As Covid-19 continues to ravage the globe, Singapore is gearing up to celebrate its 56th birthday. The theme song for this year’s National Day Parade is The Road Ahead, composed by singer-songwriter Linying and music producer Evan Low. They hope to remind everyone through the song that the road to recovery may be bumpy but there is strength to be found in unity. Last year, in honour of National Day, we wrote about five stocks that had been flying the Singapore flag high. They were Ascendas REIT, DBS Group Holdings, City Development, Sats and Singapore Telecommunications. This year, we celebrate by examining two companies that have helped put the Red Dot on the map — Sea and Razer.
Singapore-based Sea is often hailed as the Tencent of Southeast Asia. The company was founded in Singapore in 2009 as Garena, an online gaming and social platform. Today, Garena is a leading online game developer and publisher with footholds in more than 130 markets.
In 2014, the group established SeaMoney as a leading digital-payment and financial-service provider in Southeast Asia. Its mission is to improve the lives of businesses and people in the region through technology in financial services. SeaMoney’s offerings include mobile wallets, payment processing, credit and other digital financial services and products.
In 2015, the group further launched Shopee as a C2C mobile-centric marketplace. Since then, Shopee has moved to a C2C/B2C hybrid model, with the aim to provide consumers with easy, secure, fast and enjoyable online shopping experiences. Shopee is consistently ranked the top app in the shopping category in Southeast Asia by monthly active users, total time in app on Android and downloads by App Annie.
Garena was renamed Sea in 2017, shortly before the group listed on the New York Stock Exchange in October that year. The group continues to operate its businesses under its Garena, Shopee and SeaMoney brands.
Revenue grew at a 73% CAGR between 2014 and 2020. Gross margins have been consistently 20– 30% except in 2018, which was affected by increasing costs of e-commerce and other services as the company ramped up its e-commerce platform. The group’s profit margins have been improving in the past few years as it scales up its businesses. In FY2020, the segment of digital entertainment was its biggest source of revenue and its most profitable segment in terms of gross profit.
In the first quarter of 2021, Sea’s GAAP revenue was up 147% y-o-y. E-commerce was its largest contributor, growing 250% y-o-y. In digital entertainment, quarterly active users and paying users increased 61% and 124% respectively.
In recognition of the stock’s market value, Sea was included in the MSCI Singapore Index on May 21, 2021. Sea ADR (Singapore) was also included as one of the three largest additions to the MSCI World Index by full company market capitalisation alongside Volvo (Sweden) and Palantir Technologies (US).
In a 2020 Temasek-Google-Bain report on the digital economy in Southeast Asia, 40 million new users were estimated to have come online in 2020, joining the 100 million people who had already started embracing the Internet in the previous five years.
Covid-19 has triggered a dramatic increase in digital consumption. About 94% of the new users said they would continue to tap online services after the pandemic. An exceptionally high 86% of users found that their financial needs could be better met online than in person or offline. Based on this finding, demand for digital financial services can generally be expected to grow further.
Sea’s digital financial services chalked up only US$51.3 million ($69.5 million) in revenue in 1Q2021. This formed a fractional 2.9% of the group’s GAAP revenue. Despite its smallest contribution, digital finance could be one of its game-changers, particularly after the group was awarded a digital-banking licence in Singapore in 2020. This means Sea can now provide retail customers with traditional banking services such as account opening, collection of deposits as well as the issue of debit and credit cards. It can also serve corporate customers. This opens up a sea of opportunities in digital finance for Sea.
Founded by Singapore Tan Min-Liang and American Robert Krakoff in 2005, Razer is a household name in gaming for its ecosystem of gaming hardware, software and services. The company operates four businesses: peripherals, systems, software & services, and others.
From 2005 to 2010, Razer was the go-to brand for gaming mice. It created the first dedicated professional mouse for gamers and went on to develop some of the best gaming keyboards, laptops and phones. For its innovations in the gaming sector, Razer has won the Best of CES Award at the annual Consumer Electronics Show in Las Vegas for seven years in a row. It continues to innovate its high-end gaming hardware and build its gaming ecosystem, while extending its worldwide reach.
The company listed on the Hong Kong Stock Exchange in 2017. Hong Kong business magnate Li Ka Shing is invested in Razer. Now recognised internationally, Razer has 17 offices worldwide and is a regular sponsor of major e-sports tournaments.
Revenue grew at a 25% CAGR between 2014 and 2020. Gross margins have been constant at 20–30% and net profit margins have been improving. Razer turned profitable in 2020, the year online entertainment exploded when people had to live, work and play at home.
After entering the FinTech space in 2019, Razer aims to set up digital banks in several countries. This is to serve its large base of gaming users in countries where vast sections of the populations remain unbanked. With digital banks, gamers can conveniently make payments while playing games.
As Razer does not yet have any digital-banking licence, its FinTech services are currently limited to payments.
Revenue grew 66% y-o-y in 2020 for Razer’s financial services. Usage of FinTech services is mushrooming in Southeast Asia and Razer is capitalising on the trend. It is highly likely that the company will continue to develop its FinTech business, even though it has encountered setbacks in obtaining a digital-banking licence in Singapore. The next two markets it intends to explore are Malaysia and the Philippines.
In its bread-and-butter gaming business, Razer continues to scale up. Sitting on a pile of free cash, it plans to use it to roll out more hardware and software to better serve its fans and capture more market share.
How to gain exposure
With economies worldwide slowly on the mend from Covid, investors have started to position their investments for the short, medium and long terms.
Covid has fanned the growth of the digital economy in Southeast Asia. Ongoing digitalisation will likely stimulate the further growth of companies in the digital economy.
We believe these two companies will reap the benefits and continue to cast the spotlight on the Red Dot.
Investors and traders with a bigger risk appetite may consider using Contracts for Differences (CFDs) to gain exposure to these stocks. CFDs are versatile tools for investors, particularly those who take an active approach to investing. They can be used for hedging, short-selling and leveraged trading. CFDs are traded on margin, which means you only need to put up a fraction of the full value of your trade upfront.
CFDs are also ideal tools for people with less capital but who wish to capitalise on the growth potential of certain industries. Or they may simply want to take advantage of the latest market movements regardless of direction.
A note of caution: Both your potential profits and losses are amplified when you trade CFDs. Hence, CFDs may not be suitable for investors whose investment objective is to preserve capital and/or whose risk tolerance is low.
Mike Ong is senior dealer, CFD, and Chua Minghai is dealer, CFD. They are both with Phillip Securities.