This weekly newsletter chronicles top digital themes and trends playing out in SE Asia, especially Indonesia. We will decode policy and regulatory changes affecting digital economy sectors, crunch earnings data of top players, track developments related to gig economy workers and attempt to piece together ecosystem buildouts in some of the fastest-growing, venture-backed plays. You can access the previous editions of the Vantage Point weekly posts here.
Executive summary
- Pertamina Geothermal Energy: Marrying Power with Sustainability
- TikTok’s gaining strength in SE Asia’s e-commerce
- SCBX: No let up on digital aspirations
Pertamina Geothermal Energy: Marrying Power with Sustainability
One of the largest initial public offerings (IPOs) in Indonesia — almost a year after the $1.1 billion listing of GoTo in April — is planned for this month by PT Pertamina Geothermal Energy (PGE).
There are several reasons to believe that the initial share sale will be a success — the company’s profitability, the sustainable nature of the business, the pricing of the IPO, and PGE’s state ownership, to name a few.
First, the details: PGE, a unit of energy company Pertamina, is offering 10.35 billion new shares or about 25% of the company’s issued and paid-in capital at 875-880 rupiah apiece, valuing the IPO at 9.11 trillion rupiah ($611 million).
The Indonesia Investment Authority (INA), in partnership with a Middle East sovereign wealth fund, is set to make a strategic investment in the upcoming public issue that will also be a key barometer for market sentiment.
PGE is entirely owned by the Pertamina group, which is a state-owned company. PGE’s inception dates back to 1974 when Pertamina began exploration and exploitation activities upon the discovery of 70 geothermal points in Indonesia.
It was established in 2006 specifically for geothermal energy development and management. The installed capacity of its geothermal power plants amounts to a total of 1,877 megawatts (MW), with around 672 MW owned and operated by PGE. The remaining 1,205 MW are managed under joint operational contracts.
The company operates 13 geothermal working areas spread across Sumatra, Java (West Java), and Sulawesi (North Sulawesi). This makes PGE one of the largest geothermal energy companies in the world, accounting for 82% of the installed geothermal capacity in Indonesia.
The archipelago, which sits on the Ring of Fire, has an estimated 40% of the world’s total geothermal potential.
Given the above factors, PGE’s prospects as an IDX-listed company seem bright.
Positive financials: In Q3 2022, for instance, it booked a net profit of $111.4 million, up 67.8% YoY. The increase was driven by PGE’s revenue growth — up 3.9% YoY to $287.4 million.
The biggest contributors to the company’s revenue came from the sale of steam and electricity, totalling $228.9m, to the state-owned electric utility PT PLN and to PT Indonesia Power worth $47.4 million.
The cost of revenue in the third quarter fell 9.5% YoY to $122.4 million, mainly due to the weakening of the rupiah against the US dollar. (Most of the cost of revenue and other direct costs were transacted in rupiah but booked in USD.)
PGE also plans to add 600 MW of geothermal power plants in the next five years, especially after securing several geothermal electricity contracts from PT PLN.
Sustainability: Being a Geothermal Power Producer, PGE will tick the renewable energy box for investors and probably make it to a lot of ESG investment lists.
Geothermal electricity is valuable given it produces what can be termed as green electricity and there is also the potential for co-generation from steam production.
There is also the potential for co-production partnerships that use CO2 as an alternative fuel, extract nanomaterials from geothermal fluids, use green hydrogen as an environment-friendly future fuel, as well as green methanol. There is also the potential for geo-eco-tourism and geo-agro industry.
Reasonable valuation: For the IPO, PGE is being offered at 7.7-8.5x FY2022E enterprise value-to-EBITDA (EV/EBITDA) multiple and 7.5-8.3x its FY2023 EV/EBITDA.
This valuation looks very reasonable and is at a discount to regional power companies which trade at an average of 19.8x FY2022E EV/EBITDA and 15.1x FY2023E EV/EBITDA.
Its FY2022E price-to-earnings ratio (P/E) is 17.5-20.2x and FY2023E P/E is 16.3-18.8x, assuming +4% revenue and EBITDA growth each year.
