SEA’s digital dragons roar back, but don’t get singed

In this issue:

• SEA’s super apps might have to trade growth for growing up
• What Singles Day data doesn’t tell you 

Good morning, BT readers. 

They grow up so quickly, our regional tech giants. One minute they’re burning cash, the next minute they’re using one-ply toilet paper. 

Now, South-east Asia’s e-commerce firms have something to show for all that financial sobriety. The latest quarter’s numbers are mostly black, and the region’s digital future is mostly bright. 

This part of the world has some 675 million people in it, and more of them are shopping online, ordering food and playing Free Fire than ever before. Gross merchandise value (GMV) continues to grow and profits have finally made an appearance in a sector notorious for losing money.

The numbers are promising, and a report by Bain, Google and Temasek has surmised that, “GMV and profit growth can happen in parallel.”

Maybe it can, but in the insatiable world of tech where growth is often taken for granted, investors will be scrutinising growth rates. For companies like Grab and Sea, delivering ever-higher growth will be the new challenge.

What’s happening?

Last week, Singapore-based Grab posted its second-ever net income, while fellow tech giant Sea swung into the black for Q3, turning around a US$144 million loss from a year ago. Even as revenue at both firms has risen, headcount cuts at Grab and Sea have helped to staunch the bottom-line bleeding. 

The market signalled its approval of the latest numbers, driving Grab shares up 15 per cent and sending Sea soaring past two-year highs. Analysts were similarly approving. HSBC and UOB Kay Hian raised their respective target prices on Sea while maintaining their “buy” rating on the stock.

Even in a cut-throat market, Sea has managed to hike the commissions that it charges merchants by about a third since the start of 2024 – displaying the kind of Maturing Behemoth behaviour analysts had wanted to see. 

On the food delivery front, consumers are accepting that there is literally no free lunch now. “The proportion of searches relating to consumer promotions is declining…Platforms have reduced customer incentives, such as free food offers and discounts,” noted the e-Conomy SEA 2024 report by Bain et al earlier this month. 

This development was borne out in Grab’s latest earnings, which saw incentive spending as a percentage of GMV trend downwards even as the firm’s deliveries revenue grew 13 per cent year on year.

Grab’s rival, Indonesia’s GoTo Group, also made headway in its path to profitability last month, reporting narrowing losses as adjusted earnings before interest, tax, depreciation, and amortisation turned positive.

Why it matters

It is objectively a good time to be in South-east Asia – its digital economy is seeing robust growth across GMV, revenue and profit metrics.

At the same time, though, growth rates for GMV and revenue have slowed. Bloomberg observed that while regional online spending is set to grow about 15 per cent this year, this is down from 2023’s 17 per cent growth as consumers tighten their belts and profits become a priority.

E-commerce, in particular, is feeling the squeeze. “Shoppers are making purchases online nearly 8X more often compared to a decade ago – but spending less each time, due to shifts in the category mix and intense competition,” said the latest e-Conomy report for the region. At the same time, take rates – fees or commissions taken as a percentage of a sale – have started to plateau for third-party platforms, it noted.

Also, China’s tech giants increasingly want a piece of South-east Asia too. Tencent’s international payments arm, Tenpay, has secured a major payments institution licence in Singapore – a harbinger of its regional ambitions. Its rival, Ant Group’s Ant International, is trying a different tack by teaming up with e-wallet operators and banks in the region. 

Both regional and Chinese players will have to navigate complex terrain in a part of the world that isn’t at all homogenous, with differing attitudes towards tech adoption and oversight. 

In Indonesia, for example, regulators have one wary eye on digital loans, limiting the number of peer-to-peer platforms that can lend to a borrower at any given time. In the Philippines, the e-commerce compliance load will increase thanks to an act that the government passed last year. Malaysia already has three digital banks, with another two on the way, but Thailand will only start handing out virtual bank licences next year.

At the same time, not all Singapore’s US-listed firms are living the American Dream. Home-grown ride-hailing and carpooling company Ryde’s share price tumbled 80 per cent within a week on the New York Stock Exchange (NYSE) in September. PropertyGuru is exiting the NYSE following an acquisition by a private equity firm and currently trades below its IPO price. And even the Peter Thiel connection could not save Nasdaq-listed fintech MoneyHero from ballooning losses while its counter languishes below its debut price.

A poor stock market showing isn’t necessarily contagious, but Nasdaq-listed Grab and NYSE-listed Sea will have to draw ahead of the regional pack even as Chinese players nip at their heels. 

A bottom-line that is black for a change is a good start – and not just for shareholders. If bottom-lines stay positive, no employee’s bottom need encounter one-ply toilet paper again.

The big number: 11.11

Singles Day data from China’s online shopping bonanza every Nov 11 has conventionally been a good proxy for consumer appetites, but analysts are giving this year’s numbers a suspicious squint. 

Sales during this event was up 26.6 per cent across all major e-commerce platforms, but Singles Day is more like Singles Month now – this year’s sales period ran from Oct 14 to Nov 11, 10 days longer than 2023’s.

At the same time, some of that revenue might not even make it to the bottom-line. Some shoppers are gaming the system, cancelling and returning orders after getting spending credit that entitles them to discounts elsewhere, Bloomberg reported. 

Discount fatigue has also set in. “People are not interested in spending and are cutting back on big-ticket items,” Shaun Rein, founder and managing director of China Market Research Group, told the Associated Press. “Since October 2022, the weak economy means that everything has been on discount year-round; 11.11 is not going to bring in more discounts than the month before.” 

If anything, JD.com’s latest earnings offer a more telling look at consumer sentiment. Despite posting a 5.1 per cent increase in Q3 revenue, the Chinese e-commerce group missed estimates, sending its share price down 4.7 per cent on the news last week. 

(Disclosure: I own shares in Grab.)

5 big reads

• DBS share buyback raises questions on capital management as counter hits all-time high Some observers point out that buybacks do not intrinsically improve the lender’s operations.
• Companies like DBS, ST Engineering are buying back their shares. Are there downsides? In the first week of November alone, seven primary-listed companies conducted buybacks over the five trading sessions.
• More Singaporeans invest, but worries persist over overspending, lack of retirement planning: OCBC survey Singaporeans are setting aside more than a quarter of income for investments.
• America Inc and its new CEO Has the US now become a distressed asset?
• Bankers see Asia deal drought easing as Hong Kong IPOs pick up Investors are renewing focus on China, there is a buzz about India, and Japan also has a solid pipeline.