Investors should scrutinise Razer's B2B fintech bet

Sep 01, 2021

HAVING failed on the consumer e-wallet front, can Razer now succeed in the B2B fintech space? This is one question investors should be asking, after the company announced it is calling time on Razer Pay while doubling down on B2B digital payment processing.

Meng Liu, a digital business strategy analyst at consultancy Forrester, is among those who don't like Razer's chances.

Pure payments specialists, such as Adyen and Stripe, have "more expertise, better product features and, more importantly, much stronger global payment networks" for cross-border transactions, Mr Liu said. This places them at an advantage over Razer, whose core business is not payments but hardware.

It was the hardware business that last week allowed Razer to report record revenue of US$752 million for its half-year ended June, up 68 per cent.

Net profit was US$31.3 million, reversing the year-ago US$17.7 million loss.

In fact, the hardware business has put Razer in a relatively comfortable position. It had a US$517 million cash pile and no debt as of end-June. The company does have current trade and other payables of US$648.7 million, versus current trade receivables of US$240.9 million. But clearly, it has enough cash to invest in growth. How the company deploys its cash war chest will determine its trajectory ahead.

After Razer's widely-publicised e-wallet efforts did not pan out, are B2B payments the next best thing?

The build-up

Razer's e-wallet ambitions drew attention back in 2017, when Prime Minister Lee Hsien Loong tweeted during his National Day Rally speech that Singapore had too many e-payment schemes.

Two days later, Razer chief Tan Min-Liang tweeted back that he could get a unified system rolled out nationwide in 18 months. The exchange went viral.

In the next few years, Razer would make several moves signalling its e-wallet ambitions. In 2018, it acquired the 65.1 per cent stake it didn't already own in MOL Global, a Malaysian gaming credits and e-payments company, for US$61 million. MOL was backed by tycoon Vincent Tan, of the conglomerate Berjaya Corp.

The acquisition was notable because MOL had delisted from the Nasdaq less than two years after its 2014 IPO, after it failed to meet the minimum bid price of US$1 per American Depository Share.

MOL had priced its IPO shares at US$12.50 apiece, but its share price when it announced its delisting was just US$0.30 - giving it a market cap of about US$20 million.

But Razer's buyout of MOL valued the Malaysian company at about US$100 million.

Razer would go on to launch its Razer Pay e-wallet in Malaysia off the back of MOL's One2Pay e-wallet base.

In May 2018, Razer also signed a memorandum of understanding with Singtel to link their e-payment systems in what was dubbed a "Star Alliance of e-wallets".

And in 2019, Razer Pay launched in Singapore under beta mode. Subsequently, in October 2020, Razer drew much publicity over its prepaid Visa card that lit up upon payment.

Anticlimax?

The lights have since gone off abruptly on Razer's e-wallet build-up. Razer Pay will cease from end-September, and the Razer Card will not be available for use after Aug 31.

Razer chief strategy officer Lee Li Meng cited the high cash burn required for e-wallets as the reason.

Consumers are unlikely to miss it. Online reviewers of Razer Pay have voiced frustrations about bugs in the app, such as instances of double purchases.

Investors are unlikely to miss the shutdown either. In its latest earnings call, Razer's Mr Lee emphasised that the end of Razer Pay has minimal financial impact.

He also said that the B2B payments business is growing. Razer Fintech processed US$3.2 billion in total payment volume (TPV) for the half-year ended June, up 79.5 per cent year on year. This was primarily driven by Razer Merchant Services, its B2B payments processing unit.

Mr Tan told investors that Razer will now "double down" on B2B fintech.

"We want to scale the TPV aggressively with an expanded merchant base. We want to enhance the services that we can provide to our customers, and of course explore M&A and investments," Mr Tan said.

Razer has the funds to do this. But whether or not investments into B2B fintech will generate value for investors is another matter altogether.

Shares of Razer, listed in Hong Kong, closed at HK$1.98 on Tuesday. They are down 16.8 per cent this year, but still trade at a decent 38.5 times historical earnings and 36.4 times forward earnings - according to Bloomberg data.

To keep those valuations up, and improve them further, Razer needs to do better than invest its funds in share buybacks, which it has done plenty of since listing.

During Razer's H1 earnings call, one investor had asked if Razer is "going into loss again with all the reinvestment plans".

In response, management rightly said it wants to use its profits to seize opportunities and that investors should look at other metrics to measure the company's growth.

Indeed, the success of other tech giants such as Sea has shown that profitability is not the only yardstick for value creation - especially in a fast-growing company operating in a fast-growing industry. But when investments are made outside of a company's core field of experience and strength, investors would be wise to keep watch.