During our latest visit to Bangkok we attended a presentation by Prayut Chan-o-cha, a retired Royal Thai Army General, current prime minister of Thailand and the favorite to retain this post once the recent election results finally emerge. He is also the current Chairman of The Association of Southeast Asian Nations (ASEAN), which he reminded us is a region of 654 million people and, as such, an important economic force.
ASEAN has its origins in an initial association between the Federation of Malaya, as it was then, Thailand and the Philippines in 1961. Indonesia and Singapore joined in 1967 when ASEAN was formerly established. In the subsequent 50 years the group has gradually expanded to 10 members encompassing pretty much everyone living between China and Australia. Its population makes it roughly half the size of either China or India. Its US$4,600 per capita GDP puts it somewhere in between these two giants, and this number is growing steadily.
For the investor it is a disparate place. History has created a melting pot with huge differences in culture, language and religion. Islam dominates in Indonesia and Malaysia, Catholicism in the Philippines and Buddhism in Thailand. A colonial past still exerts cultural influence, whether it is from the Dutch in Jakarta, the Americans in Manila or the French in Ho Chi Minh. More controversially the common thread could be the Chinese and particularly the Chinese businessman who have been active in the region for hundreds of years, but whose influence increased most strongly post 1949 when the diaspora grew markedly. Many of the companies we invest in today are founded by these emigres.
People across the region have at times been very wary of their mighty northern neighbour. Whether territorial disputes in the South China Sea, or economic ones such as the pros and cons of the Belt and Road Initiative (BRI). The BRI is an ambitious development plan initiated and largely financed by Beijing to improve infrastructure throughout Central and South East Asia, as well, no doubt, to increase Chinese influence along the way. Malaysia has perhaps resisted most, with its inherently discriminatory economic policies, and a recent backlash against a number of BRI projects. We shall see how long this resistance lasts. At the other end of the spectrum, minnow Cambodia has decided to take the money, and is increasingly becoming a vassal state. Perhaps more importantly for us as investors, Corporate China is spreading its wings. Increasingly the competitive threat in these markets comes not from a local company, or indeed a western multinational, but from a leading Chinese business.
Economically, there is a huge divergence across the region as the following IMF estimates of 2019 GDP/Capita in US Dollars demonstrate. The city state of Singapore ($65,600) stands alone as a regional financial hub, but the more mature economies of Malaysia ($11,400) and, increasingly, Thailand ($7,600), are now very much “middle income” economies with reasonable standards of living and generally lower growth rates. The populations are also beginning to age and no longer have the demographic tailwinds they once enjoyed.
At the other end of the scale there is Myanmar ($1,200) and Vietnam ($2,700), along with neighbours, Cambodia ($1,600) and tiny Laos ($2,900). Of these, Vietnam is the only real opportunity for the stock market investor today and even this comes with the challenges of access often present in such an immature market. That leaves the two most populous members somewhere in the middle, Indonesia ($4,100) and the Philippines ($3,200), with 266mn and 108mn people respectively. Both present excellent demographic profiles with large, young populations just entering their prime, economically active age and perhaps not surprisingly, they top the GDP growth tables as well.
The fact that Indonesia has 2.5x more people than anywhere else in the region, with a level of GDP per capita often associated with a sharp upturn in consumption, has not escaped the attentions of the technology and e-commerce world. It has become the key battleground for success in ASEAN with all the usual suspects pouring in capital: Alibaba, Tencent and JD.com from China; venture capitalists Rocket and Softbank; as well as the ubiquitous Uber. The result has been a classic land grab, with much of this capital finding its way into consumers’ pockets by way of free shipping and other customer acquisition incentives. Throw into the mix an under-developed offline retail network, rapid rise in smartphone penetration, and Indonesian e-commerce growth is at the take off stage, with growth of over 50% compound annual growth rate (CAGR) expected between 2018 and 2022.
The next phase will be one of consolidation as the capital becomes more selective. We are already seeing signs of this and from over a dozen potential contenders in Indonesia four years ago, there are only three key e-commerce players today. With this consolidation will come more rational pricing, improving margins and ultimately profitability. Historically, this has been hard to access other than indirectly through the Chinese investors such as Alibaba, JD.com or Tencent, however there is now a more direct route through the US listed and Singapore headquartered SEA Limited, itself supported by a Tencent 36% shareholding.
SEA has three main businesses. Garena, an online gaming business which distributes Tencent’s games as well as others throughout the region which include the hit in-house developed game Free Fire. Airpay, an e-wallet business originally set up to assist with payments for online games but useful for e-commerce as well. And finally, Shopee, one of the remaining leaders in Indonesian and regional e-commerce. A relative latecomer, Shopee adopted three key strategies, learnt the hard way from management experiences elsewhere.
Firstly, it’s a marketplace model only and therefore relatively asset-light. Secondly, it is mobile only and circumvented the PC’s completely, along with most of their customers. Thirdly, rather than start with the more traditional electronics and phones, which have relatively few stock keeping units (SKUs) and easier to manage, Shopee focused on “long tail” products like fashion, health & beauty, home and kids. Harder to do, but once established, also harder to replicate.
The result has been an impressive rise from a standing start in 2015 to a market leading position today. Moreover, this is not just Indonesia but across the region with strong positions in Thailand, Taiwan and in particular Vietnam where its leadership is unquestioned. Shopee has a variety of ways to make money, starting with a commission for using its marketplace, advertising and a range of other value-added services. Shopee have started to charge for these services in the more advanced markets, and the success of these efforts proved a very pleasant surprise to the market with their latest quarterly results. Helped along the way by the runaway success of Garena’s Free Fire, a battle royale game specifically designed for the low-end smartphones, and relatively slow bandwidths often found in developing markets. We forecast the company will be profitable in 2021 and grow rapidly thereafter.
In our visits to the ASEAN region in recent years we have sometimes struggled to identify many consumer companies which that meet our growth and return criteria. This maybe because the markets themselves are maturing (Malaysia, Singapore, Thailand), or where competition has become destructively fierce (consumer staples and retail across the region), or where we have found accessing the right businesses in the right sectors difficult (Vietnam). For much of the region, e-commerce is now in the sweet spot for growth and, thankfully, there is also now a means to invest in its leading practitioner.
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