Alibaba's Singaporean company quietly seeks backdoor listing

In 2023, Synagistics (referred to as Synagie below) was named the fastest-growing company in Singapore by "The Straits Times". Synagie is a leading digital commerce solutions platform in Southeast Asia, founded in Singapore in 2014. In simple terms, its business involves providing comprehensive operational services such as logistics warehousing, product advertising, keyword optimization, and pricing strategies to brands like Nike, Estée Lauder, and lululemon.

Alibaba is a controlling shareholder of Synagie and privatized it in November 2020. On July 1st, Hong Kong Huitong Acquisition-Z (7841.HK) updated its application documents on the Hong Kong Stock Exchange, planning to acquire Synagie through a De-SPAC process. After the acquisition is completed, Synagie will be listed in Hong Kong. Following the equity transfer, Alibaba's stake will decrease from 47.22% to 27.79%, but it will still remain the controlling shareholder.

A Singaporean company first privatized by a Chinese enterprise and now going public on the Hong Kong stock market, Alibaba, as the controlling shareholder, clearly has its own considerations.

I. Unsexy Business Model

With the Southeast Asian e-commerce economy becoming another battleground for domestic internet companies, platforms sponsored by Tencent such as Shopee, those sponsored by Alibaba like Lazada, and TikTok Shop under ByteDance have seen explosive growth. As a partner of these platforms, Synagie has also experienced rapid development.

Based on the 2023 revenue, Synagie ranks second among all digital commerce solutions platforms in Southeast Asia. It currently has over 600 brand partners, with more than half being international big brands. These internationally renowned brands often struggle to adapt quickly to local customs when entering emerging markets. To quickly scale up, they need a local like Synagie to provide end-to-end operational services from content creation to supply chain management.

These operational companies typically engage in two businesses: D2B business, charging service fees to brand customers, and D2C business, purchasing products from brand customers and selling them to consumers through e-commerce channels.

This business model may not sound sexy at first glance. Synagie, which sells products sourced from brand owners rather than directly from manufacturers, is an intermediary without cost advantages. Financial data also cruelly points out that the company has fallen into a situation of increasing revenue without increasing profits.

As of the fiscal years 2021, 2022, and 2023, Synagie's total revenue was HKD 490 million, HKD 650 million, and HKD 730 million respectively. In the fiscal years 2022 and 2023, its revenue increased by 31% and 12% respectively.

However, the adjusted EBITDA for the same period was a loss of HKD 37.89 million, HKD 40.26 million, and HKD 50.13 million respectively, with the loss magnitude even greater than the revenue growth rate. Even the gross profit margin decreased from 27.6% in 2021 to 25.1% in 2023.

The reason for Synagie's increase in revenue but not in profit is simple: the gross profit margin of the D2C business is only 13.8%, but it accounts for 80% of the total revenue. On the other hand, the D2B gross profit margin is over 60%, but its share is only 20%.

Despite the continuous growth of GMV on major e-commerce platforms in Southeast Asia, Synagie's D2C revenue continues to increase. However, due to high procurement costs, the larger the revenue scale, the more severe the drag on the company's total gross profit.

More crucially, Synagie may even face further losses and find it difficult to break free from the curse of increasing revenue without increasing profit in the short term.

II. Unavoidable Predicament

Synagie has established partnerships with almost all mainstream digital commerce channels in Southeast Asia, including Lazada. Since becoming its strategic regional partner in 2019, Lazada has been Synagie's most important sales channel.

The cooperation between the two naturally involves the matchmaking of the same controlling shareholder, Alibaba. After being acquired in 2016, Lazada has been a crucial part of Alibaba's overseas layout. Initially, the positioning of the Lazada platform was similar to "Tmall" and mainly targeted the middle to high-end consumer groups in Southeast Asia.

However, after Lazada lowered the threshold for merchants and introduced a fully managed model, the platform's positioning began to subtly change.

In March 2021, Lazada held a merchant conference in Yiwu for the first time, announcing services such as cross-border parcel post and low-threshold free collection. In April 2023, Lazada introduced the fully managed model. Under this model, merchants become pure suppliers who do not need to handle subsequent processes such as operations and sales. This model has significant advantages in increasing order volume and attracting new customers.

According to Alibaba's 2024 financial report, the international retail business revenue of the International Digital Commerce Group (AIDC), which includes the Lazada business, increased by 87% year-on-year to RMB 81.65 billion, becoming one of the fastest-growing business segments within the Alibaba Group In June of this year, the total visit volume (desktop + mobile) of various e-commerce platforms in Southeast Asia showed that Lazada's total visit volume increased by 10.4% to 138.1 million, achieving a growth rate higher than its peers.

