Here’s why Garena is listing in US and bypassing SGX
Garena, a Singapore-based online games and ecommerce giant has plans to list in the US in the second half of this year according to a report in the Financial Times. Founded in 2009, the company was valued at approximately US$3.75 billion last year when it raised US$170 million from Khazanah Nasional Berhad, the Malaysian government’s strategic investment fund, and Tencent, the Chinese internet behemoth.
The annual revenues of Garena in 2015 were US$300 million and according to the company, it is expanding its top line by 95% every year.
What is behind the company’s success and can it keep up this rapid growth?
Southeast Asia’s highest-valued technology startup
In March 2015, the Ontario Teachers’ Pension Plan took part in a round of funding when Garena was valued at US$2.5 billion. The company’s gaming platform includes highly popular titles like League of Legends, Path of Exile, and FIFA Online.
There are four primary areas in which the tech company concentrates. While gaming is its mainstay, Garena is also active in communication tools, mobile social networks, and payments. In 2015, the company’s Garena+, its game and social platform had over 100 million users.
It is estimated that Tencent holds about 30% in the company. Its relationship with Garena is not limited to just a financial stake. Tencent has provided the company with a licence for League of Legends for Taiwan and Southeast Asia.
Garena is well-positioned to cash in on the internet boom that the region is witnessing. A study by Google and Temasek estimates that the internet economy in Southeast Asia will be US$200 billion by 2025. Two of the growth areas are expected to be ecommerce and financial services, both of which Garena has a presence in.
According to Group president Nick Nash, the Singapore-based company is like its Chinese investor, Tencent, in many ways. Garena started as a chat platform in 2009 and then moved into the content and game delivery business. In 2014, it started AirPay, a payment service, and in the next year, it launched Shopee, an ecommerce marketplace.
The company has reportedly picked Goldman Sachs to lead its IPO slated to launch in the US in the second half of this year.
Why has Garena chosen to list in the US?
The Singapore Exchange (SGX) would have been the logical place for Garena to list its shares. But the local bourse has been facing headwinds in the recent past.
One major issue confronting SGX is the number of companies that have been delisting their shares. According to a recent report, 18 firms made exits in 2015. The number of companies which delisted in 2016? A whopping 27 with heavyweights like Neptune Orient Lines and SMRT Corp topping the list.
Top 10 companies which delisted in 2016
Market cap as at delisting (S$ million)
Neptune Orient Lines
China Merchants Holdings (Pacific)
Sim Lian Group
Source – The Business Times
What has led to this exodus? One line of thinking is that privatisations have been more common in those industries where valuations have been low. The major shareholders were of the view that the companies were worth much more than what their share prices indicated.
Shutdown has undermined confidence in SGX
Last year in July, the Singapore Exchange crashed because of a hardware problem. At 11.38am on the 14th of the month, SGX authorities closed the exchange as duplicate trade confirmation messages were being generated. Trading remained suspended for the rest of the day.
This was not the first time that SGX faced this type of problem. In late 2014, there were two disruptions, one due to a software error and another because of a power failure. At that time the Monetary Authority of Singapore issued a rebuke and imposed a moratorium on fee increases.
The July 2016 outage upset some traders. Wong Kok Fai, a trader with Azurewing Asset Management said, “We’re badly affected, one minute means a lot to a high-frequency trader and it took SGX 30 minutes before it communicated there was something wrong.”
What can be done to restore confidence in SGX?
SGX has been confronted by one crisis after another in recent years. In 2013, the penny stocks crash wiped $8.7 billion off the markets in a few trading sessions. Subsequently, the glitches in the trading system drew international attention to SGX’s problems. More recently, the exodus of companies from Singapore’s bourse has led to a shrinkage in the total market capitalisation of SGX.
Garena’s reported decision to list in the US instead of in Singapore will be another blow. But the exchange is fighting back. It is considering a proposal to allow dual-class share listings. If it introduces this change, then it could become the preferred exchange for the potential IPOs of tech companies like ride-hailing service Grab and GO-JEK, and companies like Tokopedia, and India’s Flipkart.