Vantage Point: Grab, Sea results this week to show if big tech has recovered from epic crashSea Ltd clocked a net profit of $422.8m in Q4 2022. Can it…

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

  • Sea riding a long wave
  • Grab takes the high road
  • Cross-border QR payments a welcome move 
  • Link Net’s restructuring could transform Indonesia’s broadband space

Sea riding a long wave

Sea Limited will announce its Q1 2023 results tomorrow with the key focus being whether it will remain profitable at the net profit level after the spectacular turnaround in Q4 2022, which saw the company swing from a loss of ($616.6 million) in 4Q2021 to a net profit of $422.8 million in Q4 2022.

The one metric that should not be an important focus is the headline GMV, given that the company has already indicated that this measure has been de-emphasized and could even decline. 

Continuing improvements to take rates and consequently revenues along with sustaining profitability will be key, even if the net profit does not grow.  

Last quarter’s net profit was impacted by one-off items with the net income figure negatively impacted by a $177.7-million impairment of goodwill related to some historical investments in the digital entertainment business. However, it was positively impacted by a $199.7-million net gain on debt extinguishment and $130-million reversal of previous accruals for certain expenses, as a result of the clear pivot towards cost efficiency and profitability. 

The company also generated $320 million in cash from operations in Q4 2022, underlining the strength of the turnaround. The key focus now will be whether this trend can be sustained. 

Sea’s adjusted EBITDA also turned positive at $495.7 million compared to adjusted EBITDA loss of ($492.1 million) for Q4 2021. The total adjusted EBITDA was positively impacted by $130 million of reverse accruals but it was still a convincing number. The direction here will also be a key focus in Q1 2023.

E-commerce will continue to be the core focus with ongoing improvements to profitability to be closely watched as well as the company’s progress towards profitability in Brazil.

We would also expect some possible commentary on the move by Brazil to remove tax exemptions on imported product under $50 and the competitive landscape in Brazil. 

Last quarter also saw some stabilisation of digital entertainment in terms of the quarterly paying ratio and this will remain an important metric to track. 

Sea Ltd also saw its digital financial services segment booking a strong performance in Q4 2022 with GAAP revenues increasing 92.5% YoY to $380.2 million, with adjusted EBITDA also turning positive at $75.6 million in Q42022 compared to a loss of $149.8 million in Q42021. 

The positive trend in this segment will also be important to track as will the growth in the company’s loan book and its credit quality. The company had a total loan of $2.1 billion at the end of Q42022, net of the allowance for credit losses of $238 million. 

What really swung the balance overall in Q42022 was the dramatic decrease in sales and marketing expenses, which declined by 61.2% YoY to $473.6 million. It will be important to track this number and whether it can be reduced further without significantly impacting revenue growth.

Competition from players such as TikTok in Indonesia and even Lazada are a market focus currently so any comments referencing this overall competitive environment will be closely watched, although its long-term impact is questionable. 

Sea Ltd is playing a long game but sustaining profitability now that it has got there will be an important milestone to maintain even if the headline does fluctuate quarter to quarter. 

Unlike its peers, Sea Ltd has demonstrated its ability to turn the switch to profitability more rapidly than anyone could have imagined. This involved some pain, partly through laying off 10% of its staff and more frugal behaviour along the way but it is now well set to govern its own future rather than relying on the fickle nature of markets.

Grab takes the high road

Grab, which will release its Q1 2023 earnings on May 18, is widely expected to make further strides toward profitability.

We can expect a further slowdown in GMV in Q1 2023 though revenues are still likely to register strong growth on the back of improvement in take rates and lower incentive spending.

Industry watchers will be keenly looking at Grab’s monthly transacting users and how cross-vertical penetration rates have improved in Q1 2023. 

Mobility is expected to continue to be the cash cow with the category generating significantly positive segment-adjusted EBITDA margins at more than 13% in Q4 2022.

Deliveries will remain in positive territory and move towards its 3% long-term sustainable segment-adjusted EBITDA margin. Even at this level, the business can start to generate significant cash flows, given an annual GMV of around $10 billion.

For mobility, there should be more certainty on driver supply in Q1 2023, especially in Singapore, as earnings improve, and in the Philippines, where the government released more licences in Q4 2022.

Grab’s recent initiatives to target tourists coming to SE Asia should yield a positive result, especially as Chinese tourists start to return in the next few quarters. 

After a period of pullback, food deliveries should start to see a normalisation of habits as consumers get back to order from home. 

Grab understands that affordability matters, and has been giving back some of its savings achieved through efficiency measures to the customer by way of lower delivery charges.

It would not be surprising to see Grab gain some share of the food delivery market in Indonesia given that Gojek has been raising prices quite aggressively for food delivery. 

The platform continues to develop its Grab Unlimited service, with penetration trending upwards given its attachment to promotions. Grab Unlimited subscribers also transact three times more regularly than non-subscriber customers and already had a penetration rate of 25% in Q4 2022 versus 17% the previous quarter. 

