2023-05-01 21:49:21 ET
Summary
- GRAB has one of the leading superapps in Southeast Asia, which provides lots of optionality for the company to expand into other businesses by leveraging its massive customer base.
- The demand for food and grocery delivery services in Southeast Asia experienced slower growth in 2022 as COVID restrictions eased and life returned to normal.
- The Southeast Asian market presents growth opportunities but also unique challenges for ride-hailing and food-delivery businesses.
- With shares at a premium valuation compared with peers, I would recommend waiting on the sidelines for a better entry point.
Thesis
Grab Holdings Limited ( GRAB ) is the major ride-hailing and food delivery player in Southeast Asia, benefiting from the high mobile internet penetration in the region. However, lower income levels and car ownership in the region may impact the longer-term profitability potential of GRAB. Food delivery is considered a premium service, but consumers' propensity to spend money on convenience is lower in an overall lower-income environment. However, GRAB's super-app strategy leaves lots of optionality in the story and could allow the company to expand into new markets or add more businesses to its portfolio. With the shares trading at a premium multiple relative to peers, I recommend staying on the sidelines to new investors.
Why do I maintain a hold rating on the stock?
GRAB is the dominant player in Southeast Asia in ride-hailing (~71% share) and food delivery (~54% share). These business models are well-established globally, and the high mobile internet penetration in Southeast Asia presents opportunities for growth. However, there are some nuances to these business models in the region that may impact the long-term investment case for GRAB.
In the ride-hailing segment, the lower income levels in Southeast Asia mean that few drivers own their own cars. This is in contrast to more developed economies like the US and Europe, where most drivers own their own cars, and the additional fixed cost of being a ride-share driver is limited to incidental costs such as insurance and licensing. In Southeast Asia, drivers need to lease the car from GRAB or third-party car leasing companies in partnership with GRAB, incurring incidental costs similar to those in developed economies. This means that the driver's calculus of cost/income is different from drivers in other regions, and the challenges of recruiting drivers since the easing of COVID-19 lockdowns has been significant. Drivers view being a GRAB driver as a full-time job, and when income dropped during the pandemic, former drivers had to find other jobs, falling out of the "driver pool" for GRAB. To lure them back, GRAB needs to offer significant incentives or wait for their other jobs to disappear due to slower macroeconomic conditions. This is a unique challenge for ride-hailing businesses in emerging markets.
In the food delivery segment, consumers pay extra for convenience, excluding incentives provided by platforms like GRAB. In some megacities in Southeast Asia, like Singapore, Bangkok, Manila, and Jakarta, there is a sizable opportunity for food delivery in the long run. However, outside of these cities, the lower discretionary income levels and lack of choices in terms of prepared food limit the TAM for food delivery. Residents in smaller cities with lower incomes rely heavily on cooking their meals or buying from food stalls next door. This presents a particular challenge for GRAB, as it may not be able to achieve the same profitability levels seen by food delivery companies in developed markets or in China, where Meituan has been able to build a highly profitable food delivery business. If GRAB decides to cut back on consumer incentives, order growth may be affected, and consumers' costs of meals may increase if they want the meals delivered instead of picking them up themselves.
Despite these challenges, GRAB has a significant differentiator in its superapp , which has hyper-local features and has become the leading app for local services in Southeast Asia. This app is a low-cost customer acquisition channel that allows GRAB to potentially expand into new markets or add more businesses on top of ride-hailing or food delivery. For example, restaurant reviews or travel are two areas where GRAB could expand to establish a dominant position.
While I am bullish about the growth of the digital economy in Southeast Asia in coming years and impressed by the strong competitive positioning GRAB has in its core segments (ridehailing and food delivery), as well as solid execution by GRAB’s strong management team, with shares trading currently at ~$3, or 3.2x FY24E EV/S multiple, higher than the multiples of most of its global peers, I would recommend waiting on the sidelines for a better entry point.
Delivery Industry Overview
The high mobile and internet penetration rates in Southeast Asia have created a significant growth opportunity in the delivery industry. Many countries in the region, such as Vietnam, Indonesia, and the Philippines, have mobile penetration rates exceeding 100%, with over 100 million subscribers in each country. The COVID-19 pandemic accelerated the shift towards digitalization in Southeast Asia, as governments implemented social distancing and dining restrictions. Consumer behavior has also changed, with over 98% of new Internet users across prominent Southeast Asian countries indicating their intention to continue using online services introduced during the pandemic. Usage and spending have also increased among existing users, with around 60% of food delivery users in the region increasing their usage and spend compared to pre-COVID levels. These trends suggest a strong potential for growth in the delivery industry in Southeast Asia.
