Razer’s First Week Trading – Institutional Option Exercise on a Razor Edge
The Razer (HKG:1337) IPO is now behind us and the company has had its first week of public trading. As initial excitement took hold, the stock soared from its offering price of HK$3.88 to briefly touch a peak of HK$5.49, representing a very nice 41% premium on the IPO before tailing off and closing the day at HK$4.58.
A rally on day two brought it up but things have again tailed off with the stock trying to find an equilibrium price and being expectedly volatile in the process, closing the week out at HK$4.30, giving IPO investors about 11% in gains from its first week trading. Not quite as high as the initial grey market trading at a 15% premium we saw in the run up to this week, but not a million miles away either.
For Min-Liang Tan, the charismatic CEO and co-founder of the firm, he has seen his holding of 33% in the company propel his personal net worth to a nice $1.5bn or so, up from a Forbes pre-IPO assessment of about $700m.
What Can we Expect from Razer (HKG:1337) in the Second Phase?
It's likely that the company has (for the time being at least) thrown the strongest card it had up its sleeve down on the table with the Razer Phone launch just before the IPO. Now it needs to show it can churn out some hits. Sales numbers for the Razer Phone will be closely watched (if broken out in reports) and although nobody is expecting Apple or Samsung like numbers, how well it does here initially is likely to be a strong indication of whether it has a quick win on its hands or a long, hard slog to make the mobile business meaningfully contribute to its bottom line. Although flagship in many of its specs, the price isn't really reflective of that compared to other flagship mobile devices so it seems likely that Razer is continuing its low margin approach from laptops into the mobile category.
As we all know, the firm is currently loss-making. One gets the sense that they are savagely investing for future growth at the expense of short term profitability. Given that fully 70% of the IPO war chest is going to fund new verticals, acquisitions and R&D, keep an eye out for more activity along the lines of the THX and Nextbit acquisitions, as well as new product lines. It will be interesting to see what the company can come up with next. I'd still personally like to see something along the lines of the previous Project Christine concept but things have been quiet on that front for a while now.
Hong Kong (where Razer chose to list) has become something of a hotbed of tech IPO activity with Tencent's China Literature ebook business also jumping when introduced recently on the back of retail investor demand, meaning the steady stream will likely continue with expected listings from an Alibaba affiliate and a peer to peer lending platform due in Hong Kong soon.
The $79m Question: Institutional Option to be Exercised or Not?
Many will be aware from our previous coverage of the Razer IPO that as the retail portion of the offering was massively oversubscribed, the firm decided to shift some allocation from the institutional side of the deal to the retail side, ultimately resulting in a 50-50 split between the institutions and retail investors who would get stock out of the IPO. What was also publicised at the time although not really delved into with any detail is that the shift in allocation also resulted in the firm giving the institutional side an option on an additional approximately 160m shares in the company.
Well I've done some digging and found the additional detail on the call option. For those unfamiliar with options, the basic scenario is that the institutional investors have an extended period of time to decide if they want to buy some extra shares in the company at the original price. The question of course arises that since the institutional portion was originally allocated an extra 425m shares under the original IPO proposal which was then shifted to the retail portion, why an option was even needed and the firm did not just make the additional shares available to the institutions at the time.
I'm not implying any gamesmanship, but it's clear that if the demand was so great from both the retail and institutional investors, the option wouldn't have been needed, or if it was needed from a regulatory perspective for some reason, it would have been immediately exercised. At time of writing, the option has yet to be taken up (at least publicly). Details below:
- Strike Price: HK$3.88 (price per share the buyer will pay if option exercised)
- Expiry: Wednesday the 6th of December 2017 (date the option can't be used after)
- Contract Size: Variable up to 159,540,000
- Option Style: American (can be exercised at any time up to expiry)
- Option Type: Call (right to buy the underlying asset)
If the option is exercised, both HKEX (at www.hkexnews.hk) and Razer (at www.razerzone.com, presumably under the new, grown up section of the website marked Investor Relations!) will need to publish the fact although the timeline to publicly state it's been exercised isn't specified.
Traded volume on Friday (the 17th of November 2017) came in at a touch over 57m shares, meaning that if the institutions decide that they want to have an additional 160m shares, they'd be clearly moving the market significantly trying to execute a trade of almost three times the size of Friday's daily volume. If the stock stays a reasonable level above the option strike price, you'd expect the option to be exercised to some degree, but there are another two and a half weeks before it expires so it will be interesting to see what the stock does before then and whether it gets exercised or not, as well as if it does get exercised, how much of the option is taken up given that it's not an all or nothing offering.
Ultimately, there are several moving parts in this trade. We'll be following the option story closely and reporting on whether it gets exercised (and how much of it is taken up) or not as soon as we have more information.