Grab Unlimited also allows the company to curate and differentiate more effectively with fewer monetary incentives by giving subscribers a certain number of prioritised orders per month coupled with priority bookings on mobility. 

We should also expect to see lower cash burn from financial services and lower losses, as Grab rolls out more lending products, with its loan book now more than $200 million and trending upwards, with NPLs manageable at less than 5%. 

The lending business is focused on drivers and merchants, where it provides cash loans with auto-deduction of repayments. Merchant loans are also relatively low risk given Grab’s visibility of the underlying businesses. We should expect more visibility on this business with the first quarter results. 

The company is expected to develop its online groceries business, with Jaya Grocer continuing to generate positive returns. The company’s next focus will be on growing its collaboration with Trans Mart in Indonesia, where Grab is increasingly visible. 

Revenue from enterprise and new initiatives rose only 10% YoY or 20% YoY on a constant currency basis in Q4 2022. This segment is relatively small and is being rationalised with the key area of potential growth to come from advertising, given it is a high-margin business. 

Grab’s net cash liquidity was at $5.1 billion at the end of Q4 2022 versus $5.3 billion in the previous quarter. This number remains healthy but will nonetheless be closely watched given the company paid down $750 million in debt last quarter.  

Cross-border QR payments a welcome move 

The cooperation between Indonesian and Malaysian central banks on cross-border QR payments is a welcome step from the perspective of ASEAN financial collaboration but the devil will be in the detail, as with any cross-border currency transaction.

The implementation of the QR payment system is to promote ASEAN payments connectivity and regional linkages through open infrastructure and retail payments interconnections.

However, question marks remain on charges and currency exchange rates as well as potential risks or avenues for fraud.

With regional travel a recovering theme in SE Asia, the move is expected to benefit tourism, retail, and SME sectors. It will allow tourists greater convenience in terms of paying for small ticket items such as F&B and shopping, as payments can be transacted and monitored through a mobile phone. 

This could also provide potential cross-border growth opportunities for large digital payments players such as GrabPay (and OVO), as well as SeaMoney (ShopeePay in Indonesia), and potentially GoPay. None of these payment methods can be used for cross-border transactions currently.

Grab and GoTo, through Gojek, already allow customers to use ride-hailing facilities across borders but payments need to be made only by credit card or cash. 

For the participating banks in cross-border transactions, it provides an opportunity to offer an additional service to their customers. This is because most bank cards can only be used at ATMs overseas but not at retail outlets, and not everyone has a credit card. 

Leading Indonesian private bank Bank Central Asia, for example, is already providing the QRIS payment facility in Thailand and Malaysia, when the merchant displays the code from its partner banks. The lender also provides competitive exchange rates. 

Bank Rakyat Indonesia and Bank Brisyariah have already entered the scheme but it is highly likely all the major Indonesian banks will do the same.

Singapore and the Philippines are also under development for Indonesian tourists to be able to use QRIS payments overseas, with QRIS Japan to follow at a later stage. 

Link Net’s restructuring could transform Indonesia’s broadband space

Indonesia’s Link Net, which was acquired by Malaysia-based Axiata Group Berhad and its Indonesian subsidiary PT XL Axiata Tbk in January this year, is currently restructuring to scale up its fixed broadband internet business, which may give some serious competition to Telkom Indonesia.

Link Net, which sells services under the commercial brand name First Media, has just over 800,000 subscribers and is dwarfed by Telkom Indonesia’s IndiHome, which has a subscriber base of 9.2 million. The company’s homes passed number stands at over 3 million and it has continued to build its subscriber base, albeit quite slowly.

XL Axiata’s push for greater fixed mobile convergence (FMC) of its services is helping to drive growth and boost the retention of customers. FMC is a trend that ensures seamless connectivity between fixed and wireless telecommunications networks.

In order to scale up both fixed broadband and its FMC strategy, the company will build on its partnership with Link Net.

This will involve a significant restructuring, whereby Link Net will become a pure wholesale fibre access provider and XL Axiata will take on all of the retail elements. This means Link Net’s existing First Media subscribers will be shifted to XL Axiata. Meanwhile, XL Axiata will transfer all its fixed broadband assets to the new fibre company under Link Net.

This transaction is due to be completed by the end of this year.

The retail business is expected to be profitable from year one, according to XL Axiata’s management, given the asset-light characteristics of the retail end of the business.

The aim post-restructuring is that Link Net will accelerate its number of homes passed to help fuel XL Axiata’s fixed broadband and FMC strategy. The target for homes passed is eight million new homes over the next five years.

The build-out of homes passed will be conducted by Link Net with XL Axiata employing a “zero capex” model, where it runs the retail element. 

The key to building out the retail side of this business will be to utilise XL Axiata’s marketing reach and ability to promote its position as a truly converged player, offering bundled services including mobile, fixed broadband, and Pay-TV utilising Link Net’s high-quality fibre network. 

The new retail venture under XL Axiata will present a greater competitive threat for Telkom Indonesia’s IndiHome given that it will extend its reach to a greater number of cities backed by strong infrastructure and high-quality content.

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.

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