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Assembling the digital economy ecosystem, one byte at a time

Amala Balakrishner
Amala Balakrishner12/20/2021 10:04 AM GMT+08  • 11 min read
Assembling the digital economy ecosystem, one byte at a time
Singapore's strong digital economy would mean more tech companies would list here. However, this has not really been the trend
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Uni-Asia Group is an alternative investment firm that makes its money from owning and operating ships, hotels and other real estate — pillars of what can be accurately described as the conventional bricks and mortar economy, for much of the last century.

Yet, as entire economies and companies embrace digitalisation — a trend that has accelerated because of the pandemic, Singapore-listed Uni-Asia knows it has to use more technology in its processes to improve its efficiency and workflow. “Technology has been quite popular since Covid-19 hit, so I think we should use more of it to increase our operational efficiency,” CEO Kenji Fukuyado tells The Edge Singapore.

While he acknowledges that the group will incur substantial costs from setting up the necessary infrastructure, Fukuyado believes this is the way forward. His game plan is to start small and go paperless before eventually looking out for ways to adopt technology in its core shipping and property segments.

Uni-Asia is not alone. A recent study conducted by EY-Parthenon shows that 39% of the larger Southeast Asian enterprises that responded had either completely transformed or made substantial progress in their digitalisation efforts. Meanwhile, 61% expect to transform digitally in the next three years.

Companies have been adopting technology in a plethora of ways. For instance, several of those set up by the younger crop of entrepreneurs have been fully operating online either through apps or interest groups on social media platforms.

Traditional sectors have also jumped on the digitalisation bandwagon. A case in point is telco providers who have pretty much been forced to turn to technology amid declining growth rates, shrinking margins and stronger competition, notes Joongshik Wang. “Technology is no longer a nice-to-have element,” the Asean leader at EY-Parthenon explains. For example, 5G technology, which would enable quicker network connectivity for companies.

See also: Majority of companies in Singapore are not cyber resilient

The higher maturity of telcos in technology adoption vis-à-vis other sectors has its benefits. It enables companies to pivot to an asset-lite model, which, in turn, allows them to reprioritise and focus on components across the value chain, says Wang. This would then facilitate the generation of ideas for further digitalisation efforts.

Changing consumer preferences

Besides adapting to the pandemic, companies have adopted digital solutions in response to the tastes and preferences of consumers. For one, younger consumers expect “speed, responsiveness and access to [goods and services] via a variety of channels along with a hyper-personalised experience [incorporating] an integrated approach,” observes Wang.

See also: Employees in Singapore prioritise digital skills over green skills

Data from the latest e-Conomy Southeast Asia report indicates that some 40 million new internet users came online this year. This brings the total internet penetration in the region to 75%. So far, eight in 10 of these individuals have already purchased something online at least once.

Southeast Asia, including Malaysia, the Philippines, Singapore, Thailand and Vietnam, is now home to more than 440 million internet users. Compiled by Google, Temasek and Bain & Company, the report projects that the region’s internet economy will reach US$360 billion ($490.1 billion) by 2025, up from the US$300 billion forecast made previously in 2020. By the end of this year alone, the region is slated to hit US$174 billion in gross merchandising value thanks to the growing base of digital merchants and consumers as well as an acceleration in e-commerce and food delivery.

“The pandemic has led to accelerated and enduring digital adoption in Southeast Asia, which has propelled its internet economy to a new height,” notes Rohit Sipahimalini, chief investment strategist and head of Southeast Asia at Temasek. Agreeing, vice-president for Google Southeast Asia Stephanie Davis says the region will define the future of global digital ecosystems.

While Asean’s digital economy has been thriving, the “little red dot” too has been punching above its weight. Singapore has the highest proportion of digital consumers out of all internet users at 97%. In comparison, the regional average was 80%.

A key reason for Singapore’s performance is the government’s smart nation strategy, says Selena Ling, chief economist at OCBC Bank. She adds that the three key pillars of the initiative are to have a digital economy, digital government and digital society.

Nasdaq, SGX, HKEX or something else

The popularity of tech-based companies amid Asean’s burgeoning digital economy, has, by extension, opened up new opportunities for investors. The real economy has taken a hit from the pandemic but the ecosystem of tech start-ups and the growing list of investors eager to put money in them has shown no signs of abating.

Amid greater deal activity and larger valuations, 11 consumer companies attained unicorn status, bringing the region’s total to 23, the e-Conomy report reveals. Overall deal value came up to US$11.5 billion in 1H2021, surpassing the US$11.6 billion for the whole of 2020.

Investors are seeing the region as a lucrative investment destination for the long-term, especially in sectors such as e-commerce and digital financial services, which continue to attract the majority of investments at more than 60% of deal value, the e-Conomy report points out.

Several tech companies have been considering the option of Initial Public Offerings (IPOs) to raise capital or allow early investors to monetise their holdings. A viable option that has come up recently is special purpose acquisition companies (spacs), which is formed strictly to raise capital for an IPO by acquiring or merging with an existing company.

Data from EY shows that Asean’s IPO performed relatively well this year, raising US$13.1 billion from 132 deals. This is up from 111 deals raising US$7.7 billion in 2020. Indonesia was the most active, with 55 deals raising US$4.8 billion. Thailand was a close second with 40 deals raising US$4.1 billion. Meanwhile, Malaysia had 23 deals (US$0.6 billion), Singapore had eight deals (US$1.2 billion) and the Philippines had six deals (US$2.4 billion).

