or simply booked to inflate revenue numbers. If the transactions are not conducted at fair value or if they are designed to circulate money within the group, it undermines the reliability of reported income.

Example 3: Weak or Negative Operating Cash Flow

A company may appear profitable on paper, but that does not necessarily mean it is financially healthy. One of the most important indicators of real business strength is whether the company is actually generating cash from its core operations. This is reflected in the Statement of Cash Flows, specifically under the section labeled "cash flows from operating activities."

When a company consistently reports negative operating cash flow, it means that its day-to-day business activities are consuming more cash than they are generating. In other words, even if the company shows accounting profits, those profits are not being translated into actual cash in the bank. This situation raises serious concerns about the company's liquidity and its ability to cover routine expenses such as payroll, rent, raw materials, and interest on debt.

Negative cash flow from operations may be caused by a number of issues. These could include:

• Delays in collecting payments from customers, which leads to a buildup of accounts receivable.

• Excessive investment in inventory that ties up cash without immediately generating revenue.

• Rising operating costs that are not matched by increases in sales or efficiency.

• Aggressive revenue recognition policies that record income before the cash has actually been received.

A company that cannot fund its operations with internally generated cash will typically rely on external financing such as bank loans, credit lines, or new equity injections. While this can work in the short term, it is not sustainable. If access to financing dries up or investor confidence weakens, the company may quickly run into serious financial trouble.

Investors should always compare the company's net income with its operating cash flow. If the two figures differ significantly over several periods, especially if cash flow is consistently negative, this is a major red flag. It suggests that the reported profits may not reflect the true financial performance of the business.

Study Case 6: PT Sari Kreasi Boga Tbk (RAFI)

RAFI had never generated net cash from operations over the past three years. This consistent lack of operating cash flow means the company has been unable to cover its day-to-day expenses and working capital needs through its core business activities.

When a company is unable to generate positive operating cash flow over several years, it signals that its revenue model may not be profitable or that its costs are too high relative to income. This situation often forces companies to seek funding from outside sources just to stay afloat. In RAFI’s case, the company had to inject new capital amounting to 18 billion Rupiah in 2021 through additional paid-in capital, which helped keep the business running. However, depending on fresh capital injections year after year is not a sustainable business model.

Furthermore, in the same year, RAFI spent approximately 6.2 billion Rupiah on investment activities, which may have included purchases of new assets or expansion plans. While investment can be a good sign if it is supported by solid operations, in this context it further strained the company’s already weak cash position. Using funds for investments while not generating any net cash from operations suggests that the company is betting on future growth without having established a financially stable foundation.

The Solution

To avoid falling into this trap, investors must go beyond the income statement and look deeper into the company’s financials. Here are some steps to help:

1. Examine the Statement of Cash Flows. This statement reveals whether profits are being backed by actual cash. If operating cash flow is consistently negative or volatile, it is a sign of underlying weakness, even if the income statement looks good.

2. Identify the Source of Profits. Look into whether profits come from actual operations or from asset revaluations, asset disposals, or one-time gains. Sustainable businesses generate recurring income from selling products or services, not from accounting maneuvers.

3. Investigate Related-Party Transactions. Review how much of the company’s revenue and receivables come from affiliated companies. Excessive reliance on related parties can be used to artificially boost revenue and hide a lack of real market demand.

4. Ask: Is the Growth Real? If a company suddenly shows strong profits or rapid growth right before the IPO, question what changed. Was there a genuine business improvement, or was it a temporary boost created to attract investors?

5. Compare Financial Trends. Look at the last three years of financial data. A consistent pattern is a better indicator than a one-year spike. Be cautious if the financials suddenly improved right before going public.

D. Not Checking the Underwriter’s Track Record

The Mistake

Many investors make the mistake of assuming that all underwriters are equally reliable or behave the same way. In reality, the choice of underwriter can significantly influence how a newly listed stock performs in its early days on the exchange. Investors often overlook the underwriter's behavior, thinking their role ends at getting the IPO listed. However, their actions after the listing can impact market stability and price movement.

The Reality

On the Indonesia Stock Exchange (IDX), underwriters do more than just bring companies public. They can either support the stock price by stabilizing demand, or they might sell their allocated shares quickly, leading to sudden price drops. Some underwriters have a pattern of aggressive selling shortly after the listing, which can cause volatility and early losses for retail investors who bought during the IPO.

