• Brett Schafer

Deep Dive: Grab

Listen On:

  1. Spotify

  2. Apple Podcasts

Show Notes

What they do: Grab is a Southeast Asian Super App. There aren’t really any of those in the US (possibly cash app), but they offer rides (uber), pay (like an apple pay), food delivery, shopping, bill payment, investing, and I think there’s even a peer-to-peer element. And for the rides service, it’s different than just Uber. There’s like Grab shuttles and stuff like that. The idea is that customers don’t need a wallet anymore. 

Then on the drivers side they have a bit of a super app as well. And treat them more like employees. They offer driver insurance, they’ve got savings goals, and schedules, and they also have Grab driver centers. They have like representatives there to walk you through earnings and insurance programs.

Grab operates in Singapore, Malaysia, Philippines, Vietnam, Thailand, and Indonesia.

History: The company was actually born out of a Harvard business competition by Anthony Tan and Hooi Ling Tan in 2011. (Not related). Anthony Tan comes from a pretty wealthy family who operates Tan Chong Motors which is the leading franchise seller of nissans in SEA and is publicly listed in Malaysia. Hooi Ling and Anthony met at Harvard, both from Asia, and they said friends complained about how hard it was to get a taxi in Malaysia. (also uber was mildly popular at the time). 

They won 2nd place at the business plan competition and received a $25,000 grant. Winning the competition also caught the attention of several asian investors and that’s where they started to get some funding. About 10 years later, him and Brad Gerstner connected (both went to Harvard) and decided to take the company public via SPAC.

Industry/Landscape/Competition:

  1. SE Asia has population of 670 million

  2. They see a $52 billion TAM that is rapidly expanding

  3. Outside of Singapore, GDP per capita in the region is low

  4. Difference between Africa and SE Asia is average age of population. A lot of countries have average age of around 30 (Africa is around 20).

  5. SE Asia has 400 million internet users, and $100 billion in annual digital spend (projected to triple within five years, which seems reasonable)

  6. Remember that there are differences within each market too

Management and Ownership:

  1. Anthony Tan and Hooi Ling Tan are the Cofounders

  2. Anthony Tan is the CEO

  3. They met at Harvard Business School, initially worked on the idea for an idea pitch competition

  4. Got runner-up in 2011 for their idea for malaysian taxi app that connected taxi seekers with taxi drivers. Won $25,000 to start the company

  5. Hooi Ling Tan had a slightly different path, started the company but had to work for Mckinsey following college due to an education agreement, then worked for Salesforce before joining Grab full-time in 2015

  6. World’s largest SPAC acquisition

  7. Softbank has been involved, receiving $4.5 billion cash payout

  8. Post-deal, Anthony Tan owns 2.2%

  9. Softbank owns 18.6%, uber owns 14.3%, Didi owns 7.5%, Toyota owns 5.9%

Valuation:

  1. Ticker of the SPAC is AGC, ticker will be GRAB post merger

  2. Equity value of $39.5 billion (higher based on SPAC price but that can change)

  3. P/S of about 25 (if you see GMV numbers, they are predicting a 13% take rate at that scale)

  4. Any profit multiple would be either negative or extremely high

Earnings: 

  1. $12.5B in GMV, up only 2.5% (but a lot of their business is still done in person despite being digital. POS payments and rides were disrupted pretty heavily this year.)

  2. Adjusted net revenue was $1.6B, up 60% YoY

  3. Revenue as a % of GMV went from 8% to 13% this year

  4. Contribution margin was 7% in 2020, albeit that was up from negative 118%

  5. EBITDA margins were -52% for the year

  6. $2.7B net loss.

  7. Negative $800M in OCF

Non-financial:

  1. 25 million transacting customers

  2. 5 million registered driver partners

  3. 2 million merchant partners

Balance sheet and liquidity:

  1. $3.4 billion pre SPAC, ~7.4 billion post SPAC

  2. About $200 million in true debt

  3. $11 billion in convertible notes

Product Experience/Anecdotal Evidence:

  1. (Ryan) In some reddit threads, someone asked what it was like to be a full-time driver for Grab. People said starting in about 2019 (when rides turned EBITDA profitable) they began getting rid of the normal incentives.

  2. (Ian)

  3. (Brett)

Competitive Advantages:

  1. (Ryan) Stickiness of the mobile wallet. Once you got locked in and have money there and get familiar using grabpay and receiving the benefits, it’s tough to switch. So a low churn environment when they’re the first ones to market is a good spot to be in. Brett you’re probably used to this a bit now with the cash app.

  2. (Brett) Most companies ignore the SE Asian region (except Uber, who for a time was trying to go into every market in the world for some reason), so Grab theoretically could have minimal competition, especially from Western players. This could give them time to build out a competitive advantage (hard to argue they have one now). For example, every Western company seems to focus on India as their growth market.

  3. (Ian) 79% 1-year retention rate if they can get users who use more than 3 services, and they seem to have enough compelling services to get that retention.

Future growth opportunities:

  1. (Ryan) GrabAds. Restaurants and local merchants can advertise to get more customers through the Grab platform. Seems like a smart idea if you have 25 million active customers using this for various needs. Especially since they offer rewards programs it can kind of incentivize spending on the platform.

  2. (Brett) Grab Bank? The financial services part of the app seems to be doing well, and they got a license for a bank in Singapore. Also have an insurance product on top as well

  3. (Ian) Riding the secular wave. 11% penetration of online food purchasing compared to china’s 21%, 3% ride hailing vs. 15%, 17% electronic transactions vs. 43%. Lots of growth if SEA is going to follow China’s moves.

Highlights and lowlights:

  1. (Ryan) Highlights: Armed with capital. Sounds like they have notoriety across SEA. Lowlights: Don’t really like the optics of how they went public. Feels exploitative. “Hey, I know you already have $4B in cash, but there’s this SPAC thing that’s getting pretty popular” Backed by Softbank and it seems like they got the WeWork treatment because all their financials are adjusted and have just insanely rosy projections. Also it looks like monthly transacting users declined 16%.  

  2. (Brett) Highlights: financial app is a smart idea, and like Jumia, in theory there is an opportunity to become the backbone for these markets as they enter the 21st century and adopt East Asian and Western infrastructure. Lowlights: Ride hailing and food delivery may be my least favorite business models. Anything the Vision Fund has touched makes me queasy. And while I said ignorance of these markets could be an advantage, it brings a level of uncertainty when someone is trying to become a Super App like Grab. No traditional e-commerce product. Also, can we stop with calling everything “Grab[blank]”? Unaudited financials so clear no go until we get them

  3. (Ian) Highlights: Cohort GMV analysis is impressive, 2016 cohort spending 3.6x initial spend, 2019 1.5x. Like the SEA market and Grab’s focus on it. Lowlights: Tough main business to make money in, looks like many rides they actually lose money on according to net revenue reconciliation. Don’t like adjusted net revenue number, would like clarification on it. Hard to get a real picture without audited financials.

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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.

#GRAB

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