Gartner
Market continued to grow but at a slower pace
The demand for food and grocery delivery services in Southeast Asia (SEA-6) has experienced slower growth in 2022 as COVID restrictions eased and life returned to normal. As per the Food Delivery Platforms in Southeast Asia report by Momentum Works for 2021, total food and grocery deliveries GMV increased by 5% to reach $16.3bn, compared to 30% in 2021. Smaller markets like the Philippines, Malaysia, and Vietnam drove GMV growth, while larger markets like Indonesia, Thailand, and Singapore shrunk. Factors contributing to this slowing growth include the resumption of in-person dining, reduced government subsidies for deliveries, and reopening of borders.
The Lowdown Asia
Grab remains a market leader in the highly concentrated industry
Despite facing competition from several single- and multi-segment players in the industry, Grab remains the dominant player in all the markets it operates in, holding double the market share of its next closest competitor, Foodpanda. Foodpanda primarily focuses on food and grocery delivery and holds 23% of the market share, while GoFood by Gojek is a closer third, holding nearly 50% of the market share in Indonesia. Other smaller regional players, such as Deliveroo in Singapore and Line Man in Thailand, primarily focus on food delivery, while some chains like Domino’s or Pizza Hut have their own online ordering platforms and delivery fleets. Despite the competition, Grab's ubiquitous presence in Southeast Asia makes it the most entrenched player in terms of scale and mind share. In a 2021 Euromonitor survey conducted across Southeast Asia's six largest economies, GrabFood was the first brand that consumers associated with the online food delivery space.
Valuation
I value GRAB on an EV/S basis. Grab is trading at a premium to its peers Meituan (MPNGF) , DoorDash (DASH), and Uber (UBER) , and I believe there are limited chances of upward multiple re-rating in the near-term. I have an end-of-year price target of $3.5 on the stock based on an assumed EV/Sales multiple of 3.5x and estimated 2024 revenue of $2.7 billion .
The superapp strategy leaves lots of optionality in the story, but for new investors looking for an entry, I would recommend waiting for a better entry point, given the company’s premium valuation multiple. While I am conservative about further upside from GRAB’s current core businesses (ride-hailing and food delivery), I do believe GRAB has one of the leading superapps in Southeast Asia, and it is possible the company, guided by its strong management team, may expand into other newer businesses by leveraging the reach and massive customer base of its superapp, which can lead to multiple expansion.
Y-charts
Risks
Grab, a popular ride-hailing and delivery platform, has been offering significant incentives to attract drivers and users. Grab's ability to become profitable depends on reducing the amount of incentives paid out while maintaining user and partner growth. However, this could be challenging as users and partners may shift to other platforms that offer better discounts and lower fees, leading to a decline in usage of Grab's services.
During the COVID-19 pandemic, Grab's delivery segment experienced significant growth as consumers turned to delivery services instead of dining out. Grab responded to this demand by expanding its offerings, including GrabMart, GrabSupermarket, and GrabExpress. However, in a post-pandemic world, it is uncertain if delivery demand will remain at the same levels or continue to grow. Additionally, the closure of restaurants due to reduced demand for dine-in eating may negatively impact Grab's delivery segment. Overall, Grab's ability to reduce incentives while retaining user and partner growth and adapt to post-pandemic changes in demand for its services will be crucial for its profitability.
Investors' Takeaway
GRAB is a dominant player in Southeast Asia's ride-hailing and food delivery markets, but the future presents limited growth opportunities due to lower income levels in the region. GRAB's superapp, with hyper-local features, has become a leading app for local services in Southeast Asia and is a low-cost customer acquisition channel for expanding into new markets or adding new businesses. The company’s stock trades at a premium multiple which is why I remain conservative and recommend a hold rating on GRAB stock. For new investors, I would recommend waiting on the sidelines and look for a better entry point.
For further details see:
Grab Holdings: Limited Upside Potential From Current Levels