This article first appeared in The Edge Malaysia Weekly on October 18, 2021 - October 24, 2021

WHAT is Southeast Asian ride-hailing giant Grab really worth as a listed firm? In April, the Singapore-based taxi disruptor, which is undergoing an extreme makeover as a super app, announced that it was seeking to merge with Altimeter Growth Corp (AGC), a Nasdaq-listed special-purpose acquisition company or SPAC, in a deal that valued it at more than US$40 billion (RM167 billion).

The blank-cheque listed shell was supposed to have completed its merger last month and changed its name to Grab but the US Securities and Exchange Commission threw a spanner in the works by asking the ride-hailing firm to re-audit its financial statements in accordance with US Public Company Accounting Oversight Board standards. The listing of the merged firm is now expected before year end.

Grab has almost a 70% share of Southeast Asia’s ride-hailing market, close to half of its food delivery market and is expanding in grocery delivery in competition with Amazon.com and Alibaba Group Holding’s Lazada. “Grab is not only in the high-growth Southeast Asian ride-hailing and delivery markets but also has a coherent super app strategy, with a focus on digital financial services,” Rolf Bulk, a London-based analyst for tech-focused New Street Research, tells The Edge in a phone interview. Grab shares should be worth US$13 apiece by the end of next year, he argues. That’s a 29% upside for investors brave enough to buy AGC, the SPAC that is merging with Grab. AGC’s stock is down 45% from the high of US$18.11 that it touched days after the deal was announced.

SPACs list on a stock market on the promise that they will merge with a “real” company over the next two years or liquidate themselves, delist and return funds to investors. The key to a SPAC merger is PIPE — or private investment in public equity — a supplementary pot of cash typically raised when the SEC approves its teaming up with the target firm. PIPEs provide a guaranteed financial backstop so that the target receives at least some cash. PIPEs also help validate the value that the SPAC ascribes to the target firm.

A year ago, SPACs were the hottest thing investors could chase. Now, they are struggling. So far this year, 452 SPACs have raised US$131 billion compared with the 248 SPACs that raised US$83.4 billion all of last year.

Of the 134 SPACs that have completed mergers with target firms so far, 62% are currently trading below their initial public offering price. That means if you buy into a SPAC at its IPO price, there is less than 38% chance you will make money when it merges with its target. Or put it another way, when you buy into a SPAC at a price above its US$10 par value, your odds of making any money dramatically decline.

Little wonder, then, that investors — mostly hedge funds— are increasingly demanding their money back instead of risking losses if the stock price dives. Retail investors who stay the course, holding on to their stakes in SPACs, risk getting clobbered once the merger is completed. SEC chairman Gary Gensler recently said he was looking to tighten the rules to protect retail investors, who are left holding the bag in the aftermath of SPAC mergers.

Grab’s Nasdaq listing through a reverse merger with a SPAC couldn’t have been timed better. Southeast Asia is seen as a clear beneficiary of global investors switch as they trim their China exposure in the wake of President Xi Jinping’s crackdown on private enterprise, from tech giants such as Alibaba to private education firms and property companies, in an attempt to tighten his grip ahead of the Chinese Communist Party’s 20th National Congress late next year, which will anoint him as president for life.

As China’s economy slows and the Communist Party curtails private enterprise, investors are turning to other higher-growth emerging markets such as Southeast Asia, India and Latin America. Since Xi ordered regulators to pull the plug on the IPO of Alibaba’s fintech affiliate Ant Group a year ago, among the big gainers have been high-growth stocks such as Latin American e-commerce giant Mercado Libre and Southeast Asian e-commerce leader Sea Ltd. Indian food delivery giant Zomato, which listed in July, has also seen its stock double.

Grab is still bleeding. New Street Research expects it to lose US$2.71 billion this year, up from a US$2.67 billion loss last year. It expects the ride-hailing firm-turned-super app to cut its losses to US$647 million in 2022 and report a slight profit in 2023. It forecasts Grab’s gross merchandise value (GMV) to expand 47% next year, up from a 24% increase this year and grow 41% again in 2023, steadying to 30% growth in 2024.

Grab’s take rate, or its adjusted net revenue as a percentage of gross bookings, is forecast to grow from 13.9% this year to 14.1% next year and 14.3% in 2023. The main drivers of its growth will be its foray into financial services through the much-heralded super app.

Clearly, those are extremely optimistic forecasts. “We don’t think our estimates are aggressive,” says Bulk. Indeed, he thinks if Grab can get better traction on its super app, his forecasts might turn out to be conservative.

The New Street Research analyst expects Grab’s mobility business to grow 30% annually on aggregate until end-2025, when it will reach US$11.2 billion in gross bookings as its ride-hailing penetration among adult urban Southeast Asians grows from 8% currently to 11%. Meanwhile, its food and more nascent grocery delivery business is forecast to grow 33% annually over the same period to US$22.7 billion, even as the post-Covid ­reopening of the region’s economies takes hold.

