A follow-on deal for a southeast Asian internet company this week illustrated just how much investor appetite there is for digital stocks in Asia – particularly if the name Tencent appears in the shareholder list. Few companies see an increase in their share price right through a primary follow-on, particularly when their value has doubled since the start of the year anyway.
Sea Limited is a Singapore-based internet company and the operator of southeast Asia’s biggest gaming platform. It is backed by Chinese internet and gaming company Tencent, which held about 40% of the company’s stock at the time of its 2017 IPO.
This week it raised $1.35 billion in a follow-on offering through Morgan Stanley and Goldman Sachs as joint bookrunners. They set out to sell 50 million shares and eventually upped to 60 million, 6.3 million of them to a Tencent affiliate and a firm linked to one of Sea’s directors.
The follow-on was striking because of the movement of the share price from its IPO and through the follow-on. It raised $884 million in its New York IPO in October 2017 for $15 apiece, and its share price initially declined, trading around the $10 as recently as the start of 2019.
The stock began to climb around the turn of the year, rising 43.1% from January 1 to February 26. It then announced its full-year results, and went up another 34.9% within a day. It announced its follow-on offer on March 1 at $22.50 per share, a 4.65% premium to the previous close, then rose another 7.91% on the day of the announcement, meaning the follow-on eventually priced at a discount. At the time of writing on March 8, the share price was up 133% in a little over two months – having continuously priced upwards all the way through a follow-on, a highly unusual state of affairs.
Why? The Tencent link clearly helps, and Sea is often called the Tencent of southeast Asia. It licenses games from the Chinese company, and Tencent’s presence has given confidence to other leading institutional investors including the Ontario Teachers’ Pension Plan and Khazanah.
But Sea, which has more than 200 developers on staff in Shanghai, is also successful in developing its own games, notably one called Free Fire, which has more than 350 million registered users – 40 million peak daily active users – and was the world’s fourth most downloaded game across the Apple and Google Pay stores in 2018. Oddly, it has become one of the most popular games in Latin America, which appears to bode well for its ability to penetrate emerging markets globally.
Sea was originally named Garena – which remains the name of its mobile and gaming platform – and was founded by Forrest Li in 2009. Today it is not only an online gaming company but has a digital payments service called AirPay and a mobile shopping business called Shopee.
We’ve successfully made a transition to being more mobile-centric, from being a pure publisher to going into self-development, and the success of Free Fire has given us a passport to spread our wings- Forrest Li, Sea
In the furore it is easy to forget that the number which prompted Sea’s wild share price inflation was actually a loss. The firm lost $961 million in 2018. But it achieved total adjusted revenue of $1.05 billion, well above guidance. And gross merchandise value in its Shopee business grew 117% to $3.4 billion in the fourth quarter of 2018 compared to the same period a year earlier.
Its guidance for 2019 is similarly ambitious (though it makes no mention of profitability): $1.2-$1.3 billion of adjusted revenue for digital entertainment, which would represent 82%-97% year-on-year growth; and $630-$660 million of adjusted revenue for e-commerce, which would represent 117%-127% growth.
“If we think about 2019 yes, it’s true, it’s quite robust in terms of where we think we’re going to land,” said Forrest Li on an analyst call for the full-year results, before the follow-on was announced.
“It’s really a reflection of… a shift in our overall strategy. When we set out several years ago we were primarily a PC-based pure publisher focused on southeast Asia and Taiwan. Now, we’ve successfully made a transition to being more mobile-centric, from being a pure publisher to going into self-development, and the success of Free Fire has given us a passport to spread our wings beyond southeast Asia and Taiwan to a lot of emerging markets.”
It is possible that e-commerce may end up having greater potential than the gaming business: there was a single day, December 12, when the company received 12 million orders in 24 hours, and 5.4 million of them were from Indonesia.
The deal, forward-looking and digital though it is, also seemed like something of a throwback: a New York IPO for an Asian company with just two American bookrunners. In an environment of Chinese deals with 20-odd bookrunners, uncertain price discovery and razor-thin diluted fees, that filled some in the market with a warm glow. Well, the ones who were on the deal, anyway.