Can GoTo rescue the S.E. Asian fintech IPO?

GoTo, the Indonesian holding company that includes ride-hailer GoJek and e-commerce giant Tokopedia, announced it will raise the equivalent of $1.25 billion via a listing on the Indonesia Stock Exchange (IDX), due on April 4.

The company is embedded in Indonesia, accounting for 2 percent of GDP, and its two main arms both have fintech businesses. The IDX listing is a stepping stone to an IPO on an overseas exchange such as Nasdaq, probably in 2023.

GoTo is however riding into rough waters. Investors will be looking at the disastrous performance of its nearest peers. The closest domestic comparable is e-commerce player Bukalapak, which also has a payments arm as well as serves as a consumer gateway for Standard Chartered. It listed on IDX on August 6, 2021, and following an initial surge, the stock has tanked.

A closer business model is that of Grab, thanks to its similar combination of ride hailing, fintech (including a virtual-bank license in Singapore), and e-commerce. Last year it achieved a back-door listing on Nasdaq via a SPAC. For shareholders the ride hasn’t been fun:

The most established listed tech company from Southeast Asia is Sea Group, which combines e-commerce platform Shopee, gaming, and fintech, also including a Singapore virtual-banking license. It’s also had a tough time of late:

The ails of these companies is not about Indonesia. The IDX has been performing quite strongly, thank you very much:

No sign of profits

The problem with the tech companies is their lack of a clear path to profitability.

Public investors seemed willing to initially buy shares of Grab and Bukalapak because these are important, fast-growing companies, and they could overlook the lack of profitability because it was regarded as transitory.

These companies have not, however, demonstrated an ability to change course. They continue to burn cash. (Sea is a different case: it’s very profitable, but its gaming arm has hit a number of roadblocks.)

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This is NOT because they are regarded as badly managed. On the contrary. And that’s the problem: they’re all very competitive, which makes it unlikely any of them can establish the superapp dominance like the Alibaba/Tencent duopoly in China.

If that’s the case, why should fund managers be ready to shell out for GoTo The problem isn’t just about GoTo, either: there are about twenty unicorns (private companies valued at $1 billion) in Indonesia, and many more across Southeast Asia.

And the market is already experiencing casualties: on Monday, March 13, Indonesian BNPL lender Kredivo (parent, FinAccel) pulled its $2.5 billion SPAC deal with Nasdaq-listed acquirer VPC Impact Acquisition Holdings. The companies sited negative market conditions, even though Kredivo is a successful, growing business.

If GoTo’s IPO turns to ash, then exit prospects for other companies will be bleak.

The case for optimism

On the other hand, if GoTo is able to nail the right pricing and deal structure so that it isn’t viewed as punishing public-market buyers, then investors will be inclined to look past the Bukalapak and Grab deals.

Chandra Firmanto, managing partner at IndoGen Capital, a local venture-capital firm, which has a position in GoTo, says Grab and Bukalapak went IPO at inflated valuations. “These tech companies need to show their economics make sense,” he said. “I hope GoTo can repair this.”

He is optimistic. First, the deal is small, representing only 4.35 percent of the shares’ free float. This is regarded as an appetizer before the main course of an overseas listing.

Moreover, not only is the deal relatively small, but it is not obviously enriching just a handful of early investors. “There’s no bias to give an insider too much control,” Firmanto said.

Third, the proposed IPO price of IDR316 to IDR346 per share is a lot lower than the IDR850 per share achieved by Bukalapak. GoTo plans to sell up to 52 billion new Series A shares, valuing the company around $28.7 billion – lower than its last private valuation of $40 billion.

Most important, Firmanto says, is GoTo’s sheer size and importance to Indonesians. Merchants of all kinds now rely on GoJek or Tokopedia. GoTo also owns a controlling stake in Bank Jago, which has been refitted as a pure digital player and is enjoying rapid growth. GoTo’s ecosystem is the biggest in Indonesia.

He argues that GoTo does have a clear path to profitability, should it choose to change tack. And as the national tech champion, it will probably enjoy plenty of support from local investors.

Doubts persist

Independent analysts are not so sure. They are concerned about the timing, both in terms of Bukalapak and Grab’s performance as well as the prospect of rising interest rates in the U.S. and the chaos unleashed by Russia’s invasion of Ukraine.

Fundamentally, they are not convinced that GoTo can reverse its cash burn.

“Missed the tide, boat won’t rise,” summed up the view of Sumeet Singh of Aequitas Research.

Another analyst, Arun George of Global Equity Research, said on Smartkarma, “In an environment where growth-at-all costs tech firms and peers have materially sold-off and are out of favour, GoTo is not for the faint-hearted.”

He added in an update, “Our valuation analysis suggests that the price range is aggressive and unattractive. We would give the IPO a pass.”

Analysts note that GoJek’s platform for on-demand services for drivers, merchants and consumers continues to lose money despite rising revenues. Its loss margin in 2021 was (-320 percent).

Tokopedia has also been losing money. Although COVID brought a surge of online buying, consumers have used it for essentials while delaying higher-value purchases of electronics, fashion, and other nice-to-haves.

The third leg of GoTo, financial services, is also in the red. This consists of three business lines: payments, financial services (credit, wealth management, insurance), and GoTo Financial, its financial technology services arm.

Added together, GoTo does benefit from a strong net cash position, and it is not burning cash as quickly as it used to, but in 2021 its free cashflow was still more than double its revenues.

For investors, the best way to benefit from GoTo may be indirectly, through firms associated with its ecosystem. Analyst Angus Mackintosh of CrossASEAN Research is bullish on multi-finance company BFI Finance Indonesia thanks in part to a bid by one of Jago Bank’s major investors to take a share.

“There is a lot more to this transaction than meets the eye with the potential for some very interesting future collaboration,” Mackintosh said on Smartkarma.

What major tech companies and digital banks around Southeast Asia need is for GoTo’s domestic listing to banish the memory of the Bukalapak and Grab deals. That will keep the exits open for everyone else – and prove that Southeast Asian tech is ready for global IPOs, through the front door.