28th May 2019
Maintain HOLD for RAZER INC (1337.HK) listed HKSE
Razer is one of the world’s leading, if not, the best companies for gaming devices. They launched Razer gaming laptop back in 2012 and Razor Phone in end 2017.
Target Price: HK$1.60 (Previous target: HK$1.95)
Entry Price: HK$1.20
The top-line push continues; bottom line missed expectations. Last year, Razer’s revenue increased 38% year-on-year (yoy) to USD$712m, mainly due to gaming systems (36% year-on-year) and services segment (approximately 3.7x that of 2017’s). Based on the international financial reporting standards (IFRS), the company’s net loss decreased to USD$97m, from USD$164m net loss a year ago, mainly due to the one-off listing fee of USD$12.8m in 2017 that did not recur in 2018.
Software & Services Crucial To Marginal Increase
Although the gross margin of these two segments of Razer decreased significantly from approximately 98% in 2017 to 48% in 2018, it was still the best amongst all of Razer’s segments. It was reported in January 2019, the number of registered users of Razer software platform had increased 41% year-on-year to 60 million users. The famous exchange between Razer’s Founder Tan Min Liang and Singapore’s Prime Minister, Lee Hsien Loong, pertaining to cashless payments did happen. To date, Razer has accumulated more than 11 million e-wallet users on its Razer Gold Platform, which was an increase by 175% year-on-year from 4 million in December 2017. Additionally, Razer also announced a partnership with NetEase to bring Razer Gold virtual credits to the latter’s best-selling games which includes ‘Rules of Survival’.
Cash Flow Position Poised For Improvement
Razer’s free cash flow was negative USD$55.4m in 2018, compared to negative USD$51.5m in 2017. 2018 free cash flow was affected by the decreasing operating cash flow in 2018. Fides Assets expect the free cash flow position to improve further in 2019 and turn positive in 2020.
Fides Assets Recommendation
Our take is a HOLD position. We have also revised our target price to HK$1.60 from HK$1.95 previously, with the main reason being the higher-than-expected volatility that this stock has shown since its initial public offering (IPO). [Our target price is based on the discounted cash flow (DCF) method.]
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*** This report is neither an offer nor the solicitation of an offer to sell or purchase any investment. Comments are based on information obtained from sources believed to be reliable but Fides Assets makes no representation and accepts no responsibility or liability as to its completeness or accuracy.