GTOFF - Ryde Group: Brace For A Bumpy Ride

2023-10-27 12:07:04 ET

Summary

• Singapore-based Ryde Group has filed to list 2.25 million Class A shares on the NYSE at an indicated price range of $4-5 per share.
• The company plans to use the proceeds to shore up working capital, develop a super app to expand its offerings and conquer additional markets.
• Ryde is financially strapped, lacks operating experience outside of its home market, and faces mounting competition.

Introduction

Singapore-based Ryde Group (RYDE) has filed to list 2.25 million Class A shares (with an overallotment option of 337,500 shares) at an indicated price range of $4-5 per share to raise net proceeds of $8.0 million (or $9.5 million if Maxim Group, the sole bookrunner, exercises its overallotment option in full). This would give the company a market cap of $82.9 million at the midpoint and a share to outstanding float ratio of 12.2%, assuming no exercise of the overallotment option. The amount is a drop in the bucket compared to the company's aborted plans to launch an SGD 200 million (USD $148.9 million) IPO on Singapore's SGX Catalist exchange back in March 2022.

There are some significant risks worth mentioning:

a) As an emerging growth company and foreign private issuer, the company is subject to relaxed reporting requirements.

b) The company maintains two separate share classes, and the Chairman/CEO and a major venture capital investor will control almost 84% of the voting power since their Class B shares are entitled to 10 votes per share. Thus, the company will continue to be very closely held.

c) The company's auditor has raised doubt about the company's ability to continue as a going concern as Ryde's working capital amounted to -$3.2 million and its shareholders' deficit to -$7.7 million as of year-end 2022.

The company's executive officers, directors, and existing shareholders have agreed to a lock-up period. In the original F-1 filing, this ranged from 12 to 36 months. However, the latest amendment appears to have revised the figure downward to 3 to 36 months while waiving the lock-up requirements for an unspecified number of shares for certain unnamed executive officers and/or directors ( Annex VI in the latest F-1/A ). Unfortunately, we don't know the details yet as the agreement itself (Annex IA and IB) has not been updated or signed.

Here's the actual language from the latest F-1/A:

We and each of our directors, executive officers and all existing shareholders of our ordinary shares have agreed , for periods varying between three (3) months to thirty-six (36) months on distinct portions of their issued and outstanding ordinary shares (Class A Ordinary Shares and/or Class B Ordinary Shares, as applicable) after the date of this prospectus, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale, lend or otherwise dispose of, except in this offering, any of our ordinary shares or securities that are substantially similar to our ordinary shares, including but not limited to any options or warrants to purchase our ordinary shares or any securities that are convertible into or exchangeable for, or that represent the right to receive, our ordinary shares or any such substantially similar securities (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date such lock-up agreement was executed), without the prior written consent of the underwriter.

While Ryde operates in Singapore, Malaysia, Hong Kong and Australia, the overwhelming majority of its revenue comes from Singapore. The company was founded by Chairman/CEO Terrance Zou in 2014 as a carpooling app focused on the social aspects of carpooling, such as meeting new people and saving the environment. Over the years, Ryde has expanded its core mobility services to include private-hire car service, taxi service, and pet-friendly carpooling service.

The company's core mobility products include the following:

RydePOOL , a carpooling app that allows real-time, on-demand, or advance bookings.

RydeX , an on-demand ride-hailing app that assigns groups of 1-4 passengers to private hire or taxi drivers.

RydeXL , an on-demand ride-hailing app that assigns larger groups of up to 6 passengers to private hire drivers.

RydeLUXE , a premium ride-hailing app, featuring professional drivers behind the wheel of Toyota Alphard or Vellfire six-passenger SUVs.

RydeFLASH , a fast pay-per-seat ride option, assigns groups of 1 to 4 passengers to either private hire, taxi, or carpool drivers.

RydePET , a pet-friendly transport option that assigns groups of up to 2 passengers and their pets to private hire and taxi drivers.

RydeHIRE , which allows passengers to rent drivers by the hour and make multiple stops.

RydeTAXI , an online metered taxi ordering app for groups of up to 4 passengers.