Grab’s biggest challenge is to execute its audacious fintech super app strategy. Every other tech company wants to be a super app like Tencent Holdings’ WeChat in China. But the Chinese super app is not easy to emulate. WeChat’s stickiest feature is messaging. Users stay inside WeChat’s app because messaging makes it their main communication tool. Whether an app run by a ride-hailing firm, a low-cost airline, a food delivery firm or even a bank can become a permanent sticky communication tool of choice for Southeast Asians and actually make money for its operator remains to be seen.

Bulk argues that Grab already has a formidable business that it can grow into a profitable regional franchise over time. The ride-hailing giant is already the top e-wallet player in Southeast Asia. Grab also uses its payment platform to provide consumers and merchants with other value-added digital financial services such as digital lending and insurance. Penetration of e-wallet payments, online lending and digital insurance in Southeast Asia is just 2%, Bulk notes.

He believes the region’s digitalisation push will help grow e-wallet and online lending penetration levels to over 6% by 2025. That compares to 40% penetration in e-wallets, 30% in online lending and 7% in digital insurance in China. Currently, Grab has 23% share of all e-wallet payments across the region. Last week, it increased its stake in Indonesian e-wallet OVO to 90%, from 50%.

One big investor concern is that Grab could face a ton of challenges as it grows its core ride-hailing and delivery business. In developed markets, regulators are forcing ride-hailing and delivery firms to pay gig workers more, or treat them as full-time employees rather than contractors. Regulators have talked about securing a fair share for gig economy workers, and restaurant owners in some markets have lobbied to cap Grab’s gross take from food delivery to 15%, which will impact profitability.

Though changes are unlikely in the foreseeable future, they could be disruptive to Grab’s business model over the long run, concedes Bulk. “Grab has forged a strong partnership with its drivers from the very beginning,” he notes. As they grow, ride-hailing and delivery firms around the world are increasing incentives for drivers and Grab would be forced to do the same in its own markets.

Another concern is that SoftBank Group Corp and Uber Technologies — Grab’s two major shareholders — are reportedly keen to reduce their exposure to the Southeast Asian ride-hailing firm. Though the two will be locked in for a short period after the listing of the merged entity, there will still be a big overhang from that expected sale, which could pressure Grab’s stock. “SoftBank’s stake in Grab is through its Vision Fund, which has been careful in the way it has sold stakes in Uber, [food delivery giant] DoorDash and [South Korean e-commerce leader] Coupang,” says Bulk.

One big fear of SPAC investors is that a year or so after its merger with a target firm, the combined entity comes back to them for more money. Grab currently has more than US$5 billion cash. PIPE and other investors in its merger partner AGC will bring in another US$4.4 billion cash. Bulk expects that Grab will be cash flow-positive at some point in 2023. Grab had over US$ 2.1 billion in debts in June. Even if profitability is pushed back another year or two, it is unlikely that Grab will ask investors to fork out more money in the foreseeable future.

So, how will it all play out for Grab if and when the SEC finally gives it the go-ahead to merge with AGC and list on Nasdaq? Assuming AGC investors follow the route other SPAC investors have taken, in the aftermath of SEC approval, the bulk of the original investors in the SPAC will head for the exit, leading to a plunge in AGC’s stock price. At that point, investors who believe in Grab’s long-term story are likely to step in and buy the stock.

Should Grab be worth more than Airbus or General Motors Co? New Street Research expects Grab to have a US$73 billion market capitalisation by end-2024. That is equivalent to US$17 per share three years from now and Bulk’s US$13 target price for end-2022. Other analysts have put a 12-month target price of US$15 on Grab and there are some that see an US$84 billion valuation for what is still just a glorified taxi and meal delivery business in Southeast Asia. At that valuation, Grab will be worth more than Uber; Airbus; Daimler AG, the owner of Mercedes-Benz; and GM. In the internet space, Grab will be worth about twice as much as Twitter and Pinterest and just a little less than Snap.

Fans might say, “Oh, it is not a taxi operator but a financial services firm.” So, let’s compare it with the No 1 bank in Southeast Asia — DBS — which has a market cap of US$62 billion. Should Grab be valued at nearly 35% more than DBS? If it is so easy to make big bucks in financial services, why haven’t Uber, DoorDash or Didi Global taken that route? And why are successful global fintech giants PayPal and Square still struggling with their own integrated super app strategies?

For all its challenges, Grab remains the No 1 player in the ride-hailing and food delivery business in Southeast Asia and has a growing fintech business through its super app ambitions, so it is possible that its growing ecosystem might become something akin to a platform. For now, though,  the ride-hailing firm clearly has its work cut out for it. But with US$9.5 billion cash in hand, a Nasdaq listing and its location at the centre of a fast-growing region, Grab can at least boast that it has a pathway to get there.

Assif Shameen is a technology and business writer based in North America

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.