Companies typically consider many factors ranging from strategic and business intent, liquidity, valuation, initial and ongoing costs, and market proximity, Max Loh, EY Asean IPO leader, tells The Edge Singapore. Loh, who is also a managing partner for Ernst & Young in Singapore and Brunei, quips that companies also consider the level of expertise of the investment and analyst community, and how well their business model is understood.

Bryan Tan, a partner at law firm Pinsent Masons, goes a step further to say that where and how a listing is done also depends on the type of start-up. For instance, consumer-facing companies like Grab, Razer and Carousell are seeing investors pumping in lots of money in the hope of getting the best returns they can. These firms tend to list in bigger exchanges with higher liquidity and visibility. However, companies with a “lower profile” that make a lot of profit may adopt a different view, says Tan.

Meanwhile, Robson Lee, a partner at law firm Gibson Dunn, notes that companies have also been seeking other ways of fundraising instead of going public. This is in line with the mindset of Zhou Lihan, co-founder and CEO of biotechnology firm MiRXES. He is carefully evaluating if and where the company should be listed. While Zhou has been in talks with the Singapore Exchange (SGX), he is also concerned that no health tech companies have ever been listed here before. “We don’t want to be the first guinea pig. What Singapore needs is a success story,” says Zhou, adding that he has been mulling opportunities at Nasdaq, Hong Kong Exchange (HKEX), and Australian Exchange to name a few. He is also considering staying private if MiRXES can “raise money privately”.

Meanwhile, local tech company G8 Subsea is resolute on listing abroad. The company, which dabbles in renewable energy, believes that a Nasdaq listing would help create a name for itself as an international brand for renewables. It also wants to access a more diversified pool of investors with better valuations and opportunities to deliver renewable energy projects globally.

In the same regard, super app GoTo — birthed from the merger of internet giant Gojek and e-commerce company Tokopedia — is looking to have a dual listing on Nasdaq and its home base, the Jakarta exchange. The company just recently secured US$1.3 billion in funding from investors ahead of its planned IPO, from the likes of Google, Tencent, Temasek, Malaysian sovereign wealth fund Permodalan Nasional as well as the wholly-owned subsidiary of the Abu Dhabi Investment Authority.

Wayne Lee, CEO of W Capital Markets, notes that GoTo was probably inclined to list on the Nasdaq since its investors include international names. He has the same understanding of why super app Grab was listed on the Nasdaq via a spac deal with Altimeter Growth Corp.

Similarly, Singapore-based Sea, which runs gaming business Garena and e-commerce site Shopee, has gained from its US listing. Its shares, quoted on the New York Stock Exchange, has gained 1,219.30% since its IPO back in October 2017, valuing the company at around US$140 billion, which is bigger than the aggregate of the three local banks.

The US listing for these companies gives them easy access to deep pools of capital, says Nirgunan Tiruchelvam, head of consumer sector equity research at Tellimer. For instance, Sea has been very well proactive in raising money by issuing new shares and could have a net cash position of US$13 billion.

Home ground attraction?

Given Singapore’s strong digital economy, one would assume that tech companies would be more than keen to list here to benefit from the high adoption levels. However, Pinsent Mason’s Tan points out that the local bourse is very different from the exchanges abroad. “In terms of liquidity and visibility — we fall off a bit from the US market because it has a bigger investor base,” he says. Meanwhile, differences between SGX and HKEX lie in the latter having a hinterland of Chinese investors and a preference for equity over debts, notes Tan.

W Capital’s Lee recalls that the local market could attract more listings before the 2008 Global Financial Crisis. “The SGX has not recovered since then in terms of listing and liquidity,” he says.

Hopes of reversing this saw the joint announcement in September by the government, EDBI, Temasek Holdings, the Monetary Authority of Singapore and SGX setting aside at least $1 billion in related schemes to help fund growth companies to steer towards an IPO here. SGX has also introduced a spac listing framework that makes it more accessible for companies that prefer to list via this route.

Lee calls these measures “better late than never”. “It was an effective booster shot that has helped change the perception of SGX,” he explains. Lee believes that the government’s involvement in a start-up’s journey at an early stage can help put SGX in the forefront when a company decides where to list. In the two months since the announcement, Lee has already received “a couple of enquiries” from companies in China, Malaysia and other parts of Asean. He is now in the midst of “getting the IPO mandates from them”.

However, Robson says that high listing costs may also be a deterrence to prospective listings of tech companies here. Even though the government is looking to defray some of this with its latest initiatives, the competing options from other exchanges may seem more viable.

Robson’s vehement belief is that SGX should create a niche for itself other than simply enshrining integrity and emphasising transparency and good governance. “We can have a well-run economy but that may not give tech companies an impetus to list here,” he tells The Edge Singapore. Robson says that spacs could be that niche uplifting the SGX — but only time will tell how well this feature performs.

EY’s Loh suggests that more attention could go into building a conducive ecosystem for tech companies to list here, the way Nasdaq did by bringing together companies and investors. SGX has created an ecosystem for REITs and real estate firms and that is what is spurring the listing of such counters here. It could possibly create a similar environment for tech firms by getting more companies like Nanofilm Technologies International to list here.

Having more such firms could potentially attract more investments from institutional and retail investors and, in turn, generate higher valuations. This will help address another issue: the need to stimulate liquidity amongst small and mid-cap counters. “This is the most common question we get,” says Lee, adding that companies end up delisting from the SGX or choose to list elsewhere because of low trading volumes.

Perhaps a good segue into having more tech companies to list here may well be playing up the opportunities Singapore and the region’s digital economy has to offer.

Cover image: Bloomberg

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