Southeast Asia’s biggest platform companies have always included an arm for fintech or financial services. The region’s leaders – Sea Group, GoTo Gojek Tokopedia and Grab Holdings – continue to work at integrating these into their other services.
Analysts are starting to look at them holistically, rather than as bundles of siloed businesses. The companies have also cut costs and fired workers. But investors remain focused on profitability; the markets are not giving these companies the benefit of the doubt.
Early this year, Sea Group’s management told analysts they could sustain steady bottom-line growth, notes analyst Oshadi Kumarasiri of LightStream Research, writing on Smartkarma (as are the other analysts cited). That didn’t happen.
NYSE-listed Sea’s stock got hammered on August 14 when its second-quarter earnings report showed the company missing its revenue forecasts. The stock dropped 29 percent in one day. Since the start of the month, the stock price has fallen from $56.52 a share to $36.52. This, despite Sea turning a profit.
GoTo and Grab have not been so adversely impacted, but GoTo’s stock price on the Indonesia Stock Exchange continues to sag, while Nasdaq-listed Grab has been volatile but with ups as well as downs.
Fintech is only part of the story for all of these companies, but its importance may be growing, as it is a bright spot for all three leaders. Those that are best at integrating financial services into their business-model flywheels are likely to restore their company valuations.
Sea’s troubles appear short term. The company is spending more on investing in e-commerce and live streaming, to ward off new competitors such as TikTok. Its gaming business, long a weak point, is slowing turning around, with more paying users. Its cash reserves have grown to $7.7 billion.
But its strongest performance is from SeaMoney, it’s payments app that is linked to Shopee, its e-commerce business. Angus Mackintosh, an analyst at CrossASEAN Research, credits SeaMoney’s success to its ability to provide easy access to financial products for the underserved.
Sea Money is also adding insurtech and more banking products, and integrating these so that customers can move seamlessly between the Sea Money and the Shopee ecosystems. Meanwhile the company is keeping non-performing loans steady at 2 percent. The upshot: in the second quarter of 2023, the company reported a 53 percent increase in quarter-on-quarter revenues from Sea Money.
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The big unknown for Sea Group is its foray into digital banking in Singapore, where its Maribank launched in March to a small, targeted customer base. It will probably burn capital for months or years to come. As a fully licensed digital bank, it is competing against Grab’s GXS as well as Standard Chartered’s Trust Bank, against whom it is the laggard.
Sea Money’s advantage is that it’s designed to thrive within the group’s ecosystems. But it’s not compelling on a standalone basis: there are plenty of e-wallets in Indonesia. Maribank, on the other hand, must succeed as a standalone business, even if it’s tied heavily to Shopee or related awards. Maribank didn’t play a role in Sea’s latest earnings projections, but it won’t be able to remain behind a curtain.
Sea will need its fintech offerings to shine, because other aspects of the business face headwinds. Analyst Shawn Yang of Blue Lotus Research Institute says TikTok Shop and the expected entrance of Temu, another Chinese e-commerce platform, will mean Sea’s net margins will turn negative.
GoTo Gojek Tokopedia
The picture is also mixed for GoTo Gojek Tokopedia, whose second-quarter results showed slower growth, due to the company slashing its spending on incentives. GoTo’s strategy is to focus on higher-quality users while relying on affordable offerings to maintain high rates of user growth. The management says it will book a positive EBITDA (earnings, but not counting a lot of costs) by the end of the year.
GoTo has cut its workforce by 24 percent this year and pulled out of non-core businesses such as entertainment; it is investing more in its own software and logistics, instead of relying on third parties.
This drive for efficiency is complemented by a push to better integrate its finance relationships, including both Bank Jago, a bank it now owns, and its internal fintech services.
Mackintosh says Bank Jago can roll out new digital products. By growing its deposit base, it creates a lower cost of funding. It also uses its balance sheet to support buy-now, pay-later installments on goods sold via Tokopedia, as well as Tokopedia’s cash lending business.
The heart of this system is GoPay, the company’s financial app that is used for payments across GoTo platforms as well as a portal to other financial systems and rewards.
Fintech is meant to spur the flywheel, in which each business line drives success among the others. GoTo’s management is trying to tell the market that its focus is at this holistic level. But the fintech business has been volatile. In the second-quarter earnings report, fintech’s contribution margin finally broke even, but the company’s management warned investors this would remain choppy as it rolls out new products.
The holistic picture is also uncertain. Most of the company’s gains have come from brutal cost cuts, which has led to a decline in gross transaction volumes. It faces stiff competition from Sea’s Shopee as well as new Chinese entrants such as TikTok Shop. Analyst Shifara Samsudeen of LightStream Research is skeptical that fintech and digital banking will compensate.
Grab is probably the closest to enjoying an upswing. It too cut costs earlier this year, reducing headcount by 11 percent. Given its base in pricy Singapore instead of affordable Jakarta, those cost cuts are meaningful.
But Grab has played offense more than defense this year. It acquired Trans-cab in Singapore, the third largest taxi operator. That adds a lot of drivers to the company’s core ride-hailing app.
The biggest lift comes from its digital bank in Singapore, GXS Bank, launched last year with partner Singtel. The Monetary Authority of Singapore has recently raised the deposit cap for both GSX and Maribank.
GSX launched last year with a limit on individual deposits of S$75,000, for a total allowed deposit base of S$50 million. This put a huge constraint on GSX’s ability to raise deposits (which is to say, to acquire cheap funding).
Since MAS removed the cap, GSX has been able to more easily fund its time deposit rate of 3.48 percent, which is attractive compared to what other banks offer. This is pulling in customers.
Now GSX will be able to compete as a lender, too, and take on its main competitor, Trust Bank, the digital offering from Standard Chartered. It is also expected to launch in Malaysia by next year.
For all three tech companies, success will depend on how well they can integrate fintech into their other offerings, and vice versa. Their advantage over incumbent banks and payment businesses is their digital platform and customer base. They lack a lot of things that successful banks have, such as a huge, captive deposit base, or breadth of product.
This puts Southeast Asia’s platform leaders in a different category, though. Fintech is both the engine the chassis. Analysts and investors will require financial statements that break out the numbers, and rightly so, but what counts is how well the parts combine to form the machine.