Understanding the reputation and historical behavior of an underwriter provides important clues about what might happen in the days following a stock's debut. If an underwriter is known to rapidly offload shares, the price may drop quickly, even if market demand initially appears strong. On the other hand, underwriters who support the price or hold their position for a longer time may contribute to more stable performance during the post-IPO period.

Examples of Aggressive Selling Underwriters

These underwriters have been observed frequently selling large volumes of shares shortly after listing, often within the first few days. This can flood the market with supply and cause the price to fall sharply.

• NH Korindo Sekuritas (XA): Known for being a top seller within the first week of several IPOs. Notable examples include SEMA, SICO, and IBOS, where the stock prices weakened quickly after XA sold off its shares.

• KGI Sekuritas (HD): Sold shares of IPPE and TAYS heavily on the first day of trading.

Examples of Mixed/Supportive Underwriters

Not all underwriters act aggressively. Some have shown a mixed approach, while others tend to be more supportive in the post-listing period.

• UOB Kay Hian Sekuritas (AI): Has demonstrated both supportive and selling behavior depending on the stock. For instance, in IPOs like NASI and ENAK, UOB Kay Hian appeared to support the price by not selling immediately. However, in other cases, they have also sold off soon after the listing, making their strategy somewhat unpredictable.

Important Warning: Strategies Can Change

The examples above are based on data primarily from 2023. It is essential to remember that underwriter behavior is not fixed. Just because a firm acted one way in the past does not mean it will follow the same strategy in the future. Underwriters may shift their tactics based on market conditions, internal policies, or client preferences. For this reason, always combine historical behavior with more recent activity before drawing firm conclusions. Use past data as a guide, not a guarantee. Stay alert, especially if the IPO market has changed significantly since the last time the underwriter was active.

The Solution

Before buying an IPO, investors should research the underwriter’s track record. This does not require deep financial analysis but simply reviewing the behavior of the underwriter in recent IPOs. A few things to look for include:

1. Did the underwriter quickly sell shares within the first few days after the IPO?

2. Were they seen as a top buyer, seller, or stabilizer post-listing?

3. How did the stock perform in the first week or two after listing under their involvement?

By observing these trends, you can make a more informed judgment about whether the underwriter is likely to help maintain price stability or contribute to early volatility. While no underwriter can guarantee strong returns, understanding their historical behavior helps investors manage risk and set more realistic expectations.

E. Getting Too Excited About Warrants

The Mistake

Many retail investors get overly enthusiastic when an IPO offers warrants as part of the package. They may treat it as a guaranteed bonus or see it as an easy way to double their money.

The Reality

Warrants can offer additional upside, but they are not guaranteed profit. In fact, they can become highly speculative instruments. Because warrants often have lower prices and smaller market capitalizations, they are more susceptible to price manipulation and volatility.

What makes warrants even riskier is the fact that they do not follow ARA (Auto Rejection Atas) or ARB (Auto Rejection Bawah) limits. A sudden spike can be tempting, but a sharp crash can wipe out gains just as fast. Many traders enter warrants without fully understanding how they work or without a strategy, essentially turning the warrant into a gambling ticket rather than a financial instrument.

Additionally, some IPOs use warrants as a marketing tool to make the offering appear more attractive. If the company's fundamentals are weak, even a warrant might not compensate for losses in the main stock.

The Solution

Approach warrants with a clear understanding of their mechanics, risks, and expiration terms. Treat them as a high-risk, high-reward bonus, not as a safety net or guaranteed return. If you're investing in an IPO, evaluate the core business first. Ask yourself: would I still buy the stock even without the warrant?

If you choose to hold or trade the warrant, make sure you know:

• When the warrant becomes active

• What the exercise price and expiration date are

• How liquid the market is

• Whether any unusual volume spikes are due to real interest or possible manipulation

Final Thoughts

IPO investing can be exciting, especially when you're just starting out. The thrill of getting in early, the hope of quick profits, and the buzz on social media can make it feel like a golden opportunity. But as we've seen, it's also full of pitfalls, many of them avoidable with the right mindset and preparation.

The key lesson is simple: do not rush. Avoid following the crowd, read the prospectus carefully, and look beyond the surface, especially when it comes to financial red flags, underwriter behavior, or tempting extras like warrants. Not every IPO is created equal, and not every one is meant to succeed.

Making mistakes is part of the learning process, and many of us (myself included) have fallen for some of these traps before. The important thing is to stay curious, ask questions, and never invest blindly.

In the next part, we’ll go beyond the basics. We’ll explore other important factors, including qualitative insights that can help you choose the right IPOs to buy.