COMMENTS — 21 Feb, 2022 | 06:38 — APAC, United States of America, Latin America

The Rise Of South And Southeast

Asia Unicorns: Cash Burn Disrupts
Credit Quality
 

Primary Credit Analysts: Shawn Park, Simon Wong

Secondary Contact: Anthony J Flintoff
Sector Corporates, Retail & Consumer Products, Technology, Media & Telecom, Transportation
Tags Americas, Latin America, APAC

View Analyst Contact Information

Table of Contents

Key Takeaways
The credit quality of leading start-ups, or the "unicorns," in South and Southeast
Asia is often constrained by rapid cash burn, the need to seek regular funding, and
small business scale relative to peers.
On the other hand, most benefit from fast market expansion, fueled by double-
digit annual growth in goods or services sold online in the region.
A record surge in funding will help extend liquidity runways, however, dependence
on external funding is unsustainable and would erode credit quality.

South and Southeast Asia will produce more unicorns, given many online markets remain
underpenetrated. Significant growth potential provides these leading start-ups with an
opportunity to turn profitable and dominate their market overtime. S&P Global Ratings
believes a lot more cash will be raised and spent before the next Alibaba or Amazon emerges
in South and Southeast Asia.
Most leading early-stage companies in this region have limited operating track records and
have yet to demonstrate positive profitability and cash flow. Start-ups tend to have weaker
business risk profiles, reflecting their negative cash flows and earnings, and high dependency
on capital markets to fund operations.

By our projections, early market leaders, such as Singapore-based Grab Holdings, may be
profitable and cash-flow positive over the next two years. This is mainly driven by expanding
gross merchandise value (GMV) in key online businesses, resulting in improved cost
structures and monetization opportunities. As unicorns mature, they will also widen their
funding sources to include more debt or debt-like instruments.

Unicorns In This Region Face Complex Operating

Conditions
We believe early-stage companies face complex operating conditions in South and Southeast
Asia, given various country risks, languages, cultures, spending power and preferences, as
well as regulatory frameworks that are evolving at different paces. This is despite their
business models being similar to disruptive technologies, products, or services that have
been proven in other countries such as the U.S. and Japan (Amazon.com Inc. – AA/Stable/A-
1+; Rakuten Group Inc. – BB+/Negative/-- ).

Most of the companies identified as unicorns in South and Southeast Asia have limited
operating track records, and have yet to demonstrate positive profitability and cash flow.
Other common characteristics include rapidly evolving business profiles, significant cash
burn, and uncertain capital structures.

Table 1

Most Online Businesses In South And Southeast Asia Are Still Loss-Making
 COVID Operating track Relative scale
Business model Competition Profitability
impact record (GMV basis)
Ride hailing Negative (-) High Nascent Loss-making Medium
Food delivery Positive (+) Intense Nascent Loss-making Small
Significantly Small, potential to
Digital payment + High Very Nascent
loss-making be large
e-Commerce (online
+ High Rapid growth Loss-making Large
shopping)
Double-digit
Online/mobile gaming + High Mature, growing Medium
margin
Online travel booking - Intense Mature, growing Loss-making Small
Online education + High Mature, growing Loss-making Very small
GMV--Gross merchandise value. Source: S&P Global Ratings.

COVID Accelerated Some Online Businesses But Disrupted

Others
Social distancing measures and lockdowns in various South and Southeast Asian countries
over the past two years have triggered changes in social behaviors and accelerated the
adoption of e-commerce (online shopping), food delivery, online gaming and digital payments
by both consumer and businesses/merchants. Southeast Asian e-commerce's GMV more
than tripled between 2019 and 2021, while online travel shrank by two-thirds during the same
period (source: Google, Temasek and Bain's "e-Conomy SEA 2021" report).

Ride hailing and online travel portals were severely disrupted during lockdowns and extended
periods of travel restrictions. That said, ride-hailing demand bounced back in countries such
as India post the recent lockdowns, while online travel portals switched their focus to
domestic tourism and staycations.

Despite the sharp increase of GMV for Southeast Asian unicorns in recent years, their
operating scale remains small relative to global peers.

Spending Will Remain Cut-Throat…

We expect the competition between the unicorns to intensify as their existing markets grow to
solidify their market shares, even as they expand into new markets or businesses. We also
expect the unicorns to face intense competition in homogenous product and service offerings,
given the low-customer switching costs.

Unicorns need to continuously differentiate themselves by adding exclusive offerings,

widening the availability of merchants, developing niches, to broaden their customer bases.

