Can Tadawul Price What You Cannot Yet See?

Islam Zween, CEO of Argaam

✍️ Islam Zween The chapters of transformation in the Saudi financial market are clearly imposing themselves, as the market has become completely open to foreign investors without complexities.

The market is no longer dependent only on oil and banks; new companies have entered various fields such as technology, renewable energy, integrated healthcare, and entertainment.

New companies listing their shares for the first time are witnessing exceptional coverage and huge cash flows. The derivatives market in Tadawul has given investors sophisticated strategic options to hedge against market fluctuations and seize new profit opportunities.

But has Tadawul reached the maturity that qualifies it to price a future we do not yet see clearly, especially with the entry of technology companies and more complex financial contracts? And when you see a stock trading at a certain price today, does this value reflect the company's true reality, or is it merely a mirror of the market's own mechanisms and engineering? An IPO covered 120 times does not necessarily mean that investors believe the company is worth 120 times what was offered. And a decline in multiples such as the price-to-earnings ratio for software and technology companies does not mean that the company's operational or financial performance has worsened, but often returns to entirely other reasons.

Concentration of ownership in few hands does not necessarily mean that the market ignores the minority or works to marginalize small investors. In each case the same question emerges: How much of this price came from real valuation, and how much came from the way the market is built? When Rasen Company, specializing in innovative solutions in the fintech sector, was listed, it received exceptional investor demand, as institutional orders flowed with record coverage ratios exceeding the target by several times, giving the stock a high valuation premium justified by subsequent actual earnings figures.

The company passed the IPO test, proving that the price premium was an entitlement based on financial solvency, not just transient optimism. However, the market's success in pricing one successful fintech company partially proves its efficiency, but is not sufficient evidence of the maturity of the entire market structure.

● In our first analysis of this issue by Argaam Intelligence team, titled:

Rasen's premium between profitability and scarcity.. and the upcoming listing separates them. The goal here is to read the real numbers of the IPO, to know how much of Rasen's stock price is due to the company's sustained profits, and how much is due to just the scarcity of shares offered. From this perspective, we explain why the upcoming large IPO of a fintech company in Tadawul will represent the most important test for the price discovery mechanism in the Saudi market in the field of digital financial technology in years. This current analysis does not seek to predict the results of that offering, but builds the methodological framework that allows reading and evaluating it objectively as soon as it occurs. The subscription in Rasen shares took place with a limited free float against enormous local demand, and in the absence of a foreign institutional tranche capable of conducting the deep due diligence that international investors bring to tech companies. The result was a hybrid price reflecting two components simultaneously: the quality of earnings, a sustainable advantage, and the structural scarcity of supply, a temporary factor destined to disappear.

Until now, the market does not have certain data to determine which was the bigger driver of the price. However, the real test that will answer this question lies in the upcoming large offering of a larger company, with wider international presence, a more complex profitability profile, a larger free float, and a base of global investors who will ask more profound and difficult questions compared to Rasen's offering. When that offering occurs, it will reveal to us from the depth and mechanisms of Tadawul what the Rasen experience was not able to show.

● As for our second analysis, it links the challenges of price discovery in Rasen's IPO with the need, sometimes, for more complex financial instruments such as perpetual futures contracts, titled:

Perpetual Futures Contracts: Is Tadawul Ushering in a New Financial Era? The analysis starts from a completely different angle than Rasen, to enter together into a complex financial tunnel, but it ends surprisingly at the same starting point: the pricing dilemma. In the case of Rasen, the market faced difficulty in discovering the logical or fair price in the face of domestic demand surge versus supply scarcity. In the case of perpetual futures, this instrument never expires, and thus there is no closing date where the contract price automatically meets the real stock price in the market. The second analysis explores the regulatory and technical conditions necessary for the success of perpetual financial derivatives in Tadawul, an idea that is not new, but was described in academic literature since 1988, before most of today's traders were born: a single, continuous investment solution that completely eliminates the need to enter into a spiral of successive and repetitive agreements. Who are the market makers and key players qualified to employ these contracts? And why is the correct order in building the market more important than rushing to launch a new financial instrument?

And from Rasen's valuation to the engineering of "perpetual futures contracts," the element of time plays a decisive role in determining market efficiency. Shortening the period between offering and listing is a competitive advantage that supports pricing accuracy in favor of Tadawul.

And in the arena of fierce competition among exchanges, winning lies not in dramatic transformations, but in small details such as faster procedures and saving management time, giving institutions flexibility to capture the true value of assets. Structural maturity is not measured only by liquidity size, but by the market mechanisms' ability to simplify procedures, absorb complex instruments, price the future efficiently, or simply save just one week of listing time.

To view Argaam Weekend newsletter this week, click here

{{displayname}}

{{profession}}

{{followercount}}

{{aboutme}}