Not only have Southeast Asia tech champions Grab and Sea remained in the red in 4Q2021, the losses for both companies have widened. However, while analysts have reduced their target prices for both stocks, they generally remain confident that the “superapp” status of both companies hold them in good stead over the longer term.
On March 3, Grab posted a net loss of US$1.1 billion ($1.5 billion), 73% higher than the previous corresponding quarter, while Sea on March 1 reported a net loss of US$616.3 million, 17.5% higher than the net loss of US$524.6 million posted in 4QFY2020.
Quite unexpectedly for what was supposed to be a fast-growing company, Grab’s revenue in 4Q2021 was down 44% y-o-y to US$122 million, as it “pre-emptively” invested to attract more drivers to support the strong recovery in mobility demand. Consumer incentives for mobility and deliveries also increased as Grab invested in its category share and monthly transacting user growth.
Segmentally, Grab’s delivery revenue declined 98% y-o-y in 4Q2021 to US$1 million as it invested in incentives to maintain its category leadership and to grow adoption of new services. Mobility revenue was US$105 million, down 27% y-o-y while Pre-InterCo total payments volume (TPV) increased by 29% y-o-y to US$3.4 billion. Pre-InterCo refers to data including earnings and other amounts from transactions between entities within the group that are eliminated upon consolidation.
Its adjusted ebitda of US$305 million fell by 199% y-o-y. The adjusted ebitda margins also dropped to 2.8% from 6.8% recorded in Q4FY2020. This is attributed to the increased investments in partner and consumer incentives as well as strategic investments in areas such as tech and financial services.
Hefty one-off listing expenses of some US$328 million also took a big bite off the bottom line.
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Meanwhile, Sea’s revenue in 4QFY2021 increased 105.7% y-o-y to US3.2 billion, with broad-based growth seen. Its digital entertainment segment saw revenue improve by 104.1% y-o-y to US$1.4 billion in 4QFY2021 due to recognition of accumulated deferred revenue from previous quarters. Sea’s e-commerce segment saw revenue grow 89.4% y-o-y to US$1.6 billion, while its digital financial services segment saw revenue surge 711.1% y-o-y, albeit from a small base, to US$197.5 million, primarily driven by the growing adoption of products and services across its businesses in the two sectors.
Sea’s total adjusted ebitda in 4QFY2021 plunged 1,110% y-o-y to a loss of US$492.1 million from US$48.7 billion recorded in the previous corresponding quarter.
Impact on share price
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Both companies’ shares prices, already trending down for one reason or another, tumbled even more after announcing their 4Q2021 results. Grab’s shares fell as much as 37% overnight, while Sea’s shares declined 7%. On March 8, shares in Grab and Sea closed at US$3.24 and US$91.53 respectively, down 54.5% and 59% year to date, and down 75.1% and 74.4% from their respective all-time highs of US$13.06 (post-spac merger debut price) and US$357.78 respectively.
Analysts at Citi Research describe Grab’s sell-off as unwarranted, as the broad market weakness amid geopolitical instability might have prompted some investors to cut losses on their positions. “With US$6.8 billion in net cash and its effective superapp strategy, we view the sell-off as an enhanced buying opportunity and remain confident of Grab’s ability to execute and facilitate on-demand services,” write the Citi analysts, who have a “buy” call and price target of US$8.20.
Meanwhile, Tellimer’s Nirgunan Tiruchelvam says the fundamental case for Grab remains solid — it has huge prospects in all three of its segments, as the pandemic has changed consumer behaviour in Asean and drove growth in digital adoption, accentuating Grab as the superapp for Asean, along the lines of Alibaba in China.
Nirgunan has reduced his price target on Grab from US$12.90 to US$6.10 but has kept his “buy” call. “Grab’s superapp status has not been fully valued by the market, in our view. Its adjusted net revenue as a percentage of gross merchandise value is 12%, while its take rate has risen threefold since 2018 — this is better than Alibaba,” he says.
On the other hand, Sea’s share price may face overhang in the near term, caused by factors such as significant shareholder Tencent Holdings’ recent cutting of its stake. Nevertheless, Maybank Research analyst Lai Gene Lih says the brokerage continues to view Sea as a champion of economic digitisation in Southeast Asia.
Similarly, CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan say the weaker gaming guidance for FY2022 is likely to cause near-term pressure on Sea’s share price. However, Shopee’s earlier-than-expected path to profitability in Southeast Asia and Taiwan as well as strong growth outlook reinforce the brokerage’s confidence in its longer-term potential.
DBS Group Research analyst Sachin Mittal says the share prices will follow the companies’ profitability metrics. Investors, presumably more sober, are starting to value these digital companies differently. “In the past, share price followed gross merchandise value (GMV) growth but that’s not the case anymore,” he observes.
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Competition and challenges
Despite the unflattering bottomline, Grab CEO and co-founder Anthony Tan claims 2021 was the company’s “strongest year” yet. “We achieved outsized growth in both GMV and revenues while continuing to improve our adjusted ebitda margins y-oy, demonstrating the resilience and growing relevance of the superapp,” says Tan.
The company plans to be judicious and disciplined in allocating capital as it doubles down on the long-term growth opportunities of its on-demand, advertising and financial services business, says Grab chief financial officer Peter Oey.
Analysts do have words of caution. In his March 4 note, Mittal says Grab is losing delivery market share to Sea in Indonesia. Sea captured 8% market share in Indonesia’s delivery business in 2021 since the launch of Shopee in March 2021 and is likely to at least double its share in 2022.
