Tech start-up Garena set to test investors' appetite for Asia

Financial Times | 19 Mar 17

By Jeevan Vasagar in Singapore and Louise Lucas in Hong Kong

Investors' appetite for Southeast Asia's burgeoning technology sector is set to be tested when Garena, the region's most valuable tech start-up, launches its initial public listing later this year.

The Singapore-based online games and ecommerce business, valued at $3.75bn last March, is racing to be the dominant tech operator in a region where transport apps are emerging as key platforms for cross-selling tech-enabled businesses.

Garena, whose investors include Tencent, has appointed Goldman Sachs as lead adviser and is expected to list in the second half of this year, according to two people familiar with the plans.

In a blow to Singapore and Hong Kong, the listing is expected in the US, one of the people said.

Competition between technology platforms is hotting up in Southeast Asia, where ride-hailing apps Grab and Go-Jek have raised millions of dollars from investors while Alibaba has acquired control of its regional counterpart Lazada.

Jayson Chi, a former partner specialising in telecoms, media and technology at McKinsey in Hong Kong, said: "China is still growing but there is less opportunity - it revolves around the big players.

"There is a lot of attention right now on Southeast Asia. These companies have taken investor money and there is pressure for them to think about exits."

Southeast Asia is the world's fastest-growing region in terms of internet users, according to joint research by Google and Singapore's Temasek last year, which estimates that the internet economy in the region will be worth $200bn by 2025.

The biggest portion of this market will be ecommerce, expected to be worth $88bn in the region in eight years' time, according to the Google study, but investors are also excited by the prospect of bringing unbanked people in the region into financial services through their phones.

Garena, which operates in Southeast Asia and Taiwan, began as a gaming platform in 2009 and has launched three additional lines of business - the chat app BeeTalk, the online marketplace Shopee and payments platform Airpay.

Not all of its business launches have succeeded. Its chat app has failed to make headway against rival offerings WhatsApp and Line, which is dominant in Thailand.

The games business is the only part of the group which is profitmaking. Overall, the company claims a compounded annual revenue growth rate of over 95 per cent, with gross revenue of more than $300m in 2015, the last year for which figures are available.

Tencent was an early backer, and is now one of the company's biggest stakeholders, with about 30 per cent of the business, according to one person familiar with the matter.

As well as snapping up games developers, Tencent tends to home in on "mini-me" companies when it is making acquisitions, the person said. "Tencent's thinking is - who's going to be the me of that market?" he said.

Tencent's backing is not just financial. The Chinese company granted Garena an exclusive licence in Southeast Asia and Taiwan for League of Legends, one of the world's most popular games.

Garena also benefits from Tencent's insights on customer data, according to Peter Liu, a research director at Gartner, the US consultancy.

"Tencent is very strong in big data analysis, especially in user behaviour analysis," Mr Liu said. "By leveraging these world-class capabilities, Garena can further strengthen their customer analysis."

Grab - Southeast Asia's challenger to Uber - illustrates how tech start-ups in the region have evolved, as it has broadened its range from transportation to payment services, introducing a mobile wallet service in partnership with an Indonesian bank last year.

Likewise, Indonesian ride-hailing app Go-Jek - which is backed by KKR and Warburg Pincus - launched digital payment service Go-Pay last April.

Tan Hooi Ling, Grab's co-founder, said she could envisage a future in which payments are as significant for the company's revenues as transportation.

"That future is what we're building towards. There's so much value to add. Transport in Southeast Asia alone is $25bn - payments including financial services is 20 times that," Ms Tan said, citing Grab's internal estimates of market size. "These are existing industries, without looking at the new industries that will spin off."

Singapore-based Grab, founded in 2012, on Wednesday announced plans to hire 800 more developers over the next two years - the company has 2,000 employees across all departments - and to open two new R&D centres in India and Vietnam.

The Grab co-founder predicts consolidation in Southeast Asia. "If you were to ask me to put a bet on it - there will be a minimum of two big platforms," Ms Tan said, suggesting there will be space in the market for at least two big internet businesses as customers prefer competition.

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