However, there are a few risks.
Geothermal power plants are costly, at around $4-5 million per MW, according to industry sources. This is because the sites for geothermal production are often inaccessible. The IPO proceeds will be used to develop additional geothermal power.
There are also risks from execution as it has had some disappointments on unplanned capacity in the past, and there are some of PGE’s smaller assets that are not performing. It also has issues with customer concentration but given its green credentials, its power should command strong demand.
PGE will also not bring any new capacity online until the end of FY2024, and it plans to add over 165 MW by 2025. Even if it manages to execute this expansion, the operations will take another year or two to ramp up. This means that the growth rates will remain around low- to mid-single digits until 2025.
TikTok’s stronghold in SE Asia’s e-commerce
TikTok, the short-form video app owned by Chinese tech major Bytedance, has recorded e-commerce gross merchandise value (GMV) of $4.4 billion in SE Asia within a span of two years, up more than four times since 2021, The Information reported.
This makes TikTok the fastest-growing e-commerce platform in Southeast Asia, and the first player ever to cross the $4-billion GMV milestone within two years. Consequently, TikTok, whose “shoppertainment” model blends shopping and entertainment, is seen as a major threat to local rivals Shopee, Lazada, and to a lesser extent Tokopedia.
A couple of factors seem to have worked in favour of TikTok. One, it started at a much more opportune time compared to its bigger e-commerce rivals given how the overall market has grown. Two, its model of selling through live-streaming has captured the imagination of consumers. Three, TikTok is focused on the fashion, health and beauty niche but, more importantly, on lower ticket sizes.
TikTok estimates “shoppertainment” to be a $1-trillion e-commerce opportunity in the Asia Pacific. It expects Indonesia, Japan, and South Korea to contribute 67% of GMV in shoppertainment by 2025, with Indonesia taking 26% of the pie.
Indonesia is the platform’s largest user base in Asia with 106.9 million users as of H1 2022. Vietnam comes next with 49.6 million users, followed by the Philippines with 42.7 million users, and Thailand with 39.5 million users.
TikTok draws in a mass market customer base with its average order size at $3-5 compared to Shopee’s at $8-9 and Tokopedia’s at $20-25. In this respect, Shopee probably has the most to lose from this battle as it seems clear that low price points are a factor in winning customers.
TikTok has also been developing its product offering to better suit local markets with the introduction of TikTok Shopping Centre – a multi-user destination page. The new offering allows for more product and pricing comparisons that were previously not strong points for TikTok.
The model is, however, not without challenges.
The key bottleneck for TikTok versus its competitors is that as most of its products are sourced from China, delivery times can stretch to even two weeks.
Besides, there are challenges in the area of payments as the company relies on third parties. This also leads to an increased incidence of cash-on-delivery transactions, where customers can reject and return impulsive orders very easily.
A potential stumbling block in Indonesia, its primary market in SE Asia, is related to consumer behaviour. Indonesian users are generally less prone to impulse buying and are more price-sensitive compared to geographies with higher per capita and disposable incomes.
Since TikTok is mainly focused on small sellers rather than large brand names, there is also the issue of counterfeit goods and low-quality items like with most social media platforms. Besides, larger brands follow a selective approach on the platform as they don’t want to be seen next to potentially counterfeit products.
TikTok’s model of live streaming and content-driven marketing is now being offered by other players as well. TikTok Shop sellers are required to live stream and produce videos on a regular basis to be eligible for additional discounts. And, to do this professionally costs money, which smaller sellers may not be able to afford.
TikTok’s success going forward will depend on how the competition positions itself, especially, in an environment of compressed promotional spending.
TikTok continues to expand in SE Asia with some aggressive hiring while others are laying off staff and reducing promotions. This may seem like a good time for the platform to consolidate in SE Asia but there are no guarantees of success, as competitors reposition themselves to fend off a new competitor, much as they did with Facebook and Instagram earlier on.
SCBX: No let up on digital aspirations
The restructuring of Thailand’s SCBX — mainly the bifurcation of the traditional banking business and new economy businesses — is now complete, according to the lender’s management.
