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Sea to find most success by replicating a strategy similar to Tencent: Maybank

Khairani Afifi Noordin
Khairani Afifi Noordin8/2/2022 12:26 PM GMT+08  • 5 min read
Sea to find most success by replicating a strategy similar to Tencent: Maybank
Backed by the original superapp creator Tencent, Sea is currently Maybank's clear favourite to dominate the region. Photo: Bloomberg
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Maybank Securities analyst Samuel Tan prefers Sea in its coverage of Asean internet companies, believing the company could find the most success by replicating a strategy similar to Tencent.

In his August 1 report, Tan says Sea is currently his favourite to dominate the region in the future, while leading mobile wallet Grab appears to be lagging behind in miniapp development.

Superapps normally start off as an app with a single use case, notes Tan. As the business exhausts adjacent verticals, the company then looks to become an open platform through application programming interface (APIs) and software-as-a-service (SaaS) revenue streams.

Mature superapps then move to rolling out development and deployment tools (also known as miniapps) usually hosted on the public cloud which marks a transition to platform-as-a-service (PaaS).

In Asean context, more than one company has declared itself a superapp — Grab being the most notable. Tan believes that Sea could be moving towards such a strategy, due to its close association with Tencent and its strategic moves into food delivery and digital financial services.

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He highlights that Sea is currently trading at a 78% discount to its peak in October 2021 and that markets are undervaluing the company based on Maybank’s sum of the parts (SOTP) target price of US$105.

“We believe that the superapp story is an additional path-to-profitability narrative for investors to look out for, and that given the low valuation Sea is currently trading at, confirms our belief in a deep value opportunity emerging once interest rates stabilise,” says Tan.

A conglomerate discount could be another explanation for Sea’s trading price that is below Maybank’s SOTP intrinsic valuation. If so, a maturation of the superapp story could see that discount lifted and possibly transformed into a premium, says Tan.

Tan points out that Sea’s business model is very similar to Alibaba and that its path to superapp status will likely emerge from ShopeePay. Fast growing its market share, ShopeePay is currently seen as a peripheral service to Sea rather than as the core business.

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“We think that a potential sign of ShopeePay becoming a greater focus is if SeaMoney were to launch a separate ShopeePay app to work on a more superapp-focused user interface, separate from the very cluttered Shopee mobile app, to pave the way for miniapps in the same template as Paytm and Alipay itself,” explains Tan.

Grab’s approach 'ultimately unsustainable'

Grab announced its aim to be an everyday superapp in 2018, promising to deliver a suite of APIs under its open platform. Although Grab never alluded to any miniapps feature being in the pipeline, Tan says the superapp strategy was largely perceived by the media as an emulation of the Chinese success story.

“Since then, its most significant API is GrabMaps, which was commercialised only in June 2022, a long four years after GrabPlatforms was announced. We asked Grab whether developing a miniapp capability is on the horizon, and Grab shared that this is currently not a priority.

“Instead, we see from recent press releases that Grab’s preferred mode of vertical expansion appears to be acquisitions of traditional businesses — this includes Jaya Grocer for expansion into grocery delivery in Malaysia and Bank Fama for expansion into digital banking in Indonesia, both in 1Q22 — or strategic partnerships,” says Tan.

This approach of vertical expansion depletes capital, adds more business risk and introduces more payback periods into the company’s financial performance and that is being reflected in Grab’s share price through its high beta versus the benchmark, notes Tan. “We think this approach is ultimately unsustainable, given that the cost of capital has increased in this rising interest rate environment,” he adds.

Grab is currently trading at a premium to Maybank’s SOTP target price of US$2.29. This does not yet incorporate any conglomerate discount for the increasing diseconomies of scale that Maybank expects from increasing strategic misfocus as Grab enters into more and more verticals to achieve its “Everyday, Everything” lifestyle agenda, unanchored by the PaaS model.

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Maybank is still sticking to the guidance and forecast for Grab to turn profitable by FY2025. This is despite the mounting risks of the projection not materialising, given long-term headwinds to the delivery and mobility sectors from food security issues and higher fuel prices.

“While we would be more positive about Grab if it were to announce a pivot to miniapps tomorrow, we are also not sure that its superapp strategy will succeed; the mobility to superapp story has not been demonstrated anywhere else in the world.

“However, GrabPay is the leading mobile wallet in Asean, and in a much better position than ShopeePay in most markets, which implies that Grab will be following the Alipay and Paytm superapp story if pursued, while going toe-to-toe with Sea,” notes Tan.

If Grab continues with acquisitions and organic growth as the principal investor in the pursuit of its superapp, Maybank expects Grab to be increasingly penalised on the EV/S metric by sinking further into the red.

Tan further notes that unlike Sea which has Garena’s cash generative capacity as a support, Grab has no such wellspring to lean on, apart from the cash hoard it has raised. “Grab may ultimately be better off abandoning its ‘superapp’ ambition and focusing full efforts on the unit economics of its core businesses, benchmarking itself to Uber.”

Shares in Sea and Grab closed at US$77.24 and US$2.88 respectively on Aug 1.

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