Introduction

SINGAPORE – Amidst the dynamic shift in consumer behavior fueled by digitalization, Southeast Asia's unicorn startups are finding it challenging to attract the attention of equity fund managers. Most portfolios tend to favor established players from the old economy, including banks, industrial conglomerates, and telecommunications, while newer sectors like e-commerce, digital entertainment, and ride-hailing grapple for recognition.

Investment Sentiments

Although a handful of fund managers have seized early opportunities in successful companies like Sea, Grab, and GoTo Gojek Tokopedia, a prevailing sense of caution has led many to steer clear of these high-risk, high-reward sectors. Analyst Hunter Beaudoin from Morningstar Manager Research Services Asia expressed this sentiment, emphasizing the uncertain profitability of many of these newer enterprises: “Most of them are not yet profitable, or have only recently become so. The unpredictability of their long-term business models raises significant questions for potential investors.”

Recent Performance and Challenges

In the second quarter of 2023, GoTo, Indonesia's leading tech corporation, reported an underlying loss of 70 billion rupiah (approximately $5.8 million). Additionally, Grab, headquartered in Singapore, posted a staggering loss of $53 million in the same quarter. In contrast, Sea has shown signs of recovery by achieving a net income of $163 million in 2023, reclaiming profitability after suffering a loss of $1.66 billion in 2022. However, Sea's recent report highlights a decrease of 75.9% in net income from the previous quarter, signaling ongoing challenges amidst fierce competition within the tech landscape.

Investor Caution

PhillipCapital has raised concerns regarding Sea's short-term growth potential due to escalating competition and the high costs needed to maintain market share. The broader struggle to establish reasonable valuations for these companies, many of which lack a solid growth history, is causing fund managers to remain hesitant. High valuations based on sales metrics or operating metrics, such as gross merchandise value, do not always equate to profitability, making overinflation a distinct risk.

Market Volatility

The volatility of the industries in which these unicorns operate exacerbates investor apprehensions. Sea’s stock price, for instance, surged by over 2,000% from its IPO in October 2017 to an all-time high of approximately $367 in October 2021, only to subsequently endure significant declines. Similarly, Grab's valuation skyrocketed as it pivoted to food delivery and online payments, but its IPO on Nasdaq in December 2021 was marred by market scrutiny of unprofitable firms, leading to a steep drop from an earlier valuation of $40 billion to about $14.6 billion by October 2023.

GoTo's Performance and Market Sentiment

GoTo shares have also suffered, dropping approximately 80% from their IPO price since their public listing in 2022, reflecting a broader trend of pronounced caution among investors in the Southeast Asian tech landscape.

Glimmers of Optimism

Despite these challenges, there are glimmers of optimism. JP Morgan Asean Equity has actively explored new investments, and Nikko AM Shenton Thrift has shown a willingness to revisit Sea stocks amid fluctuating performance and increasing competition. This cautious approach reveals a preference among many funds for profitability over speculative growth.

Future Outlook

As Southeast Asia moves toward significant structural transformations—with the ASEAN Digital Economy Framework Agreement projected to double the region’s digital economy value to $2 trillion by 2030—emerging opportunities could reignite investor interest. Upcoming IPOs for regional unicorns, including Thailand's Line Man Wongnai, Malaysia's Carsome, and the Philippines' GCash, signal potential breakthroughs.

Conclusion

Hunter Beaudoin underscored the significance of the region's youthful, tech-savvy population as a driving force for a burgeoning digital economy. With supportive government initiatives and a strengthening economic foundation, Southeast Asia may soon transform from a hesitant investment landscape to a thriving hub for innovative companies and investment diversification. Will Southeast Asian unicorns turn the tide and reclaim the hearts of fund managers? Only time will reveal the answer.