To expand its footprint in last-mile package delivery (so-called quick commerce), the company recently acquired Meili Technologies Pte. Ltd., which operates a network of package delivery drivers in Singapore and Malaysia. The company's RydeSEND app provides quick on-demand or scheduled multi-point delivery of packages with real-time tracking.

Ryde has also introduced several payment and customer loyalty apps, including RydePay, a digital payments solution that allows passengers to pay fares or top up with a credit or debit card, and RydeCoins, a proprietary payment token that provides loyalty rewards to passengers along with credit toward future rides. Ryde has also introduced a value subscription plan, Ryde+, which provides expedited booking and discounts within the Ryde ecosystem for a fixed monthly fee (currently SGD 19.99 per month or 49.99 per quarter).

Financial data:

The company reported the following financials in its latest F-1/A:

Revenue/YoY change:

2022: SGD 8.825 million (USD 6.577 million) / +42%

2021: SGD 6.195 million (USD 4.617 million)

Net loss/YoY change:

2022: SGD 4.96 million (USD 3.697 million) / +300%

2021: SGD 1.24 million (USD 0.924 million)

Loss per share/YoY change:

2022: SGD 0.42 (USD 0.32) / +300%

2021: SGD 0.11 (USD 0.08)

Net cash used in operating activities/YoY change:

2022: SGD 3.841 million (USD 2.862 million) / +3,348%

2021: SGD 0.112 million (USD 0.083 million)

The rapid revenue growth in 2022 was bolstered by advertising sales, which started up in June, and sales of the company's new Ryde+ premium membership. The former included the sale of in-app/web advertising space and the display of merchant ads within the mobile/web platform and e-mails under contractual agreements.

Meanwhile, the company's core mobility segment, which accounted for 75% of its sales , was fairly stagnant, increasing by just 7% year over year. In spite of the fact that the company increased its spending on driver and customer promotions (85% of sales in 2022 versus 68% of sales in 2021), year-over-year GMV declined by 11% and the number of transactions fell by 29%.

Financial ratios*:

Price/Sales: 12.6x

EV/R: 13.3x

* based on YE 2022 data and no exercise of the underwriter's overallotment option

Market opportunity (all data from the latest F-1/A):

The company states that the pandemic had a significant impact on Singapore's mobility market, with the market contracting in size from USD 2.572 billion in 2019 to USD 1.275 billion in 2021. However, they expect the market to increase from USD 1.849 billion in 2022 to USD 6.026 billion in 2027, representing a CAGR of 26.7%. In terms of segments, ride-hailing, which accounted for 92% of the mobility market, is expected to grow at a CAGR of 26.2% from 2022 to 2027 while carpooling is expected to grow at a CAGR of 31.1%.

The Average Revenue Per User (ARPU) for ride-hailing is forecast to increase from USD 336.00 in 2023 to USD 391.30 in 2027, with the penetration rate rising from 41.1% to 43.8%.In spite of its status as a developed market, the ultra-high cost of car ownership in Singapore has facilitated rapid growth in the ride-hailing and carpooling industry. The country's customs duties on vehicles, which account for up to 45% of the vehicle's price, and registration fees (up to 150% of the vehicle's price) are among the highest in the world. For this reason, Singapore has one of the highest ride-hailing utilization rates (64%) in Southeast Asia.

As for the quick commerce market, it is expected to grow from USD 6.384 billion in 2022 to USD 13.492 billion in 2027, representing a CAGR of 16.1%.

Competition:

In Singapore, the mobility market is highly concentrated, with the top 5 players accounting for 95.2% of the market share. Ryde competes with Grab (GRAB), Gojek (GTOFF), Tada, Jugnoo, Comfort Del Gro (CDG Zip app), MVL, Filo, Karidi, Urge, Maxim, and new entrant Geolah (GeoRide app). Grab, which was the first ride-hailing company to enter the Singapore market, is the clear market leader , with a 50.2% share as of Mar. 2022, followed by Gojek (17.1%), CDG Taxi (15.1%), and Tada (11.1%), while Ryde brings up the rear at 5.9%. In terms of GMV, the disparity is even greater , with Grab accounting for 65.2% of the market and Ryde just 2.5%. Indeed, when Singaporeans were surveyed about which app they used most often, Grab was cited by 74% of respondents while Ryde was cited by less than 1%.

