ASEAN Tech Stocks: What's In Store for 2023?

Kate Lin: Welcome back to Morningstar Asia Outlook for 2023. I'm Kate Lin, an editor based in Hong Kong for Morningstar. Today, we're focusing on Southeast Asia's internet companies. Grab (GRAB) and Sea Ltd (SE) are two most well-known players in the space. And after a painful plunge in their share prices, is the digitization investment thesis still solid? We're asking Kai Wang, senior equity analyst at Morningstar.

Hi, Kai. Grab is a ride-sharing leader while Sea Ltd operates an e-commerce platform. How have these businesses performed in a volatile 2022?

Kai Wang: So, Grab has done a little better than Sea. Grab recently hit their monetization rates before their target date while Sea still hasn't really been able to replenish their gaming pipeline, and some of their e-commerce geographies are still not making money yet. They're still trying to figure out how to turn a positive profit in their e-commerce space.

Lin: Most recently, both companies have reprioritized profitability over growth. Why is that, and how has it worked out so far?

Wang: Simply put, the cost of capital is now a lot higher than two three years ago. So, therefore, the longer they don't make a profit, the greater the cash burn, and the likelihood that they have to borrow at a higher rate.

Lin: We're seeing how Chinese players build out all-in-one internet platforms like the one Tencent has. Are Grab and Sea Ltd paving a similar path? How will this help to fortify their moat?

Wang: Yeah, they try to do that through their fintech operation and their businesses. So far, it hasn't really panned out yet. Fintech is very saturated in Southeast Asia. So, really, how we look at Grab and Sea is just through their standalone services. For Grab, their delivery and ride-sharing services and for Sea, their gaming and their e-commerce operations.

Lin: Right. Lastly, both of these companies dropped by over 60% last year in their share prices. What are the key catalysts to watch in this year?

Wang: Basically, we want to see profitability without sacrificing too much of growth. So, therefore, for Grab, we want to see there a continuation of them increasing the modernization rates and the volume of deliveries in ride sharing. And then, for Sea, we want to see more transactions while being able to make a profit.

Lin: Thank you so much, Kai. Stay tuned for more on the outlook series.