Once loved, South-east Asian unicorns fight waning interest from fund managers
Buyer beware as S-E Asian unicorns promise higher growth prospects but struggle to meet bottom lines
SINGAPORE - Most Asean equity fund managers are cautious about putting money in new economy companies that have sprouted in South-east Asia from changing consumer behaviour as a result of digitalisation.
Portfolios today are still dominated by well-established, money-making old economy stocks of banks, industrial conglomerates and telecommunications providers instead of younger companies in e-commerce, digital entertainment and online ride-hailing.
A few fund managers have capitalised on early investments in such stocks like Sea, Grab and GoTo Gojek Tokopedia, but most have opted for a more conservative approach, avoiding these high-risk sectors altogether, said analyst Hunter Beaudoin at Morningstar Manager Research Services Asia.
These nascent firms offer much higher growth prospects and access to innovative technologies than their traditional rivals in the region, but their risks cannot be overlooked, the analyst said.
“Most of them are not yet profitable, or are companies that have just turned profitable. These types of companies’ future shareholder returns can be uncertain as the long-term viability of their business models remains unproven,” Mr Beaudoin told The Straits Times.
In the second quarter ended June 30, GoTo, Indonesia’s biggest tech company, remained in the red with an underlying loss of 70 billion rupiah (S$5.8 million).
Mr Etta Putra, a Maybank analyst, said operating loss caused by high discounts and marketing expenses is a structural risk for GoTo.
Singapore-based Grab has also continued to bleed with a loss of US$53 million (S$69 million) in the quarter ended June 30.
Sea, another Singapore-headquartered firm, which owns e-commerce platform Shopee, beat its rivals to profitability after posting a net income of US$163 million in 2023, from a loss of US$1.66 billion in 2022.
For the three months ended June 30, Sea reported a net income of US$79.9 million, but it said it “wasn’t all smooth sailing” as that was 75.9 per cent down from the US$331 million generated in the second quarter of 2023.
Financial house PhillipCapital warned that Sea’s short-term growth remains challenged by keen rivalry, which means high costs will persist to maintain sales and market share.
The difficulty in valuing these companies, due to a limited or lack of track record for growth projections, is also keeping interest at bay.
They are often valued based on sales, earnings before interest, tax, depreciation and amortisation, or operating metrics such as gross merchandise value for e-commerce companies.
These do not necessarily translate to profits for shareholders and can incorporate high expectations, which make overvaluations more likely, Mr Beaudoin said.
The industries they serve are also competitive and susceptible to fluctuations in the economy, which could result in wide price swings.
Such volatility was seen in Sea’s stock price, which soared over 2,000 per cent from its initial public offering (IPO) at US$15 in October 2017 to an all-time high of about US$367 in October 2021.
Sea saw an intense rally in its stock price at the start of the Covid-19 pandemic, which pushed it to overtake banking giant DBS Bank as the largest listed Asean company from May 2020 to end-February 2022.
The gains were fuelled by a combination of low interest rates and pandemic-induced demand for its three main business units: mobile gaming through subsidiary Garena, e-commerce on Shopee and digital financial services via SeaMoney.
On Oct 8, Sea was trading at around US$95 on the New York Stock Exchange.
A similar story played out for Grab, South-east Asia’s biggest ride-hailing and delivery firm, which saw its valuation skyrocket while it was private, thanks to strategic pivots into food delivery and online payments. It listed on Nasdaq in December 2021 in the largest US debut for an Asean company.
However, the timing of Grab’s IPO coincided with greater market scrutiny of non-profitable companies that led to its sharp derating, along with Sea, over the subsequent months. After achieving a US$40 billion valuation in a 2021 deal with a US special-purpose acquisition company, Nasdaq-listed Grab is worth US$14.6 billion as at Oct 8.
GoTo, the digital ecosystem formed through the merger of ride-hailing giant Gojek and e-commerce platform Tokopedia, is another example. GoTo’s shares in Jakarta are 80 per cent below their IPO price in 2022.
Rekindling flame
JP Morgan Asean Equity was one of the early embracers of the new investment opportunities in the region.
Portfolio managers at Nikko AM Shenton Thrift also held varying exposures to Sea. They said they first purchased Sea stocks in May 2021 for the company’s market dominance and competitive edge across its business segments.
They sold the stock in August 2023 on fierce rivalry and stagnating gaming operation, before buying again in February on signs of sustainable profitability.
Most funds like Manulife GF Asean Equity avoided these companies entirely, preferring to put money in profitable growth companies.
Many were wary of the aggressive borrowing practices and were not convinced of the growth sustainability given the high cash burn, or the speed at which these companies spend available cash.
High-profile closures of bike-sharing start-ups in Singapore such as oBike and Ofo serve as rude reminders of the need to pay attention to bottom lines, not just revenue or market share.
Despite the rough start, there are tailwinds for investor interest to pick up as Mr Beaudoin sees more investment opportunities emerging as regional economies race to upgrade themselves.
One such initiative is the Asean Digital Economy Framework Agreement, which is projected to become the world’s first comprehensive regional digital economy agreement, potentially doubling the region’s digital economy value to US$2 trillion by 2030, he noted.
Several IPOs of regional unicorns are also in the works. These include Thai food delivery service Line Man Wongnai, Malaysian auto e-commerce platform Carsome and Philippine financial technology app GCash.
“Asean’s young population of digital natives is a structural driver of the new economy. The region’s strong fundamentals and continued support of local governments and institutions will ultimately pave the way for a more diverse investment landscape in the future,” Mr Beaudoin said.
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