Despite rapid digitalization in Southeast Asia, most ASEAN equity fund managers are choosing to invest in tried-and-true companies within traditional sectors.
They remain wary of the risks associated with younger companies in the new economy, according to a report by The Straits Times.
While companies like Sea, Grab, and GoTo have emerged as significant players in e-commerce, ride-hailing, and digital entertainment, they are considered high-risk investments.
Instead, financial services, telecommunications, and industrial conglomerates continue to dominate the portfolios of these fund managers.
Hunter Beaudoin, an analyst at Morningstar Manager Research Services Asia, told the publication, “Most of these companies are either not yet profitable or have only recently turned profitable, making future returns uncertain.”
Profitability challenges for tech giants
Southeast Asia’s largest tech firms, including Sea, Grab, and GoTo, are grappling with profitability challenges.
For instance, Indonesia’s GoTo, the country’s biggest tech company, reported a loss of 70 billion rupiah (S$5.8 million) in the second quarter of 2024.
According to Maybank analyst Etta Putra, GoTo’s structural issues stem from high marketing expenses and discounts that undermine its ability to achieve profitability.
Grab, another major player headquartered in Singapore, also faced difficulties, reporting a loss of US$53 million (S$69 million) for the same quarter.
Although Sea Ltd posted a net income of US$163 million in 2023, it experienced a sharp decline in profit for the second quarter of 2024, with earnings dropping 75.9% compared to the previous year.
Valuation difficulties and volatile stock prices
One significant barrier to more widespread investment in these new economy firms is the challenge of accurately valuing them.
Traditional valuation methods, such as sales or EBITDA (earnings before interest, taxes, depreciation, and amortization), often do not provide a complete picture, as many of these companies have limited track records and lack consistent profit growth.
Overvaluation is a concern, especially in highly competitive sectors where high expectations are built into stock prices.
Stock price volatility complicates the situation further. Sea Ltd, for example, saw its stock price increase over 2,000% from its IPO at US$15 in 2017 to a peak of around US$367 in 2021.
However, by October 2024, the stock was trading at US$95, reflecting significant fluctuations as the market reassessed the company’s long-term profitability.
A similar trajectory was observed with Grab, which experienced a surge in valuation after pivoting into food delivery and digital payments.
Grab’s December 2021 listing on Nasdaq, the largest US debut for an ASEAN company, was initially met with enthusiasm.
However, as market scrutiny of unprofitable companies grew, its valuation plummeted from a high of US$40 billion to US$14.6 billion by October 2024.
GoTo, which merged the ride-hailing firm Gojek with the e-commerce platform Tokopedia, has also struggled.
The company’s shares have fallen 80% below their IPO price since its listing in 2022, highlighting the challenges these digital economy firms face in maintaining investor confidence.
Cautious optimism
While most fund managers remain conservative, some early adopters see opportunities in the new economy space.
JP Morgan ASEAN Equity was among the first to invest in the region’s burgeoning tech sector.
Nikko AM Shenton Thrift also capitalized on Sea Ltd’s market leadership in mobile gaming, e-commerce, and digital payments.
However, even these fund managers have exercised caution, adjusting their holdings based on market dynamics.
For instance, Nikko AM Shenton Thrift initially sold off its Sea stocks in 2023 due to intensifying competition and challenges in the gaming sector but later repurchased shares in early 2024 when the company showed signs of sustained profitability.
Most funds, such as Manulife GF ASEAN Equity, have stayed away from these companies altogether, preferring to invest in profitable growth stocks.
The cautious stance taken by many fund managers can also be attributed to past failures, such as the high-profile closures of bike-sharing startups oBike and Ofo in Singapore.
These ventures burned through cash quickly and collapsed under unsustainable business models, serving as a stark reminder of the risks of prioritizing growth over profitability.
Bright spots: IPOs and digital initiatives
Despite current challenges, there are signs that the future could be brighter for Southeast Asia’s digital economy.
The ASEAN Digital Economy Framework Agreement, projected to be the world’s first comprehensive regional digital economy agreement, aims to double the region’s digital economy value to US$2 trillion by 2030.
This initiative could spur more investment in emerging sectors and create a more diverse investment landscape.
Additionally, several highly anticipated IPOs of regional unicorns are expected shortly.
Thai food delivery service Line Man Wongnai, Malaysian auto e-commerce platform Carsome, and Philippine fintech firm GCash are among the companies preparing to go public.
These listings could provide investors with fresh opportunities to tap into the region’s digital growth.
Hunter Beaudoin emphasized that the region’s youthful, digitally savvy population will be a key driver of future growth in Southeast Asia’s new economy.
“ASEAN’s strong fundamentals, coupled with continued government support, will ultimately create a more diverse and attractive investment environment,” he said.
While fund managers remain cautious for now, the long-term potential of the region’s digital economy is undeniable.
Investors willing to navigate the risks and focus on companies with a path to sustainable profitability could find significant opportunities in the years to come.
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