Grab vs Sea – Which is a better investment?

TL;DR

• Grab will start trading on 2 December through a combination with Altimeter Growth Corp.
• Positioned as Southeast Asia’s super-app, Grab has significant exposure to the growth of the digital economy in the region. On the other hand, Sea has expanded outside of Southeast Asia in both its gaming and e-commerce businesses.
• Grab’s ride-hailing business has been impacted by the Covid-19 pandemic, which led to revenue projections being revised lower. Both of Sea’s e-commerce and gaming businesses continue to benefit from the pandemic.
• With both stocks valued at a enterprise value to sales (EV/sales) multiple of about 15-16x in 2021, their share price performance might be determined by whether 2022 will see a continuation of work-from-home trends as well as successful rollout of their digital banks.

What happened?

Grab and Shopee are familiar names for many of us in Singapore, fulfilling a lot of our ride hailing, food delivery and online shopping needs especially during the pandemic. While investors could previously own a stake in Shopee through Sea Limited, there is now also an opportunity to invest in the Southeast Asian super-app.

Following the approval by shareholders, Grab will start trading on 2 December through a combination with Altimeter Growth Corp (AGC). The listing through a special purpose acquisition company (SPAC), would value Grab at close to US$40 billion, making it one of the world’s largest transactions involving a SPAC.

What does this mean?

Rather than looking at the Grab listing on its own, many Beansprouters have been keen to find out how it compares to Sea Limited, which owns Shopee (e-commerce) and Garena (gaming). Here, we compare the two Southeast Asian digital titans to see which could be a better investment.

• Sea has more global exposure compared to Grab. Grab claims to be Southeast Asia’s super-app as the leader in the areas of Mobility, Deliveries and Financial Services where it operates in. It is diversified across 8 countries in Southeast Asia with no single country contributing more than 35% of its adjusted net revenue. On the other hand, Sea only has slightly above 60% of its revenue coming from Southeast Asia in 2020, with Latin America making up close to another 20% of revenue. Free Fire, Sea’s self-developed global hit game, is consistently the highest grossing mobile game in not just Southeast Asia but also Latin America and India. More recently, Shopee has expanded into Europe by launching its platform in France, Spain and Poland.

• Grab’s ride hailing business continues to be impacted by the pandemic. In September, Grab lowered its revenue forecasts for 2021 to US$2.1-2.2 billion, from its initial forecast of US$2.3 billion in April. EBITDA losses were also expected to widen to US$0.7-0.9 billion, compared to its previous projection for a loss of US$0.6 billion. This was driven by the extension of lockdowns in the markets that Grab operated in, which affected its Mobility (ride-hailing) business. On the other hand, Sea raised its 2021 e-commerce revenue projections to US$5.0-5.2 billion in November, from US$4.7 billion to US$4.9 billion previously, as it continues to benefit from the boom in online shopping.

• Grab Finance and SeaMoney rollout key to upside. In December 2020, both Grab (through a partnership with Singtel), and Sea were awarded digital bank licenses in Singapore, allowing them to tap on financial services as an additional area of growth. Both Grab and Sea already have a fintech presence through their payment wallets. Grab saw a 102% increase in its total payment volume (TPV) from 2018-20, reaching US$8.9bn in 2020, which was slightly above SeaMoney’s TPV of US$7.8bn. The digital banking license will allow both companies to expand and diversify into other areas of financial services including giving loans and taking deposits. The new digital banks are expected to commence operations from early 2022, and the success of the digital banks will likely drive the share price movement in the coming year.

What would Beansprout do?

• Valuation of Grab on par with Sea. Based on its enterprise value (EV) of about US$31bn, Grab would have a 2021 EV/sales valuation multiple of about 15x using the midpoint of its revenue projections. This is almost similar to the EV/sales multiple of Sea, which saw a sharp correction of close to 30% following its 3Q results in November.
• Food delivery or e-commerce? Ride hailing or gaming? Given similar valuation, the share price performance of these two stocks might be driven by their revenue growth in the coming year. For investors looking for a company with direct exposure to the Southeast Asian digital economy, and believe that we will see a re-opening of the economy in 2022 as Covid-19 concerns start to ease, it might be worthwhile taking a look at Grab. For those who prefer a more global exposure with businesses that benefit from work-from-home trends, then Sea might fit the bill. In the meantime, do keep a lookout for the rollout of their digital banks in the coming months!