Tuya Inc. ("Tuya" or the "Company") recently announced that 65 Equity Partners, an independently managed wholly-owned investment platform of Temasek has acquired approximately 13% of Tuya's total issued shares from New Enterprise Associates ("NEA"), an investor in the Company for 10 years.
NEA, founded in 1977 and headquartered in the United States, is a global venture capital firm with assets under management ("AUM") over US$25 billion as of June 30, 2024, primarily focused on the technology and healthcare sectors. In the nearly 50 years since its founding, NEA has achieved over 700 exits, including more than 280 portfolio company IPOs and more than 465 mergers and acquisitions.
Following the transfer of around 13% of Tuya’s shares, NEA still retains a considerable amount of equity in the Company. Carmen Chang, who has invested in well-known projects such as ByteDance and Tuya, stated in the announcement that NEA has been a key stakeholder since Tuya's inception in 2014 and is pleased to remain a significant shareholder of the Company.65 Equity Partners was founded in 2021, with Tan Chong Lee, the former president of Temasek, serving as its CEO. Temasek has a long history of investing in many exceptional companies. In the fiscal year ending March 31, 2024, Temasek's global investment portfolio net value reached S$389 billion, and its investment exposure in the Chinese market has been decreasing in recent years. According to Temasek's 2024 annual report, for the fiscal year ending March 31, 2024, the proportion of Chinese assets in Temasek's investment portfolio dropped to 19%, the first time in nearly a decade that it was lower than the American market and far below the 27% in the Singapore market.
The transaction amount of the transfer accounts for a certain proportion of the incremental investment in Temasek's portfolio. Regarding this investment, Tan Chong Lee, CEO of 65 Equity Partners, stated that the investment aligns with 65 Equity Partners' mandate of supporting high-quality companies seeking a listing on the Singapore Exchange ("SGX").
Is Temasek choosing Tuya solely because of its highly globalized nature that can help mitigate regional risks?
From Tuya’s third-quarter financial report, we can have a glimpse of its development blueprint.
1. Financial Data: Continued Achievements, Steady Growth
Tuya recently released its third-quarter financial results. Founder and CEO Mr. Xueji (Jerry) Wang used "practical " to summarize the latest quarter's performance. By emphasizing practical strategies and focusing on execution, Tuya also demonstrated solid financial results for this quarter.
Tuya achieved a total revenue of US$81.6 million in the third quarter of 2024, a year-on-year increase of 33.6%, exceeding the market consensus estimate by over 8% (Bloomberg's market consensus estimate for Q3 revenue before the announcement was US$75.5 million). The revenue of IoT Platform-as-a-Service (PaaS) in the third quarter was US$57.9 million, an increase of 26.4% compared to US$45.8 million in the same period last year; Software-as-a-Service (SaaS) and other revenue was US$9.9 million, an increase of 16.7% from US$8.5 million in the same period last year; The revenue from smart solution was US$13.8 million, an increase of approximately 102.9% compared to the same period last year's US$6.8 million.
The sustainable development of Tuya relies on steady customer growth and scenario expansion. In Q3, the customer base increased year-on-year, and more leading companies in various industries around the world joined the Tuya ecosystem. The dollar-based net expansion rate ("DBNER") of IoT PaaS reached 124%, maintaining around 120% for three consecutive quarters, indicating the Company’s solid performance in retaining existing customers and generating revenue growth from them.
At the same time, Tuya maintained an improved operating leverage, and specific data can verify that after achieving non-GAAP quarterly operating profit for the first time in Q2, the Company continued to maintain this profit trend in Q3, achieving a non-GAAP net profit of US$20.1 million; The non-GAAP net margin increased by 8.2 percentage points year-on-year to 24.7%, successfully achieving the business target.
In respect of cash flow, the net cash generated from operating activities in Q3 was US$23.9 million, with a total net cash of over US$1 billion, demonstrating the Company's unique self-sustaining cash generation capabilities.
Note: The slight increase in debt ratio at the end of September is due to the provision of a dividend of US$33 million announced by Tuya in September 2024. After excluding this dividend provision, its asset liability ratio is still only around 8%, which is a very strong level.