With the restructuring, the company has started to launch itself into growth areas outside the traditional scope of a bank. These have started to develop fast, with a number of them destined for possible public listings.
SCBX calls its traditional banking arm Gen 1, which also includes its digital lending services originating through SCB Easy. The business has achieved high levels of digitalisation, with more than 14.2 million registered users on the SCB Easy App. Around 82% of SCBX’s banking transactions are done on the app, which it aims to increase to 90% by end-2023.
Meanwhile, Gen 2’s core business is Card X — the credit card and personal loans business, which already has 3.2 million accounts and 115 billion baht in loans outstanding. The non-performing loans (NPLs) here is less than 1%.
Card X recently signed an agreement with Indonesian fintech Akulaku for BNPL collaboration in Thailand.
The next biggest Gen 2 business is AutoX, a new player in Thailand’s microlending and car title loan market. It aims to be among the top three in the sector with 70 billion baht in loans outstanding in three years versus 7.5 billion baht currently. It currently has 1,200 branches and 2,300 salespeople but aims for 3,000 branches by 2025 and potentially an IPO by 2027.
Another Gen 2 division is Monix, which is a fintech focusing on digital personal loans through the Finnix app that uses AI to assess the creditworthiness of borrowers. The Finnix app has been downloaded 7 million times, with 2.7 million registered users and 5.9 billion baht in loans outstanding. It has less than 1% NPLs.
Among other Gen 2 divisions, SCB Abacus is an SME-focused digital lending programme using the Money Thunder app that uses data to power its lending decisions. It also partners with digital players such as Food Panda and Lazada helping to provide financing for merchants. It already has 2.9 million registered users on the app, disbursing 5.9 billion baht in loans to small businesses, with NPLs at less than 1.5%.
Alpha X, another Gen 2 business, is a provider of hire-purchase loans, leasing, and refinancing, focusing on customers in the premium-luxury automotive segment covering cars, big bikes, yachts, and riverboats. It already has over 700,000 customers with outstanding loans of 3.8 billion baht and zero NPLs.
SCBX’s next layer of growth will come from its Gen 3 businesses, which include investment app InnovestX, the venture capital arm SCB 10X, and super app Robinhood.
InnovestX is an investment app that covers multi-asset investments from mutual funds to digital assets. It already has 750,000 customers, which translates to an over 50% market share of new customers in this space.
InnovestX had 1 million customers by end-2023 and 4-5 billion baht in revenue. It aims to have 4-5 million customers, and 8-10 billion baht in revenues by 2025, and an RoE of over 20%. It is also targeting to IPO this business by 2025.
SCB 10X is the venture capital arm of SCBX, which has already made 58 investments in 15 different countries, with assets under management (AUM) of $470 million and a revenue of 1.2 billion baht in 2022. It is primarily focused on new economic investments.
SCBX has also not been shy of investing in a number of strategic offshore businesses including an investment of $180 million in FWD Group, a leading Pan-Asian Life insurer, with a digital-first approach.
It has also invested $100 million in Akulaku.
Additionally, in Indonesia, SCBX has invested $50 million in Bank Jasa Jakarta alongside Astra International, and WeLab, which has plans to transform into a digital bank. This gave the bank a toehold into banking in Indonesia, where Bangkok Bank Public has invested in Bank Permata.
One potential misstep for SCBX was a nearly $500 million investment in crypto exchange Bitkub, which it narrowly avoided, backing away from the deal due to Bitkub being investigated by the regulators in Thailand. This could have been a thorn in the side of SCBX had it gone ahead.
SCBX stands apart from its peers thanks to the digitalisation of its banking business, and its Gen 2 and Gen 3 businesses, which have good financial health. SCBX trades at 0.7x its FY2023 price-to-book value (PBV), which looks attractive given the potential upside from its digital initiatives.
Angus Mackintosh, a consulting editor with DealStreetAsia, is responsible for the publication’s Southeast Asia digital economy weekly newsletter and its monthly research reports. Angus is also the founder of CrossASEAN Research and publishes on Smartkarma.