This article was originally published in Chinese on Momentum Works’ Wechat account, translated in English here by the team. 

As the stock indices in the US are hitting new highs, benefiting SEA Group, the only listed major tech company in Southeast Asia enormously, other unicorns are accelerating their efforts to go public. 

In recent weeks, Traveloka and Tokopedia have both flirted with the idea of SPAC, while Gojek is seemingly abandoning a merger with Grab to bundle with Tokopedia. Grab, the most valued private tech company in the region is also planning to go for IPO this year, much ahead of its mid-2023 deadline. 

Although there are some skeptical voices in the market, citing that all these IPO talks are basically a war of words, we believe that the players are serious, and timing precious. 

Especially for the case of Grab, they raised more than US$700m from Japan’s largest financial institution, Mitsubishi UFJ Financial Group (MUFG), making its cash reserves better than its major private peers in the region. Although the ride-hailing business took a bit hit because of the pandemic, the food delivery volume has almost tripled – according to the numbers in Momentum Works’s latest Food Delivery Platforms in Southeast Asia report. Grab is also leading the region accounting for half of the GMV in food delivery. 

As we all know, the food delivery business is more valuable than ride-hailing. Grab President Ming Maa also recently announced earlier that the business overall had recovered from the pandemic. 

Cooperation and competition

We had predicted the consolidation of unicorns especially in Indonesia for 2020, and it was finally moving faster at the end of the year. 

First, Tokopedia upped its stake in Indonesia’s largest mobile wallet OVO, which counted Grab as the largest Shareholder. Subsequently, Grab took a stake in Indonesia’s state-owned digital wallet LinkAja. These are in addition to the merger talks between OVO and DANA, another major mobile wallet jointed owned by Ant Group and Emtek.

For a time, the merger of Grab, Gojek, OVO, Tokopedia, and other “gossips” appeared one after another, and there were even talks that Alibaba planned to invest up to $3 billion in Grab. It has become hard for the outside world to fully comprehend the dynamics here. There are a lot of different interests at play – the founding teams, board of directors, other major shareholders, the authorities and regulators, etc. 

Plus the key uncertainties posed by Covid-19, reaching a conclusion might be nuanced.

Grab has a cliff of June 2023 where preferred shareholders can exercise their redemption rights if the company still has not gone listed by then. However, it has a good chance to IPO way before that – thanks to the abundant liquidity and positive investor sentiment now. Airbnb, or probably more relevant, US food delivery platform DoorDash, have recently concluded very positive IPOs. Even outside the US market, Meituan (China’s super app and leading food delivery player) has seen its prices surge in Hong Kong, while India’s OTA Makemytrip has also recovered most ground. 

Not to mention the amazing year SEA had. 

Grab has recently started to issue bonds – for which Moody’s and Standard & Poor’s have rated respectively. Moody’s gave B3, while S&P gave B-. For those who are not familiar with how this works or whether such ratings are good, it is worth noting some details: 

Profit is only a matter of time

Although Moody’s believes that Grab will still be loss-making until early 2023, as the company focuses on controlling costs and improving profitability, the company will become operationally profitable in the first quarter of 2021 (that is excluding regional and other overhead costs). 

Since mid-2019, Grab has drastically reduced the subsidies to customers, drivers, and merchants. Even so, Grab still achieved growth, further demonstrating the relative robustness of its business model. 

In the future, as Grab strikes a balance between achieving revenue growth and controlling costs, profitability is only a matter of time.

Complex corporate structure

Grab’s group structure is relatively complicated. As a major market in Southeast Asia, Grab has many subsidiaries. This is also part of Grab’s localization strategy and the result of its expansion into markets such as Vietnam, the Philippines and Thailand. 

These emerging markets require a certain degree of local ownership, and these partially owned corporate entities account for approximately 30% of Grab’s consolidated reported revenue.

Therefore, on the basis of a complete merger, Grab’s financial indicators also reflect its good credit status, and Grab’s complex group structure may also inhibit the timely flow of funds within the group. As the group expands its business across departments and jurisdictions, the company structure will become more and more complex over time.

This is the only way to navigate the complexities in Southeast Asia. As Grab only has 5-10% of the cash sitting in partially owned entities as of 30 September, it is actually quite disciplined in this regard and performs well.

The impact of COVID-19

Although the pandemic has impacted Grab’s ride-hailing business:

This trend is expected before the pandemic in the region is effectively controlled. There will be no large-scale rebound.

In view of the strong growth of the food delivery business and the lack of market penetration of the business in some Southeast Asian countries, its food delivery business will continue to expand in Southeast Asia. However, as social mobility restrictions ease in 2021, the growth rate may gradually slow down.

At the same time, Grab obtained a digital banking license in Singapore last month. In the future, Grab’s core business and the long-term strategy of the financial sector will become a key part of the development of the entire Grab group. (We predicted in 2020 that Grab Financial Group would become better than Grab ride-hailing). 

Liquidity 

Both rating agencies expect to Grab to be able to comfortably cover its liquidity needs (operating losses and capital expenditure) in the next two years. 

Since 2014, the company has raised nearly $10 billion, including about $1.4 billion in 2020. The agencies expect to Grab to be able to solve the liquidity pressure in 2023 by going IPO or other means. 

Both rating agencies seem to recognize Grab’s localization capabilities as well as a professional discipline. The next important task for the company is to make profits for investors – after all, many investors who invested in Grab after 2016 are still looking forward to higher capital appreciation.

Once the listing is successful, this may also be one of the largest IPOs in Southeast Asia in 2021, and the Sea Group will see a more well-capitalized rival in Southeast Asia’s payment and digital financial services in the future.

Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at hello@mworks.asia.