 
In addition, unicorns adopt a high degree of localization for their respective markets on their
platforms to increase customer engagement to develop brand loyalty, which could translate to
lower retention costs over time.

Continued spending on customer acquisition and retention has forced most early-stage
companies to burn cash, including Grab Holdings Ltd. (B-/Stable/--), whose platform offers
services ranging from payments, ride-hailing, to food and grocery delivery.

Chart 1
Grab's Subsidies Per GMV Will Likely Decline Through 2023

2,500 25

19.3
2,000 20
Consumer incentives (left
scale)
1,500 15
Mil. US$

Driver and merchant

%
9.9 incentives (left scale)
1,000 8.4 10
6.3 Total incentives/GMV (right
4.8 scale)
500 5

0 0
2019 2020 2021f 2022f 2023f

GMV--Gross merchandise value. Mil.--Million. f--Forecast. Source: Investor presentation, S&P Global
Ratings.
Copyright © 2022 by Standard & Poor's Financial Services LLC. All rights reserved.

We expect such competition to remain entrenched as most of the region's unicorns were able
to sustain their cash burn, thanks to financially strong sponsors, favorable investor sentiment
supporting equity raising and ultimately public listing. Grab's listing on Nasdaq raised US$4.5
billion and provided the Singapore-headquartered company with ample liquidity to fund
growth and spending.

We suspect the surge in funding for South and Southeast Asian unicorns is also due to
regulatory tightening on China's e-commerce companies in 2021.

Chart 2
Thriving Deal Landscape For Unicorns In Southeast Asia

10

6
Bil. US$

0
2017 2018 2019 2020 1H21

Bil.--Billion. 1H--First half. Source: Temasek: e-Conomy SEA 2021, S&P Global Ratings.
Copyright © 2022 by Standard & Poor's Financial Services LLC. All rights reserved.
….But Will Fall As A Proportion Of GMV Amid Fast Market
Growth
We estimate GMV will grow at double-digit annual rates up to 2025, led by digital payments
and online retail. This reflects ongoing digitization, easing social restrictions, and rising user
adoption and disposable income.

Chart 3
GMV For Most Market Segments Set To Expand Further By 2025

250 1,500
E-commerce (left scale)

Online video, gaming, music

200 1,200 (left scale)

Transportation & food (left

scale)
150 900 Online travel (left scale)
Bil. US$

Bil. US$
Digital financial
100 600 services (right scale)

50 300

0 0
2017 2018 2019 2020 2021 2025

GMV--Gross merchandise value. Bil.--Billion. Source: Temasek: e-Conomy SEA 2021, S&P Global Ratings.
Copyright © 2022 by Standard & Poor's Financial Services LLC. All rights reserved.

Chart 4
Improving Cost Structure Is Critical To Achieve Profitability

30 600

25 500

20 400

15 300

10 200
%
%

5 100 Total cost to GMV (left scale)

Net revenue to GMV (left scale)
0 0
Net income margin (right scale)
(5) (100)

(10) (200)
2018 2019* 2020 2018 2019 2020 2018 2019 2020
Grab§ Sea† Meituan‡

*Grab's net revenue for 2019 was negative due to high incentive spending. §Grab's net margin was removed

as some historical revenue was negative. †E-commerce GMV is used for Sea. ‡Food delivery GMV is used for
Meituan. Source: Investor presentations, S&P Global Ratings.
Copyright © 2022 by Standard & Poor's Financial Services LLC. All rights reserved.

In our view, the spending to GMV will further reduce over the next few years as GMV
meaningfully scales up in the region. This will improve prospects for generating positive
EBITDA and operating cash flow.

Chart 5a
Grab's Cash Burn Set to Improve
EBITDA FOCF

500

(500)
Mil. US$

(1,000)

(1,500)

(2,000)

(2,500)
2016 2017 2018 2019 2020 2021f 2022f 2023f

FOCF--Free operating cash flow. Mil.--Million. f--Forecast. Source: S&P Global Ratings.
Copyright © 2022 by Standard & Poor's Financial Services LLC. All rights reserved.

Chart 5b
…Driven By Lower Cost Relative To GMV

Total cost to GMV SG&A to GMV

35

30

25

20
%

15

10

0
2018 2019 2020 2021f 2022f 2023f

GMV--Gross merchandise value. SG&A--Selling, general, and administrative expense.

f--Forecast. Source: S&P Global Ratings
Copyright © 2022 by Standard & Poor's Financial Services LLC. All rights reserved.

