Indonesia – Dumile Capital

Beenos has performed exceptionally well since my first write-up in August last year, rising more than 180% in about 10 months:

As I explained in the original post, the Company’s consolidated financials don’t tell the story very well at all, as headline revenue and operating income have actually fallen over this timeframe due to various moving parts and accounting rules for . The main driver of the stock’s performance was continued strong results in the Company’s Global Commerce segment, which exceeded my own optimistic forecast from August 2020 and grew significantly over the prior year:

(JPY bil)	FY20E	FY20A	% Beat	YoY Growth
Global Commerce GMV	28.3	29.7	4.9%	20.2%
Buyee GMV	19.3	20.3	5.2%	26.9%
Sekaimon GMV	5.3	6.1	15.1%	32.6%
Tenso GMV	3.7	3.8	2.7%	-5%
Global Commerce Net Revenue	5.75	5.925	3.0%	20.2%
Global Commerce EBIT	1.52	1.686	10.9%	132.2%

More importantly, the Company also gave aggressive guidance for FY21 (roughly equal to my previous assumptions for FY22), which they have easily beaten thus far in the first half of the year:

Returns have also been boosted by multiple expansion, a natural result of the acceleration of growth and profitability in Global Commerce and the return to profitability in the Value Cycle and Entertainment segments. The multiples still appear reasonable in this context; the core Buyee business has the potential to sustain a high level of growth for the foreseeable future (currently growing GMV 45% yoy) based on new market entries, the potential of key partnerships with Mercari and Shopee, and ongoing investments in logistics infrastructure that are lowering the cost of delivery in core markets. At the current price, Beenos has roughly 20% of its market cap in net cash, and based on the Global Commerce segment alone trades at a trailing valuation of ~1.1x EV/GMV, 5.4x EV/Sales, and 17x EV/EBIT, with segment sales and operating income in Q2 growing 31% and 42% yoy, respectively. This is still a significant discount to Raccoon, which I highlighted in the original post, the leading overseas B2B e-commerce player in Japan that is growing slower yet trades at 50x EV/EBIT and 13x EV/Sales.

This valuation does not take into account the Incubation portfolio, which in Q2 was marked at JPY20.9B, roughly half the market cap of Beenos. Given their focus on online marketplaces in India and Southeast Asia, it would stand to reason that the underlying performance of their portfolio companies should be doing well over the last year as coronavirus measures drove increased adoption of e-commerce and online services. The Company sounded very bullish in the latest quarterly presentation, noting “astronomical growth” in their investments in Southeast Asia.

However, as valuations in the VC portfolio are based on the last funding round, strong underlying business performance does not necessarily translate to gains on Beenos’ balance sheet. Furthermore, the Company gives limited detail about the size of each individual position, and information about the private companies that investors would use to determine their own valuation is often sparse. For these reasons, it seems the market has decided to ignore the Incubation portfolio, rather than attempt to value it. On closer inspection, I think investors will find some hidden gems here that could have a significant impact on Beenos’ long-term returns.

The largest position in the portfolio is a stake in the newly formed GoTo Group, born of a merger between Tokopedia, a leading e-commerce player, and Gojek, a leading ride-hailing player, both based in Indonesia with a primary focus on their home market. Beenos first invested in Tokopedia in their 2012 Series A round under the direction of Beenos’ founder, Teru Sato. In subsequent rounds, Tokopedia attracted investment from Softbank, Sequoia, Alibaba, Google, and Temasek on its way to a $7.5 billion valuation. Tokopedia is one of four major players that has emerged in e-commerce and online services in Indonesia: Tokopedia and Sea Limited (Shopee) focusing on e-commerce, and Gojek and Grab in ride-hailing and delivery.

With competition heating up, a negative impact on ride-hailing from coronavirus, and a lull in interest in further private funding rounds, Softbank started pushing for industry consolidation. At first, Softbank attempted to bring together Grab (another Softbank investee) and Gojek, but the deal fell apart over regulatory concerns about creating a monopoly in ride-hailing and internal disagreements over control of the new entity. Ultimately a deal was struck instead for a merger between Tokopedia and Gojek, a better cultural fit between two homegrown Indonesian champions (Sea and Grab both based in Singapore). The combined entity has reshaped the competitive landscape, as the GoTo Group is now the first platform in Indonesia to encompass e-commerce, on-demand and financial services:

While Tokopedia and Gojek will retain their standalone brands, the combined entity should find a number of opportunities for synergies within the expanded ecosystem. The companies first worked together in 2015 to accelerate e-commerce deliveries using Gojek’s driver network, and the GoTo merger is expected to lead to better utilization of the total registered driver fleet of over 2 million, making same-day deliveries possible across the country, a 17,000-island archipelago with notoriously difficult logistical challenges. In areas where they have historically competed with one another, funds for user acquisition can now be directed to more efficient use. Overall, the merger should result in better unit economics and a more prosperous future, with more ways to bring new users into the ecosystem and more reasons for them to stay.

This is also a defensive response to intensifying competition from Shopee and Grab. Sea’s immensely profitable gaming unit, Garena, has enabled them to fund rapid growth in their e-commerce and payments arms across multiple markets. Thanks to subsidized shipping costs, an emphasis on Beauty and Fashion, and a mobile-first strategy, Shopee surpassed Tokopedia in Q4 2019 as the most active e-commerce platform in Indonesia, and it now holds the leading position across Southeast Asia and Taiwan. However, Tokopedia has managed to keep pace with Shopee in terms of transaction value, with both marketplaces generating about $14B each in 2020, together making up 70% of the Indonesian e-commerce market.

