In June we put out an article entitled, “Going to the sea”, which was an update on why we owned Sea Limited, South East Asia’s leading e-commerce and gaming business. This piece looks beyond Sea and what similar opportunities there may be in this region. Remember that South East Asia, a region of over 650mn people, once accounted for over half the Aubrey GEMs portfolio, while today it is represented by just the one stock.
Sea has continued to move higher, gaining another 44% in the past quarter, and is now capitalised at over $80bn. At a growth rate of 93%, second quarter revenue blew expectations clear out of the water, and while the gaming side grew a respectable 62%, this masked a truly spectacular 188% growth in ecommerce revenue. Our multiyear thesis of extremely rapid e-commerce growth in the region is playing out, but even faster than expected. And not surprisingly, as it cements its leadership position, the stock is getting re-rated.
Has it done too much? We don’t think so. Firstly, for the sake of context this is not a replay of the dot com bubble of the turn of the century when, some may remember, Amazon reached a valuation of 100x revenue at its peak (although even buying then you would have made over 30x your money if you held until today). For the record, Amazon trades at around 5x revenue today. Secondly, Sea at 12x revenue may seem high, but on its current growth path, it will be back at into single digits before very long, assuming the shares just mark time. To us this feels more like Tencent in late 2013, a year when its shares reached $100, more or less doubling during the year. Many at the time may have thought it had run its course, but since then it has risen a further fivefold, albeit at a slightly more leisurely pace.
Whether $80bn is the right valuation for Sea or not, it now dwarfs the other “leaders” around the region on our watchlist such as Thailand’s CP All (retailer) at $17bn, The Philippines’ Ayala Land (real estate) at $9bn, or Indonesia’s Astra International (auto sales) at $13bn. I remember buying Astra International when it was listed in 1990 for my Indonesian Growth Fund. At the time already a 33 year old business, it was a huge deal with a market cap of around $1bn in those early years. As a sign of how quickly the world is changing, Sea is an eleven year old company that has been listed for less than four years.
More importantly, where are the opportunities in ASEAN to come from now? It is possible to see a resurgence in the more traditional businesses mentioned above. There will also be opportunities in the smaller capitalised, niche end of these markets. But this may need a change for the better in political leadership, which in Thailand and The Philippines at least, does not look imminent. Indonesia’s passing of the so-called “omnibus bill” which, amongst many other things increases flexibility for employers and should ease the complexity and cost of investment, may be a step in the right direction, but we remain to be convinced.
Forgive our scepticism, but let us offer you a quote:
“The thrust of the liberalisation has been toward easing direct investment restrictions to attract the flow of direct investment currently destined for China and Vietnam”
While I could have written this today, in fact it comes from the 1993 annual report of the aforementioned Indonesian Growth Fund. In the same report we were also commending the stability implied by a sixth consecutive “election” victory for President Suharto. For the record it was a good year, with my Indonesian Growth fund rising 117%, and scooping the Lipper award for Best Indonesian Fund – yes, there was a separate category for that then!
To revert to the point, in 2020 the omnibus bill may be too little, too late, especially as that other previous foot dragger in this regard, India, may have beaten Indonesia to the punch. It may surprise some to hear that India has become a net exporter of mobile phones for the first time this year. In Indonesia’s favour, although to a lesser extent than India, its large population and potential home market offers a draw for investment which others in the region may lack. Time will tell, but we doubt we will look back in 20 years on Indonesia as the world’s next factory, after China.
More likely than not, the opportunities in ASEAN will increasingly come from new businesses more akin to Sea. While they are not there yet, and most are still a bit cash thirsty for us, there is a growing list of interesting companies coming to the stock markets over the next year or two. Whether those businesses are listed in their local stock markets, in Singapore or in New York is not important to us, although it will further confuse the indexers.
In the field of e-commerce there are the two Indonesian-only players, Tokopedia and Bukalapak, both of whom we have spoken to in the last few months, as well as the other main regional player, Lazada. Tokopedia has the largest share of e-commerce gross merchandise value (GMV) in Indonesia, partially due to larger ticket sizes than Sea’s Shopee, and it grew that GMV by an impressive 128% in 2019. Bukalapak has taken a different approach and has become more of an Online-to-Offline (O2O) business, tying up with over 1.5 million mom-and-pop stores, or “mitras”, across the country. Lazada stands as the major regional competitor to Shopee, but despite Alibaba control it has not yet shared its parent’s path to success, as suggested by its four CEO’s in as many years since the Chinese giant took control. With a focus on first party (1P) sales, heavily weighted towards consumer electronics, it has lost ground to Shopee’s broad based, marketplace model.
The other major battle today is between the region’s wannabe “super apps”, Gojek and Grab. Their services cover ride hailing, local delivery, payments and much more. Indonesian champion and Tencent backed, Gojek, is trying to push beyond its home market, while the Singapore based, Softbank backed, Grab is already regional with a presence in eight countries, but is now pushing hard into Gojek’s home turf. Interestingly, and not to be left out, our old friend Astra has a small stake in, as well as a joint venture in leasing with Gojek, which is very much the local favourite. Both companies however are currently unlisted.
With Alibaba rumoured to be entering the fray in support of Grab, and Softbank’s Masayoshi Son trying to broker a merger between the two, it is too early to tell what form these businesses will take by the time they reach the public markets. The only thing we can say is that these listings will be big, with current valuations of Grab and Gojek already around $15bn and $10bn respectively.
Beyond this we look forward to South East Asian versions of online travel sites (Traveloka is not far away), video games (Sea’s Garena looks to have this covered), video sharing, social media, online education and healthcare etc. The path is fairly clear, the winners sometimes less so.
Just like China today, the landscape of listed equity in South East Asia will look very different in five or ten years’ time, with the arrival of many large and fast growing new businesses, all of which, by the way, would have been unimaginable to any of us back in 1993. Sea might be the first, but the queue is building.
This document has been issued by Aubrey Capital Management Limited which is authorised and regulated in the UK by the Financial Conduct Authority and is registered as an Investment Adviser with the US Securities & Exchange Commission. You should be aware that the regulatory regime applicable in the UK may well be different in your home jurisdiction. This document has been prepared solely for the intended recipient for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and no representation or warranty, express or implied, is made as to their accuracy. All expressions of opinion are subject to change without notice. Any comments expressed in this presentation should not be taken as a recommendation or advice.
Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated.
Aubrey Capital Management Limited accepts no liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. This document does not in any way constitute investment advice or an offer or invitation to deal in securities. Recipients should always seek the advice of a qualified investment professional before making any investment decisions.