For example, we anticipate Grab's growing scale and user awareness will allow it to transfer a
part of customer retention costs to merchants and drivers, as the online platform become a
more prominent mode of marketing and advertisement for merchants. Grab's total cost to
GMV will halve to 5%-6% by 2023 from about 10% in 2021. These are the factors driving our
view that Grab's EBITDA and FOCF will turn positive from 2023 (see charts 5a-5b on previous
page).

Other Factors Relevant To Unicorn Strategies Include…

Aggressive expansion strategy into new countries and business segments.  
We believe
Unicorns' desire for rapid growth leads to extensive spending and can cause cash burns to
persist. This is evident with Singapore-based Shopee (not rated) entering the Latin American
market and China's Meituan (BBB-/Negative/--) expanding into community group buying.

Another common trend is the eventual expansion into digital payment services, as seen with
Grab's GrabPay and GoTo's GoPay. We view this as a logical step as a digital-payments service
complements their existing ecosystem and allows consumers to use GrabPay as a mode of
payment for services. This increases customer loyalty, given many South and Southeast Asian
customers do not have credit card or bank accounts. Nevertheless, to achieve sustainable
operations, which is still far off, the cost can be onerous.

The data generated on platforms, including spending patterns of users, can be leveraged to
cross-sell other financial product offerings. With strong growth potential ahead for digital
payment services, the unicorns would also have to cope with evolving regulatory frameworks
and potential cyber risks.

A reliance on some form of redeemable preference shares for funding which we view as debt-
like.  
For unlisted unicorns, convertible redeemable preference shares (CRPS) and
compulsory convertible preference shares (CCPS) are the popular funding instruments. S&P
Global Ratings generally considers CRPS and CCPS as debt-like, and adjusts them to the
company's debt calculation. This is based on our view that these instruments lack
permanence with low visibility for exit plans (i.e., IPO) to materialize, while investors have the
rights to exercise drag-along, which could enforce asset sales, or liquidation of the company.

However, in our analysis, we acknowledge that for companies in the early growth phase, this
type of funding has equity-like characteristics, and the holders of these instruments do not
have the same incentives as pure debt providers.

Currency mismatches between debt and operating cash flows can be viewed as credit
negative.  
For early-stage companies in South and Southeast Asia, revenue and cash flows
are usually denominated in local currency, while their borrowings and redeemable preference
shares are in U.S dollars, such as ANI and Grab. We see risks stemming from unhedged
currency risk.

This capital-structure risk is also the case for Grab, though its recent listing has substantially
increased its U.S. dollar cash holdings, reducing any immediate concerns of potential
currency mismatch. Having said that, at current 'B-' rating levels for Grab and ANI, the
currency mismatch does not lower their ratings, but could constrain their elevation to a higher
rating.

Evolving regulatory framework could increase compliance and operating costs, and limit
topline growth over time.  
In our view, the types of regulatory issues Uber Inc (B/Stable/-) has
faced, such as the company's greater obligation to its employees in the UK as well as the U.S.
state of California, could also affect South and Southeast Asian unicorns. Singapore is
reviewing policies for gig workers, or independent contractors to provide them with paid leave
or workplace injury compensation.

Hence this could have implication to Grab in the future. Previously, the company has paid
fines for infringement of antitrust laws, related to its merger with Uber's Southeast Asia
operation in 2018.

Similarly, India issued guidelines for capping daily driving hours for ride-hailing since 2020.
Subsequently, India also issued guidelines that cap ride-hailing operators' ride commissions
at 20%, and surge pricing at 50% of base fare. We believe these guidelines could further
evolve over time, which could constrain ANI's revenue and profit trajectory.

In our view, the unicorns will remain exposed to regulatory risks, clouding the visibility to
profitable operations, given the nascent stage of various industries that the unicorns are
involved in.

Global Peers May Offer Potential Blueprints

Based on our analysis of global peers, a sustainable and profitable business requires many
factors--including attaining economy of scale and market share, building up brand loyalty and
customer stickiness, while controlling spending and investments. At the same time,
companies must maintain sufficient liquidity buffers to withstand uncertain and volatile
operating environments.

Meituan's journey to profitability offers lessons. Its dominant position in a range of services
was cemented in 2015 when it merged with a former competitor, Dianping, which created a
"super-app" to generate further operational synergies between food delivery and hotel
booking. Meituan's good capital market access and liquidity also solidified its existing
business while supporting new initiatives.

