July 13, 2017 / 10:06 AM / 11 days ago

Hong Kong gaming IPO is not Razer sharp

3 Min Read

A man holds an Xbox 360 controller while playing a game at Games Convention Asia in Singapore September 17, 2009.Vivek Prakash

HONG KONG (Reuters) - Hong Kong's latest gaming initial public offering is not Razer sharp. The U.S.-Singaporean firm, which makes gaming keyboards and mice, is eyeing a valuation of up to $5 billion in a listing later this year, Reuters reported on Wednesday citing a source. While the broader industry in which this company operates is hot, the financial reality of Razer is underwhelming.

Razer’s motto is "For Gamers. By Gamers.". It boasts a loyal customer base of hardcore players - a niche that is expected to spend $3.3 billion globally on peripherals by 2020, according to the company’s prospectus. Razer already dominates the market for gaming mice in China and Europe, these are emblazoned with the trademark logo of a neon green three-headed snake bearing names like DeathAdder and Lancehead. Existing investors include chipmaker Intel and Hong Kong tycoon Li Ka-shing.

The excitement ends there. Annual sales from its peripherals business grew at a tepid 5.7 percent last year. And while top-line growth for Razer's gaming laptops looks promising, gross margins there stood at a dismal 2.9 percent. Boss Min-Liang Tan, who enjoys a cult-like status, is also investing heavily in research and marketing. Excluding share-based compensation and other onetime charges, adjusted losses stood at $20.3 million at the end of December – more than triple the level of a year earlier.

Tan's expansion drive is also cause for caution. Razer is preparing to launch a mobile device and has started selling credits – via a digital currency called "zGold" - which players can use to purchase items in online games. Razer will be taking its chance against handset makers like Apple and Samsung, plus the likes of Nintendo and Sony. Meanwhile, the business of virtual currencies is still evolving.

Rival peripherals-maker Logitech trades at just over three times last year's sales, Eikon shows. Applying the same multiple to Razer's core peripherals unit, which accounts for more than three quarters of revenue and almost all of its gross profit, will value that business at $902 million. Finding value for the rest of the company will require the same stretch of imagination as a fantasy role-playing game.

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