Analysis: The rise and rise of Southeast Asian tech giant Grab

A few days ago, it was announced that food delivery giant Grab Holdings is reportedly seeking a listing in the US. It could float as soon as this week through a merger with one of Altimeter Capital Management’s SPACs (Special Purpose Acquisition Company), which is already listed on the stock market.

Talk of an IPO for the ride-hailing and food delivery app comes hot on the heels of the flotation of Deliveroo in London last week. That listing was not exactly a success, with Deliveroo’s stock price plummeting by 29 per cent on its first day of trading. However, it does not look like a potential Grab IPO will face such a lukewarm reception and it could set the stage for other Southeast Asian unicorns to list in the US.

Why is Grab shunning a regular IPO?

The Grab IPO is unusual in that its listing on the stock market will be secured by merging with a SPAC. These businesses are set up specifically with the aim of raising capital through a listing and are known as ‘blank cheque companies’, as investors do not know which particular company will eventually buy into it.

The advantage of this construction is that Grab is able to avoid a lengthy listing process and avoid scrutiny of its financials. The listing is also expected to allow Grab to raise US$2 billion and would value the business at US$35 billion, resulting in a significant payday for its founder and CEO Anthony Tan, as well as backers such as SoftBank Group and Toyota.

Transformation into a super app

It is quite ironic that Grab’s financials will not be put under the spotlight as there is certainly reason to be optimistic about its prospects. The company was founded as a ride-hailing app in Malaysia in 2012, but quickly expanded into other Southeast Asian markets. Along the way it saw off some formidable competition, with Uber exiting the region in 2018.

But where Grab has really set itself apart is its relentless diversification. When it was still a transportation business, it quickly discovered that many of its customers were lacking access to basic services such as banking. This gave rise to the development of the app into a digital payment service. Other services such as food deliveries followed, which has essentially led to it becoming an all-in-one ‘super app’.

Food deliveries overtake transport in terms of sales

Grab’s Southeast Asian market gives it access to a captive audience of around 650 million people. So far the app has been downloaded 214 million times, so there is still much scope to grow. The company is now active in nearly 400 cities in eight countries, with its food delivery business overtaking the transport division to become its biggest segment last year.

While its ride sharing business was impacted by the pandemic in 2020, Grab reported that overall revenues still managed to soar by 70 per cent year-on-year. Crucially, the transport division has already broken even in all countries – including in its biggest market, Indonesia. Grab’s food deliveries are forecast to break even during 2021, in sharp contrast to the losses racked up by Deliveroo.

Meanwhile, it is very unlikely that Grab will face the same problems as Deliveroo as currently facing in regards to how it employs its riders. Southeast Asia is notably more relaxed on the gig economy employment model than many European countries in which Deliveroo is facing legal challenges. 

Financial services set to become major growth driver

While many analysts expect Grab to reach profitability in 2023 at the earliest, this is mainly because of heavy investment in its financial services division. And it is exactly these activities that will likely be the biggest growth driver for Grab over the longer term.

A majority of the Southeast Asia population  – estimated to be around 70 per cent  – is unbanked and lacks access to mainstream financial services such as lending, credit cards and insurance. Obviously, the app has made a difference through its digital payment facilities, which are similar to those used by Alipay and WeChat Pay, but Grab is aiming to expand into other services as well.

A key development has been the granting of a virtual banking license in Singapore, which Grab will operate in a consortium with Singtel. This business is expected to launch in 2022 and will help accelerate Grab’s plans to advance inclusive financial services.

As Grab will be competing with traditional banks, but without all the costs associated with maintaining a physical branch network, virtual banking should provide a significant boost to profitability. With its Singapore virtual bank likely to be used as a springboard for similar launches in other Southeast Asian countries, there are plenty of reasons to be bullish about Grab’s prospects. It should therefore be able to pull off a successful IPO. 

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