Along a similar vein, Grab has been able to leverage its dominant position in other Southeast Asian markets to subsidize its Indonesian operations and take market share. After Uber sold its Southeast Asia ride-hailing and food delivery operations to Grab in exchange for a 27.5% stake, Grab commanded near-monopolies in many of its markets. One exception has been Indonesia, where Gojek and Grab roughly split revenue market share in ride-hailing.

Tokopedia and Gojek’s resilience in the face of well-funded competition highlight that these are not necessarily “winner take all,” or even “winner take most” markets. The GoTo Group now likely has the organizational resources needed to solidify its market position as one of Indonesia’s dominant super apps. The Group’s primary focus on Indonesia may prove to be an advantage now, as Shopee and Grab may be running into resource constraints as they battle for share in multiple markets. With every fluctuation in market share being met by a competitive response that tips the scales back in the other direction, the natural outcome may be a duopoly in e-commerce and on-demand services. As the market matures, a smaller number of players should lead to more rational capital allocation over time, and there is no reason the Big 3 should not be quite profitable at scale. This is especially true as the companies share some strategic shareholders; Tencent backs both Sea and GoTo, and Alibaba and Softbank back both GoTo and Grab. But for now, the Indonesian market is still relatively nascent, and the focus is still on user acquisition over near-term profitability.

The GoTo Group reported $22 billion Gross Transaction Value in 2020, accounting for about 2.2% of Indonesia’s GDP and roughly half of Indonesia’s digital economy. The merger valued the company at $18 billion, which was based on Tokopedia and Gojek’s valuations in their last funding rounds. The merger paves the way for a listing over the next year or two, and the post-merger valuation is expected to be around $40 billion. A valuation of 1.8x GTV would still be on the low-end of comparable businesses in the region. Sea Limited’s market cap currently $130 billion vs. GMV of $35.4 billion in 2020, an increase of 101% yoy. Grab going public in partnership with Altimeter Growth Corp. (Nasdaq: AGC), expecting a valuation of $39.6 billion vs. GMV of $12.5 billion in 2020. Chinese super app leader Meituan’s market cap is $242 billion vs. Food Delivery GTV of $76 billion, which accounted for 58% of the company’s revenues. The digital economy in Indonesia is expected to triple again by 2025 to reach $124 billion, implying about 25% annual growth. The Indonesian market should support a decades-long runway for exceptional growth in digital services, with a population of 150 million under 35 out of a total of 270 million, rising GDP per capita roughly ten years behind China, and a relatively low but booming penetration of mobile internet usage. In a nutshell, this is a generational opportunity to bring a massive, young population into the GoTo ecosystem as the country is getting rich for the first time and become everything from their bank to their hypermarket to their ride home.

Whether the valuation of GoTo turns out to be $18 billion or $40 billion after listing, the more important question is, how much is this worth to Beenos shareholders? The Company is very vague about its stake in corporate presentations, only disclosing a range between 0.5% and 5% of Tokopedia in the past. Fortunately, we can do a lot better than that; a legal document filed with the Indonesian authorities in 2018 that reflected the company structure and shareholding prior to its Series G round showed that Beenos held roughly 1.95% of the shares outstanding:

There were two rounds following this snapshot. The Series G round raised $1.1B at a $5.9B pre-money valuation in November 2018, resulting in 18.6% dilution. The Series H round raised $350m at a $7.5B pre-money valuation in November 2020, resulting in a further 4.66% dilution. My best estimate of Beenos’ stake in Tokopedia prior to the GoTo merger is therefore 1.57%, which would imply a 0.65% stake in GoTo. At a valuation range of $18 billion to $40 billion, Beenos’ stake is worth $118m to $262m, or JPY13 billion to JPY28.8 billion at current exchange rates. At the high-end of the range, a full recognition by the market for the value of this stake would add another 64% to the current market cap, and over five years it could possibly return multiples of the current share price.

I think the most compelling aspect of Beenos as an investment is that the company is positioned to win in several ways. If Sea’s special sauce continues to fuel Shopee’s explosive growth in the region and the GoTo Group suffers a long and painful decline, Beenos’ Buyee segment stands to benefit considerably from its partnership with Shopee. If I am wrong about the trajectory of the Global Commerce segment, perhaps management will find a way to position the Value Cycle and Entertainment segments for profitable growth once again. If GoTo doesn’t work out as well as hoped, maybe there is another investment in the Incubation segment that will, such as their stakes in India’s leading used auto marketplace or the largest B2B fashion marketplace in Thailand. When we add up all the pieces together, it’s hard to imagine a chain of events that would make the business in aggregate worth less than the current share price.

Reassuringly, Beenos management appears to be thinking the same way. The Company announced its intention to repurchase 1.2% of the shares outstanding on May 27th, and by June 2nd the repurchase was already completed. Returning capital to shareholders in this fashion over time should also contribute nicely to total returns for long-term investors.

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Sources:

Beenos Investees “Tokopedia” and “Gojek” Announce Merger

Tokopedia-Gojek Merger to Create Southeast Asia Internet Giant

Gojek, Tokopedia Explore Holding Company Structure as Merger Talks Move Forward

GoTo Group, New Asian Super App, Born of Merger

Tokopedia: Indonesian Ecommerce Giant

Inside Tokopedia, the Indonesian e-commerce company offering almost everything

Gojek co-founder Kevin Aluwi on super apps, post-pandemic Asia

How will the Gojek-Tokopedia merger rival Grab in SEA?

Snapshot of Tokopedia’s company structure and major shareholders

William Tanuwijaya, CEO and Founder, Tokopedia: Interview