Sunday 9 January 2022

How Much is Grab Holding Worth?

Initially, I had planned to wait for Grab to report it's full year financial results. However my prediction is that the narrative then will be similar to now - "Yes we are now loss making and cash burning in all segments, but we will turn around soon."

Investing in Grab involves a lot of prediction that with (i) scale and (ii) it defeats its competitors, it will become profitable.

Can We Trust the Narrative?

Judging from the need to scale, I don't think Grab can be massively profitable just by growing revenue. It is difficult to achieve this feat with only South East Asia as your base. Venturing into China and India, you will fight the incumbents who are well entrenched and some have profitable, cash generating subsidiaries.

Alternatively, if Grab wants to be profitable with just only SEA, it could turn to cost cutting measures such as reducing the commission/incentives paid to freelance workers or cut corporate cost. Not a palatable option but it will right the ship.

To find the value of Grab, it is important to evaluate the future of the main segments it has business in.

Peering into the Crystal Ball

Let's look at these main segments.

Digital banking/Fintech:

This is the most promising segment. Relying on the draw of users from it's food delivery and mobility segment, Grab hopes it can build a Super app where users will use it's lucrative financial services. Essentially the other 2 segments work as customer acquisition units to draw users to eventually use its high margin financial services.

It's a good strategy and revolves around a Winner-takes-all strategy in South East Asia; however Sea group is its competitor in this segment. Personally I feel Sea Group is better funded because it has a profitable arm in Garena to subsidize losses (its game unit is earning USD $530 million per year) and Shopee to acquire the customers. Unless Garena turns out to be a fraud, I don't think Sea Group will lose this battle and will become the no 1 in South East Asia. Secondly, Sea Group has a US$12.5 billion cash chest while Grab only has US$8 billion (post Grab IPO).

Using probability scenarios, I assume a 10% probability Grab wins against Sea in the digital bank segment (putting Grab's segment at DBS's value of USD$65 billion), 60% probability both will agree to harmony and Grab will be the smaller player earning only about US$100 million of annual profits (Grab's market value of USD $3 billion then). I doubt as the smaller player it will be able to earn even UOB's level of profits because South East Asia is too small. It will be around Hong Leong's Finance level of USD$50 million. Lastly, there is a 30% chance that Sea Group will win (Grab's market value of USD $100 million for residual). The expected probability E(X) will be about USD $8.4 billion value.

Food Delivery:

Delivery Hero (Food Panda) is a tough competitor in South East Asia's space and has been fighting on the same strategy of burning cash and making losses. I expect Grab to use the same strategy as well, continuously burning cash to fight competitors. Leaving this market segment is a good option, however if Grab does it, a significant amount of users will be lost and it loses its ability to build a Superapp (the product). In a sense, the food delivery arm is like the marketing arm, a cost center to burn cash but to acquire users to use its product. Delivery hero is a weaker competitor than Sea due to balance sheet weakness. Hence, it is likely grab can eke out a USD 200 million annual profit long term. This puts Grab business at a 20x P/E of USD $4 billion.


I doubt it will ever be profitable. It is a loss making segment to draw users and will likely only break even on accounting basis with positive numbers only reported at EBITDA level. Uber uses the same strategy- low margin ride hailing to attract users to use other product offerings. Secondly, if grab prices its mobility offerings too high, it runs into Comfortdelgro pricing and CDG has cash cow businesses and will be able to keep to its current prices. I have compared CDG ride hailing app prices vs Grab and notice Grab tends to be cheaper by $2-$3 at most times.

Hence I will ascribe this segment as an accounting profit segment of zero with no value.

Valuation of Grab

Based on the above, Grab's value should be USD$12.4 billion.

To be honest, Grab is too hard to value because it has been loss making (accumulated more than US$11 billion in losses in its 9 years history) and doesn't show any signs of profitability in its quarterly results yet unlike Tencent Music, Palantir, Spotify or Netflix.

It is still based on a winner-takes-all strategy but it has a final boss level in Sea Group and a first boss to fight in Delivery Hero. Mobility is difficult to earn because if it raises prices too high, it infringes into the profitable taxi companies of South East Asia and will lose market share to them.

Stock analysts tend to value such companies on a Price to Sales ratio which I find is a bull shit metric. If your sales continue to bring negative margin, there isn't a P/S ratio to value, except zero.

Based on the latest SEC filing, post Temasek and its band of investors investing, Grab will have close to US$8 billion in cash and equity of US$9.1 billion to outmaneuver its rivals. To me this is not impressive because Sea Group has a larger cash warchest and only in 2025, will its convertible bonds be due. Its important to watch in 2022, who burns their cash faster.

Sea Group in its Way and Motivation for SEA Domination

In terms of the war for South East Asia dominance, Sea Group has more "troops" and it knows when 2025 comes, it will be at a stage where convertible bond holders will either redeem their bonds in cash or at a share price of US$90 or US$477. It has to justify its current sky high valuation by dominating South East Asia as promised. Otherwise, it will run into cash calls and have to dilute existing Sea shareholders. (An interesting fact is Forrest Li owns a larger proportion of Sea Group shares (25%) than all of Grab's executives and Directors combined have in Grab; indicating he has more skin in the game). Given how Sea executives' wealth are tied to the rise and fall of Sea's share price, they are likely more motivated for domination here.

Sea Group does have some urgency to kill off Grab, hence why I had priced in a much higher probability that Sea will be the winner in digital banking. Grab's advantage is that it has Temasek Holdings backing it but I am unsure how much more cash will Temasek inject into it (my estimate is USD $5 billion at best as Temasek is unable to concentrate its holdings too much).

Sea Group could venture beyond South East Asia to continue its growth story while living with Grab as two leading giants In SEA but it is an unbelievable story as the surrounding Asian countries have incumbents who have bigger cash balances and are well funded. Its easier to be the leader in this region here than going for Asia conquest.

Grab's Fair Value

At worse, Grab is worth its current book value (USD $9.1 billion). Alternatively, we can estimate its value post 2025 after the war; probability wise, it puts Grab at USD$12.4 billion. Share price wise it will be at the range of $2.25 to $3.10 currently. However, should Grab successfully defeat Sea Group in South East Asia, Grab will be worth a fortune and can fetch a USD $70 billion value ($17.50 per share). This is a giant killing act.

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