Despite the intensified competition, Citi analysts point out that Grab still maintains its Southeast Asia category leadership at 51% share in online food delivery, 71% share in ride-hailing and 21% in e-wallet. In 2021, 27% of its users used three or more offerings, up from 22% in 2020.
Grab is also facing litigation issues — so far, at least three law firms have started investigating claims on behalf of investors for violations of the securities laws after the 4QFY2021 results triggered the sell-off.
However, securities class action is very common in the US, although the amount of cases has dwindled over the years. According to a Nera Economic Consulting study, 2021 saw fewer than 300 new US federal securities class action suits filed — the lowest since 2016. Aggregate settlements amounted to US$1.8 billion, US$400 million lower than the settlement amount recorded in 2019 and considerably lower than the US$3.1 billion and US$5.2 billion recorded in 2020 and 2018 respectively.
DBS analyst Mittal is also not reading too much into the legal actions. “Lawsuits are common challenges for public listed companies when the share price is so volatile like Grab. Generally, there are sufficient legal protections built in when companies go for public listing. Investors would be better off tracking its ebitda metrics in our view,” he says.
Unfortunately in the case of Sea, it is facing regulatory actions in India. Its gaming subsidiary Garena’s self-developed game Free Fire (FF) has been banned in India since mid-February.
The issue has been reportedly raised to the government, but users still cannot download the game in app stores in India. DBS suspects that this could be due to its alleged affiliations with Chinese company Tencent Holdings, as India has been going after Chinese apps.
“Based on third-party (3P) sources, we had estimated that the revenue contribution from India to FF could be less than 5%. Based on our discussion with Sea, it seems that 3P sources have underestimated the sizeable Indian market. Management’s 2022 guidance for the gaming business excludes the contribution of the Indian market,” Mittal adds.
In any case, FF continued to maintain top global rankings in user and grossing metrics, remaining the most downloaded mobile game globally for the fourth quarter for the full year of 2021 according to data.ai3.
Nevertheless, Sea’s guidance for gaming booking was below DBS’s expectations at US$4.5 billion, says Mittal. He adds that Sea assumed that its gaming revenue may drop to pre-Covid-19 levels in 2020. “We had expected the user acquisition to moderate in 4Q2021. However, Garena experienced a steeper drop of 10% q-o-q, largely due to the economy reopening and virtual socialisation being less of a virtue.”
In a results statement, Sea says it is working on multiple prototype games across different stages through both self-development and publishing pipelines. “In 2022 and beyond, we expect to expand our portfolio with more games across diverse genres such as multiplayer action, role-playing, sandbox and casual games,” it adds.
Despite that, DBS does not expect any other Garena games to replicate the success of FF.
Maybank’s Lai concurs, adding that the newly developing games are still in the nascent stages. “Meaningful revenue contributions might either come later in the year or when Garena has sufficiently built user scale and penetration that paves the way for monetisation,” says Lai.
FY2022 outlook
Optimistic stakeholders of both companies, despite the near-term challenges, will be looking for things to pick up down the road. For 1Q2022, Grab guided for its deliveries GMV, mobilities GMV and financial services Pre-InterCo TPV to be between US$2.4 billion to US$2.5 billion; US$750 million to US$800 million; and US$3.1 billion to US$3.2 billion, respectively.
The 1Q21 GMV guidance seems soft, Citi analysts point out, mainly reflecting uncertainty from the pandemic that affects mobility and payment demand. “Nevertheless, management guided GMV for 2Q to 4Q22 to accelerate to 30%-35% y-o-y with deliveries to achieve breakeven by end 2023,” they add.
The midpoint of the guidance translates into 31% GMV growth in 2022, in line with DBS’s estimates but below its previous guidance of 38% growth, says Mittal.
“This variance can be explained by much slower fintech growth due to potential loss of a very sizeable player — Tokopedia as a customer in Indonesia, which the company is trying to offset with new partners such as Lazada and Bukalapak,” says Mittal.
Grab’s projection for its delivery segment adjusted ebitda to breakeven in 2023 is in line with DBS’s estimates. “Grab is progressing towards core food delivery segment adjusted ebitda breakeven by the first half of 2023 and deliveries segment adjusted ebitda to breakeven by the end of 2023. Overall, we don’t expect ebitda losses to narrow in 2022,” says Mittal.
This year, Grab and Singtel’s digibank joint venture is ramping up for its anticipated launch in Singapore. The company said it continues to invest in digibank opportunities in key markets — in Malaysia, for example, Grab and its consortium of partners have applied for a similar licence pending Bank Negara Malaysia’s approval. In Indonesia the company recently completed an acquisition of a 16.26% stake in Bank Fama.
Sea was also awarded the digibank licence in Singapore, although it did not specify the launching date. Last year, it acquired Indonesian lender Bank BKE.
“We also expanded various product offerings including credit services to consumers and merchants across more markets, started offering services in digital banking and insurtech in Indonesia and obtained a bank licence in the Philippines,” the company says.
CGS-CIMB’s Ong and Tan highlight that Sea has provided strong revenue growth guidance for SeaMoney in FY2022 at US$1.1 billion to US$1.3 billion, above the brokerage’s and Bloomberg’s consensus expectations of US$1 billion.
Sea has also provided strong revenue guidance for its e-commerce revenue at US$9 billion. The company expects ebitda to break even for e-commerce in Southeast Asia and Taiwan in FY2022 as well as fintech in 2023.
Moving forward, CGS-CIMB analysts highlight that Sea believes it has the financial resources required to fund growth on Shopee and SeaMoney over the coming years without having to rely heavily on Garena’s cash generation
Photo: Bloomberg
