Grab’s $40bn Nasdaq listing is a key test for Asian tech

Grab’s $40bn Nasdaq listing is a key test for Asian tech

by Lily White
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A BIG CHANGE is under way in Asia’s technology industry. As investors avert their eyes from the government-imposed nightmare engulfing China’s internet champions, a cohort of South-East Asian counterparts is booming. Tot up the value ascribed by the market to just three listed and soon-to-be listed consumer-app giants with headquarters in Singapore and Jakarta, and the figure approaches a quarter of a trillion dollars. Add to that the $70bn-or-so combined worth of a whole field of new unicorns—privately-held startups worth $1bn or more—and South-East Asia is fulfilling hopes, long-held, that a big emerging-market consumer-tech sector would rise outside China.

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On December 2nd, as The Economist went to press, Singapore-based Grab, a consumer-technology firm, was due to list on America’s Nasdaq through a merger with a special purpose acquisition company (SPAC). The record-breaking SPAC transaction is expected to value Grab at $40bn. Another giant, GoTo Group, formed from the merger of Indonesia’s Gojek, a ride-hailing firm, with Tokopedia, an e-commerce company, will follow in the first half of 2022. Sea, largest of the three behemoths, and parent to regional e-commerce pioneer Shopee, was the earliest to list, in 2017. Its market value has risen seven-fold since the end of 2019, to $145bn, making it the largest listed firm in South-East Asia.

The three companies are each some combination drawn from ride-hailing and food delivery, financial services and mobile gaming. The precise blend varies from firm to firm, but the same idea runs through the core of each. It is to bring hundreds of millions of consumers together into a network of services. These may be low-margin, but the transaction volumes in question are vast. The model is often referred to as a super-app or app-cluster strategy. The firms are already giants at home. With a fleet of over 2m drivers, GoTo had transactions of $22bn last year, equivalent to 2% of Indonesia’s GDP.

The prospects for South-East Asian consumer tech have been alternately hyped up and talked down over the past decade. Optimists, now in the ascendant, point to a market of 650m people poised for rapid economic growth. Mark Goodridge, an equity analyst at Morgan Stanley, a bank, notes that online retail made up 6% of retail sales in the countries of the Association of Southeast Asian Nations (ASEAN) in 2019, compared with around 15% in America and about 30% in China.

But sceptics note the region’s fragmentation. South-East Asia’s markets are anything but a contiguous economic bloc. Countries have widely differing income levels and infrastructure capacity. That no doubt contributes to the huge losses that are being racked up. None of the big companies is reliably profitable. In the third quarter of the year, Sea’s losses widened to $571m, a year-on-year increase of a third. The two largest companies, Grab and Sea, have made a combined $17bn of net losses since the beginning of 2018.

The sea of red ink does not alarm investors. They wanted consolidation to make the market more investable, and, by and large, have got it. Mergers and acquisition activity in tech in South-East Asia exploded this year. By late November deal volume had already reached $61bn, equivalent to all activity for the past decade. Those transactions helped create the super-app strategy embraced by consumers. “What customers want is deeper, faster digital solutions, which are not done in a fragmented way. They don’t want six wallets, they don’t want five e-commerce options and three food-delivery companies,” explains Patrick Cao, president of GoTo Group.

The triumph of GoTo Group, Grab and Sea came at the expense of powerful American and Chinese rivals. Ali baba still has a local presence through e-commerce firm Lazada, but, having led only two years ago, the firm has slipped into the second tier of competitors. Since Uber beat a retreat in 2018 (its operations were bought by Grab), no American company has built a significant presence in e-commerce or in ride-hailing. As local firms see it, that is ample proof were it needed that a focus on localisation has borne fruit.

Act local

Consolidation and scale should in theory lead to profits. The firms can bundle services together, and different lines of business can complement one another. Ming Maa, president of Grab, notes that in the second quarter of the year, 66% of the two-wheeled drivers in Indonesia, Vietnam and Thailand were working on both delivery and transport, up from 58% in the same period in 2020. That lowers costs.

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How soon will profits arrive? It is promising that Grab’s take rate—revenue as a proportion of the value of rides taken or deliveries made—has risen from 9.5% in 2018 for mobility and 5.6% for deliveries in 2018 to 21.7% and 17.1% respectively in the third quarter of 2021. Grab’s preferred profit measure—adjusted earnings before interest, tax and depreciation relative to gross bookings—is chosen to flatter, but at least the 12% margin it shows for mobility is more than twice as high as Uber’s 5.5%. The firm’s argument that lack of profits is a choice linked to expansion is not wholly unconvincing. But the three firms’ ambitions to add financial services to their super apps will mean a diversion from the path to profit. Grab’s financial services goals will drag on profitability, as Moody’s, a credit-rating agency, recently noted.

South-East Asia’s tech boom is by no means restricted to large companies. There are 35 unicorns in ASEAN countries, according to Credit Suisse, a bank. Of those, 19 reached unicorn status this year. True, America and China already have hundreds of tech firms valued in the billions of dollars. But that is a recent development, notes Nick Nash of Asia Partners, an investment firm focused on the sector. The two countries only had ten such unicorns as recently as 2013 and 2014 respectively, before the numbers began to surge.

Far from the stereotype of cash-bleeding startups, some South-East Asian firms have been disciplined in fundraising. Mr Nash uses the example of SCI E-commerce, which specialises in cross-border retail and helps international brands access South-East and East Asia. It has become one of the region’s fastest-growing firms, having raised less than $70m. Its revenues have surged to over $100m in 2020.

And although the tech firms that have emerged in South-East Asia have done so only from a few sectors—such as ride-hailing, consumer e-commerce, food delivery and online gaming—the mix is broadening. Listings by firms as varied as Singapore’s Doctor Anywhere, which offers video consultations with doctors, and Malaysia’s Carsome, an online marketplace for used-car sales, are in the offing.

For now, most attention is focused on South-East Asia’s leading trio—Sea, GoTo and Grab. First among equals is Sea, whose recent expansion outside its home region sets it apart. Sea’s highly-profitable gaming arm, Garena, is responsible for “Free Fire”, a popular mobile game which gives the firm a footprint globally that the other two lack. Its move abroad in e-commerce is no small beer. According to Apptopia, a Boston-based research company, Shopee is now Latin America’s most popular e-commerce app, coming from a standing start at the end of 2019. It launched in Poland and Spain this autumn, and has quietly set up shop in India, too.

South-East Asia’s tech champions follow a model flourishing elsewhere. As well as MercadoLibre in Latin America, South Korea has both Kakao and Coupang, with market capitalisations of around $50bn apiece. Given the turmoil in China’s tech sector, such firms are popular and likely to become more so. Take one leading fund, the JPMorgan Pacific Technology Fund, with $1.5bn of assets under management. At the end of September it counted no Chinese firms among its top four holdings. Its largest single exposure, at 7%, is to the firm called Sea that is coming to epitomise Asian tech’s sea change.

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This article appeared in the Business section of the print edition under the headline “Hot tropics”

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