The shift to this new fully managed model is Alibaba's move to enable Lazada to compete more fiercely with Shopee and TikTok Shop. By promoting fully managed services and attracting a large number of white-label suppliers with more obvious price advantages, the platform's product prices become more attractive. However, it is also evident that the transformed Lazada has changed from its previous brand-oriented mid-to-high-end positioning.

This change is currently beneficial for Lazada, but not so much for Synagie.

As brands in the Southeast Asian e-commerce market are continuously squeezed by low prices, and when Lazada, the most important sales channel traditionally positioned in the mid-to-high-end segment, starts to implement lower prices, downstream brand operators like Synagie will continue to struggle with increasing revenue without increasing profitability.

For Lazada, having Synagie as a source of supply allows for a diversified SKU even if Lululemon does not open an online store on its own platform. For Synagie, although continuous sales to channels like Lazada have reduced inventory and increased cash flow to some extent, the D2C business, due to high incoming costs, significantly squeezes the company's profits, making it increasingly difficult to operate as the business grows.

Furthermore, Synagie also provides D2B services for merchants on the Lazada platform. However, after Lazada lowered the threshold for merchant recruitment, Synagie's core customer base may increasingly consist of more small and medium-sized enterprises. These SMEs have lower willingness to pay compared to high-end brand customers and are more susceptible to the impact of sticky inflation rates and high interest rates, which can directly affect Synagie's revenue in the D2B business model.

Shopify, which has always focused on small and medium-sized enterprises as its core customer base, has had poor profit performance. In order to meet long-awaited profit expectations, Shopify is now actively seeking partnerships with brand manufacturers, a development direction that is completely opposite to Synagie's.

However, if Synagie's current development direction can ensure that Lazada continues to expand sustainably or maintain market share and drive Synagie's market share growth, then it is meaningful. Because after reaching a certain market share, Synagie can leverage its scale to dictate terms to customers, thereby raising prices to break the curse of increasing revenue without increasing profitability However, the biggest risk now is that Lazada is continuously losing market share.

In 2020, Lazada's market share dropped from 49% in the previous year to 38%, while Shopee's market share increased to 42%. By 2022, Lazada's share shrunk to 20.2%. According to a forecast by a Singaporean venture capital firm, Lazada is expected to further decline to 17.5% in 2023.

These data clearly indicate that Lazada is in a weak competitive position. If Lazada itself cannot retain its share, it may not be wise for Synagie, which relies on it as the largest sales channel, to continue in that direction.

TikTok Shop and Shopee are also partners of Synagie, but possibly due to being controlled by Alibaba, Synagie may not be able to collaborate deeply with e-commerce platforms other than Lazada. Therefore, this company, which benefits from the development of the Southeast Asian digital economy and is the fastest-growing in Singapore, may be constrained by Alibaba in the future.

III. Conclusion

By 2024, the competition among major platforms in Southeast Asia will undoubtedly intensify.

The only platform achieving annual profitability, Shopee, will further strengthen its position and seize market share. TikTok Shop has set a GMV target of 50 billion US dollars for 2024, more than double the previous 20 billion US dollars.

While one's own failure is certainly frightening, the success of peers is even more worrying, and Alibaba will not back down. At the end of May this year, Alibaba once again invested 230 million US dollars in Lazada, bringing the total investment in Lazada to about 7.7 billion US dollars.

The emphasis on the Southeast Asian market seems to be one of the reasons driving Synagie's backdoor listing in Hong Kong. Listings through De-SPAC acquisitions are often easier to achieve than conventional IPOs. Synagie's PIPE round of investment has been completed, injecting over 600 million Hong Kong dollars into the company.

Currently, Synagie is valued at 3.5 billion Hong Kong dollars, with a PS ratio of 4.6 times. In 2022, Lazada's GMV was 2 billion US dollars, and as of 2023, Synagie's procurement from Lazada was less than 4 million US dollars; in addition, there are opportunities for small-scale cooperation with TikTok Shop and Shopee, and considering the Southeast Asia's digital economy scale in the six major countries is expected to grow at a compound annual growth rate of 15.6% in the next 5 years, Synagie's current valuation level seems reasonable However, valuation alone clearly cannot be an investment reason. Synagie's business has a positive impact on Lazada's fully managed model, but the fully managed model is too costly. Alibaba's AIDC recorded an adjusted EBITA loss of 4.085 billion yuan in the first quarter, an 88% increase year-on-year, with excessive investment in the corresponding Choice service being the main reason for the loss.

For Alibaba, whose market value has dropped by nearly 80% from its peak, there are many places where money is needed. Every penny needs to be spent wisely now, and if Synagie can be listed to raise funds, it is best not to use their own money, which is probably Alibaba's consideration. However, even with Alibaba leading the investment, it cannot hide the fact that Synagie's business model is not attractive enough and lacks high investment value