Tuya saw its shareholder returns begin to increase thanks to steady growth in revenue and profitability, high customer stickiness, ever-increasing customer base, high net cash balance, and sustained positive cash flow contribution from main businesses, which may also be one of the factors that attracted Temasek.
2. Win-Win Results in Global Layout
As a long-term investor with value and risk return at its core, Temasek invests in the potential for sustainable growth and future development, rather than just short-term benefits.
Temasek's decision to invest in Tuya by directly purchasing shares from NEA demonstrates its inclination towards long-term ownership.
In addition, after the transaction is completed, Temasek will become the second largest shareholder of Tuya. This not only reflects Temasek's confidence in the Company's long-term stable development, but also its willingness to grow and share risks with the Company.
Mr. Xueji (Jerry) Wang, Founder and Chief Executive Officer of Tuya, stated that Temasek's investment is highly aligned with the Company’s international expansion strategy.
As a top global investment institution, Temasek has extensive influence in the global investment field. 65 Equity Partners, a wholly-owned investment platform under its umbrella, is also a global investment firm focused on identifying market leaders in the consumer goods, industrial, business services, healthcare, and technology industries worldwide, with a particular emphasis on Southeast Asia, Europe, and the United States markets. Tuya also boasts a global perspective with the international market as its main battlefield, and it has rapidly expanded its global footprint in recent years in Southeast Asian, European, and Middle Eastern markets.
From the perspective of business collaboration, Temasek, as a strong and resource-rich investor, holds the ability to bring new development opportunities for Tuya. 65 Equity Partners aims to collaborate with founders through leveraging their international influence to jointly create sustainable long-term value as a supportive and value-added partner. Tuya is expected to leverage Temasek's global network and 65 Equity Partners' industrial resources to accelerate its expansion into international markets.
From an investment perspective, Temasek's support and endorsement can help Tuya attract more attention from global institutional investors. Temasek is also actively supporting high-quality companies to go public on the SGX. If Tuya pursues a listing on the SGX, it is expected to further enhance the Company’s liquidity and stimulate market vitality.
3. Temasek Eyes More on Long-term Trends & Development Potential
Temasek's investment strategy is to capture structural trends and make proactive investments. Faced with global uncertainty, Temasek focuses on four key structural trends: digitalization, sustainable living, future of consumption, and longer lifespans. The core businesses of Tuya undoubtedly conforms to the above trends.
After ten years of efforts, Tuya has become one of the world's leading third-party smart soluion cloud platform services providers. At present, the Company's customers have covered more than 200 countries and regions, and the number of registered developers on its developer platform has exceeded 1.26 million. From smart homes to smart cities, from consumer electronics to industrial manufacturing and energy management, Tuya has successfully attracted numerous leading companies across diverse industries globally.
Currently, there is still much room for improvement in the penetration rate of smart devices and the like. Despite the tens of billions of consumer electronic devices in a broad sense, only a very small number of them are intelligent devices newly brought to the market, leaving about 95% that are still non-intelligent counterparts. The trend of intelligence is irreversible and creates great market potential.
Furthermore, Tuya is empowering global customers with AI tools, including helping them launch Generative AI ("GenAI") applications and releasing a newly upgraded AI Agent development platform by combining GenAI technology with developer platforms. The unique advantage of Tuya lies in its profound accumulation in application scenarios and customer cases, which enables the Company to identify and implement the application of AI technology in practical scenarios more effectively, and make commercialization. The management also revealed that the Company is trying various cases to explore applications with commercial capabilities and the potential to scale up.
Tuya is ready to seize future opportunities, a core signal conveyed through the heavyweight participation of powerful shareholders such as Temasek, and the steady progress in the Company’s business and operation, as well as the continuous improvement in business structure and ever-increasing investment in innovation. Therefore, the Company is undoubtedly an attractive value proposition in the fields of digital economy and artificial intelligence.
It is like winning the match point to invest in a company featuring stable growth, excellent financial structure, and active dividend distribution. Only one trigger point or hit point is required.
Will Temasek's participation serve as a trigger for Tuya’s value reassessment? Let's wait and see.