Chart 6
Meituan's Annual Funds Raised Far Exceeded Cash Burn

35 New funding
30 EBITDA

25

20
Bil. RMB

15

10

(5)

(10)
2015 2016 2017 2018 2019 2020

Bil.--Billion. RMB--Chinese renminbi. Source: S&P Global Ratings.

Copyright © 2022 by Standard & Poor's Financial Services LLC. All rights reserved.
We believe Meituan's dominant 60% share in China's food-delivery market enabled the
company to increase and maintain its monetization rate over the years, despite strong
competition, while reducing subsidies and other costs. These supported the company's
positive EBITDA in 2019 and 2020. However, Meituan's EBITDA turned negative for 2021 due to
new investments, especially into Meituan Select (a group-buying platform).

Chart 7
Meituan's Monetization Rate Flattening Amid Competition

350 16
Total cost to total
300 14 sales (left scale)

12
250
Sales* to GMV§ (right
10
scale)
200
%

%
150
6
100
4

50 2

0 0
2015 2016 2017 2018 2019 2020 3Q21

*Food delivery sales. §Food delivery GMV. GMV--Gross merchandise value. Source: S&P Global
Ratings
Copyright © 2022 by Standard & Poor's Financial Services LLC. All rights reserved.

MercadoLibre Inc. (MELI, BB+/Stable/--) is another global peer whose pathway to profitability
may serve as a blueprint for unicorns in South and Southeast Asia. MELI runs Latin America's
dominant e-commerce and payment ecosystem. Comparable to Meituan, MELI was able to
achieve profitability first by spending and establishing market presence. With users' high
dependence on its services, MELI was able to increase monetization , while lowering cost to
GMV, resulting in profitable operations.

That said, with Shopee entering the Latin American e-commerce market last year, MELI's free
operating cash flows turned negative again in the first nine months of 2021, despite stronger
top-line and EBITDA performance. This was mainly due to the company's significant
investment in the continued rollout of its logistics network, in order to solidify and maintain its
dominant position in the market.

Chart 8a
MELI's Aggressive Spending To Fend Off Competition…

Total cost to total GMV SG&A to total GMV

4
%

0
2015 2016 2017 2018 2019 2020 3Q21

GMV--Gross merchandise value. SG&A--Selling, general, and administrative expense.

Source: S&P Global Ratings
Copyright © 2022 by Standard & Poor's Financial Services LLC. All rights reserved.

Chart 8b
...Paid Off In Other Ways

Revenue (left scale) EBITDA (right scale) FOCF (right scale)

5,000 1,250

4,000 1,000

3,000 750
Mil. US$

Mil. US$

2,000 500

1,000 250

0 0

(1,000) (250)
2015 2016 2017 2018 2019 2020 3Q21

FOCF--Free operating cash flow. Mil.--Million. Source: S&P Global Ratings.

Copyright © 2022 by Standard & Poor's Financial Services LLC. All rights reserved.

A Visible Pathway To Sustainability Is Important To Credit

Quality
Assessing the credit quality of early-stage companies is challenging. A fast-changing
competitive landscape, evolving regulatory framework, and shifts in consumer preferences
can limit visibility on the sustainability of business models. Furthermore, management is
likely to prioritize equity valuation over credit quality, meaning more tolerance for aggressive
spending to accelerate growth trajectories.
From a credit standpoint, we acknowledge that strong backing by equity investors can buy
unicorns time to expand and drive out competition, in order to reap market dominance and
positive operating cash flow. The cash buffers procured through a listing or fund raising can
shore up liquidity. But measuring repayment capability is predicated upon the company's
ability to generate positive operating cash flow. Therefore, a dependence on frequent external
fundraising will in most cases equate with a low credit rating. In assessing unicorns in South
and Southeast Asia, our focus largely remains on the pathway to positive operating cash flows
and sustainable capital structure. We view protracted cash burn as unsustainable.

Editor: Cathy Holcombe

Digital Design: Evy Cheung

Related Research
Grab Holdings Ltd., Jan. 13, 2022
ANI Technologies Pte. Ltd., Jan. 13, 2022
What Factors Drive Ratings For High-Growth, Early-Stage Companies Like Tesla And
WeWork?
, Dec. 3, 2018

This report does not constitute a rating action.

Shawn Park, Singapore + 65 6216 1047;

Primary Credit Analysts:

shawn.park@spglobal.com

Simon Wong, Singapore (65) 6239-6336;

simon.wong@spglobal.com

Anthony J Flintoff, Singapore + 65 62396380;

Secondary Contact:
anthony.flintoff@spglobal.com

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