As far as carpooling goes, Grab is also the market leader , offering a popular social, non-commercial app called GrabHitch along with a commercial app, GrabShare. Other competitors include Tada, which competes on price with a zero-commission policy, and Swat Mobility .

The quick commerce market, which has expanded in recent years to encompass retail, supermarkets, food delivery, and errand services, is also highly concentrated in Singapore, with the top 10 players accounting for 97.0% of the market share in terms of 2022 GMV. Once again, Grab is the clear market leader, with a 46.2% share of GMV. Aside from Grab, major competitors include GoGoX, Deliveroo (DROOF), Lalamove, and Pickupp.

The company indicated that it plans to use the funds from the IPO for working capital and other purposes (45%), research and development to improve its mobile and web-based technology and service offerings (20%), marketing and brand-building activities (20%), and expansion into other Southeast Asian and oceanic markets (15%). The earmarked funds for research and development include plans to develop a ?super mobility app" bundling a variety of mobility and package delivery services (similar to what Grab and Gojek already offer).

The Bull Case

Ryde's low driver commissions ( 10% versus 20-25% for Grab and others ) may enable the company to carve out a defensible niche, allowing it to poach business from drivers who are dissatisfied with Grab's draconian commissions (I have personally experienced several major disruptions to Grab's service from driver strikes and licensing issues that made it impossible to order a ride). Combine this with the cost-savings of the Ryde+ membership program, which grew from just SGD 21,000 (USD 15,663) in 2021 to SGD 606,000 (USD 452,000) in 2022 , and the company may have a bright future as an attractive low-cost alternative to the major players in the industry.

In addition, Singapore's Land Transport Authority is currently reviewing ride-hailing and taxi regulations . The review is focused on supply and night-time availability issues, the inclusivity of services, and the adoption of clean-air vehicles and is expected to wrap up in the second quarter of 2024. However, at this time, it's an open question as to how this will impact the various players in the industry and whether it might provide Ryde with a competitive advantage.

Aside from these arguments, there's the charitable aspect of an investment (cue up the sarcasm font). Ryde is up to its eyeballs in debt, faces mounting competition from better-capitalized international competitors, and desperately needs a lifeline to stay afloat. For just $5 a share, you can help feed this poor, disadvantaged company for up to a year, giving it hope as well as a new lease on life.

The Bear Case

Where shall I begin? Perhaps with a historical analogy from the infamous toaster wars of the late 20th century. Back in 1968, Nabisco tried to go toe-to-toe with Kellogg's (now called Kellanova ), the 800-pound gorilla of the toaster pastry world. The company's product, Toastettes , featured a crispier crust, a fresh fruit filling, and glittery sugar sprinkles. However, none of this made a darned bit of difference as Kellogg's had a vast advertising war chest and simply continued to inundate the airwaves with non-stop Pop Tart commercials. As these uber-processed treats continued to grow in market share, the network effect kicked in. Retailers began allocating ever-increasing shelf facings to Pop Tarts, pushing aside smaller competitors like Toastettes. By the mid-1990s, the last Toastettes disappeared from store shelves and faded ignominiously into the history books.

Unlike Ryde, which is vastly undercapitalized, lacks any operating experience outside its home market, and is dwarfed in scale by its main competitors, Nabisco was an established, well-funded multinational company with years of experience in the US market. Yet, they were nonetheless unable to overcome Kellogg's superior brand awareness and advertising resources. Ryde alludes to this network effect in its F-1/A, stating that:

More riders will lead to an increased number of trips and consequently higher driver partner utilization and earnings for the driver partners. This in turn will attract more driver partners and enable us to reduce fares for consumers through the effects of dynamic pricing.

