Momentum Works & Huxiu: Southeast Asia market trends and growth potential: Part 1 of 2

On 30 November 2022, Jianggan Li, CEO of Momentum Works, was invited by Huxiu, the Chinese media platform, to join their “Chuhai Periscope” event where he shared his thoughts on “Market trends in Southeast Asia and growth potential”.

“Chuhai Periscope” (出海潜望镜) by Huxiu is a series of sharings by industry practitioners on their strategies and insights, especially for Chinese tech companies going overseas. 

Jianggan shared his perspectives on the Southeast Asian market environment and future prospects with investors and entrepreneurs at the event, which we have divided into two parts. 

In this first part, we have outlined the key points he shared on the macro trends of Southeast Asia, investment trends in the region and a deep dive into the financial services industry.

1. Macro trends in Southeast Asia

There are six major countries in Southeast Asia, similar to Latin America (read our Southeast Asia and Latin America report here). Both these regions have differences, especially in history and customs. This results in varying local factors, which should be considered when managing a company, its organizational culture, and in securing and implementing projects. 

We have mentioned before that when looking at opportunities overseas, we like to look at the global population density map, which always tells a lot – total population, median age (demographic dividend), urbanization, and internet penetration. 

It also conveys banks and bank account penetration rates, which are macro-level measures of market attractiveness for the fintech industry.

And all these factors differ between the various countries in Southeast Asia.

An in-depth analysis of the demographics in Southeast Asia 

Philippines, Indonesia and Malaysia have a very young demographic (some friends believe that Malaysia’s young population is one of the reasons why its GDP per capita has not risen much in 10 years). Thailand’s median population is similar to China, faced with an ageing population. When interpreting these characteristics, it should be analyzed based on specific business models. 

We have selected a few interesting dimensions to see the commonalities between the countries in Southeast Asia. For instance, Singapore, Malaysia, and the Philippines are more influenced by the West, while Indonesia, Thailand, and Vietnam retained local characteristics and use local languages.

The number of credit cards per capita is a useful index for fintech – Singapore has a higher penetration rate followed by Malaysia and Thailand.

Despite the differences, Southeast Asia is united by its love for bubble tea. Earlier this year, we published a report on “Bubble Tea in Southeast Asia”. In the report, we mentioned that Mixue crossed 1,000 stores in August and September this year. This is proof that the consumer market in each country, especially offline consumption, is recovering quite well. 

2. Investment trends

From 2016 to 2017, the Southeast Asian investment scene began to see a big boost (Shopee’s parent company, SEA Group, went public in 2017). Around 2018 to 2019, the whole market gained more attention across the globe. Several big companies, including Grab and Gojek, absorbed a lot of money and facilitated infrastructure construction at that time. 

This year, the general environment could have affected the market performance. However, in the long run, overseas investors’ awareness and interest in Southeast Asia continue to grow.

Both funding sizes and rounds are increasing. These numbers are tiny compared to China or the U.S. but have been a big improvement over the long term.

Investors are relatively diverse – of course, local PE/VC/family offices still dominate at this stage. Global investor participation in Southeast Asia has been higher than in Latin America over the past few years.

The last decade was exceptional for the unique interest rate environment. When the U.S. dot-com bubble burst in 2000, everyone said that the previous decade’s low-interest rate environment led to many dot-com companies’ growth. However, interest rates in the last decade have been much lower than that. 

The recent rise in interest rates will create more uncertainty – many investors and entrepreneurs in Southeast Asia are yet to see a truly high-interest rate environment.

Southeast Asian internet companies have generally underperformed this year, affecting the market, investors, and the specific segment. Several companies that were set to go public last year have postponed their IPO plans.

The highest investment growth has been in financial services, followed by retail (the calculation here does not include secondary market financing). Multi-vertical or super apps are actually uncommon in other regions. However, they are a key focus for major companies like Grab and Gojek in Southeast Asia.

3. Financial services

In 2021, the financial services sector accounted for 35% of all investments in Southeast Asia – a very high share, and this has been increasing. Most of the countries in Southeast Asia experienced the financial crisis in 1997, but the development path of each country’s financial system is very different. For instance, we feel that Thailand’s regulation is more advanced than Singapore’s. The whole financial system is more organized, resulting in a challenging environment for many licensed financial businesses.

After UPI was built in India, some Southeast Asian and Latin American countries started to do their own real-time digital payment clearing systems. We went to Thailand last week and saw that PromptPay has a pretty good penetration rate among small and medium-sized merchants. It is worth watching what changes the government-led system will bring to the payment environment.

Digital banks are very active lately, especially in Indonesia (e.g., Shopee’s parent company recently bought a bank in Indonesia). Many fintech companies are also acquiring stakes in banks for several reasons, including the need to get some low-cost funding and to hedge against the uncertainty of some newly licensed financial services.

The picture below has Thailand’s Siam Commercial Bank and Kasikornbank, both of which have extreme online and offline penetration. It’s pretty tricky for digital banks to disrupt them.

Shopee’s parent company, SEA Group, finally made headlines about their consumer lending business in its Q3 2022 earnings report, which is doing quite well, and they have gotten many licenses in the process. As we mentioned in ‘our thoughts on Sea group’s 2022 Q3 results’, financial services are a good growth point and can hedge their investments in e-commerce.

In the second part, we analyze the e-commerce consumer industry, the opportunities and challenges, and answer some of the questions from the audience.