The company claims in the prospectus that its network of over 100,000 driver partners and 900,000 registered riders is a competitive advantage due to this network effect. Although I wasn't able to find any recent data, it's reasonable to assume that Grab and Gojek boast far stronger numbers. Moreover, the methodology behind this number may merit scrutiny since Grab only had around 40,000 drivers back in 2016 while the Strait Times has indicated there were a grand total of 55,000 active private-hire and taxi drivers operating in the city-state as recently as March this year.

Ryde's stagnant mobility revenue (despite a significant increase in driver and customer promotional spending) suggests that the network effect from competitors' significantly larger driver pools and passenger bases may simply be much of a barrier to overcome. It's clear from the intended use of the IPO funds (55% for working capital and ?other purposes"), the accumulated deficit, and the negative cash flow that Ryde is hemorrhaging cash and in desperate need of funding. Therefore, I question whether 45% of $8 million in proceeds (or $9.5 million if Maxim Group fully exercises the overallotment option) is going to be enough to enable them to create a ?super app" and develop a presence in other Southeast Asian markets (or even successfully defend their own turf).

Then there's the valuation, which is approaching nosebleed levels. Even factoring in the 42% revenue growth in 2022 (and ignoring the stagnant growth in mobility revenue), at a price/sales ratio of 12.6x and an EV/R of 13.3x (assuming no exercise of the overallotment option), Ryde will be priced at a formidable premium compared to its market-leading competitors (e.g. Grab at a current EV/R of 4.54x with a revenue growth rate of over 76% and Gojek at a current EV/R of 2.88x with a revenue growth rate of over 86%).

As if this isn't enough of an argument against an investment in the offering, there's the lack of public shareholder influence, with the Chairman/CEO and DLG Ventures collectively controlling 84% of the overall voting power, along with the less stringent reporting requirements as a foreign private issuer and emerging growth company.

Finally, while the company notes in the prospectus that it expects increasing consolidation in the industry, I question whether a company like Grab or Gojek would be interested in acquiring Ryde's dwindling 6% of Singapore's mobility market in the absence of any visible market segment leadership (Grab is already the market leader in ride-sharing, carpooling, and last-mile delivery!) or cutting-edge technological capabilities.

The Sizzle

I don't see anything here that's likely to excite investors, and the disappointing aftermarket performance of fellow ride-share competitor Grab suggests that there probably won't be a lot of retail demand from investors looking for the next ?hot" Southeast Asian ride-share IPO. Add Ryde's lack of brand awareness, minuscule market share in its home market, and limited financial resources, and I just don't see a recipe for solid aftermarket performance. Finally, with an adequate 12.2% share-to-outstanding float ratio, the stock is unlikely to generate a big first-day pop thanks to limited supply.

Rating (on a scale of 1-5, where 1 pepper is a supreme fail and 5 peppers is a smashing hit)

The Steak

While Ryde's YoY revenue growth (42% in 2022) looks impressive at first glance, as the core mobility segment declined in terms of GMV (-11%) and transaction volume (-29%), I question whether the company will be able to maintain this pace of growth simply from advertising revenue, which grew from a non-existent base, and Ryde+ membership sales. Deducting the 55% that's earmarked for working capital and ?other purposes" leaves the company with just $3.6-$4.3 million (depending on the exercise of the overallotment option) to develop a super app and successfully penetrate additional Southeast Asian markets.

Call me a doubting Thomas, but I'm skeptical that this meager amount of funding is going to enable them to compete on a level playing field with much larger, better-financed companies like Grab and Gojek, which have years of experience operating in these markets. In the final analysis, Ryde is a ?me-also" company with no distinct competitive advantages, operating in an industry where, despite low barriers to entry, the network effect builds an enormous moat (i.e., drivers prefer to work with the ride-share companies with the largest amount of customers while riders prefer to patronize ride-share companies with the greatest number of drivers).

Despite these long odds, Maxim has priced the offering at a huge premium, so investors should brace for a bumpy ride.

Rating (on a scale of 1-5, where 1 pepper is a supreme fail and 5 peppers is a smashing hit)

Overall Rating

Avoid this Ryde at all costs.

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