Southeast Asia | Why the region may become a multi-decade Tech growth opportunity (part 1)

8 Aug 2021

Dear Reader,

While I believe many investors around the world have probably not yet latched onto Southeast Asia, there are opportunities for those investors who do so early on, as an interesting development is emerging beneath the surface. I believe the region is at an interesting inflection point today and one must take a closer look at it from an investment perspective:

  • Southeast Asia is home to 660 million people. If considered as one country, Southeast Asia would be the third most populous country in the world. Combined with a very young population that has a median age of approximately 30 years, it is a solid foundation to build an ample economy.
  • As urbanization is the major driver of economic growth, emerging (mega-)cities in the region (population in Jakarta already reaches 35 million, Manila 23 million, Bangkok 17 million, Ho Chi Minh City 13 million…) provide a network effect and are beneficial to the job mix effect since people leave behind rural agricultural for urban jobs that pay higher salaries. With a degree of urbanization of only 52 % across the region, there is still room to grow urbanization.
  • The weighted-average GDP per capita entered the “golden age” zone, resulting in disproportionate discretionary spending when the GDP per capita raises further, resulting in an expanding Total Addressable Market, spurring demand for a wide range of goods and services that were not demanded previously and as a result accelerate growth and enable new business models to emerge.
  • While the archipelago nature of much of the region creates noticeable barriers of geography, which is obstructive for businesses scaling up, Technologies that can help to overcome physical distance and gaps in the logistics network could thus be particularly valuable to the region. COVID-19 accelerated the internet penetration, adding 40 million new internet users in 2021 alone, bringing the penetration rate to 70 % now, making it a really interesting market for tech companies.

On the funding side, the ecosystem started to change in 2014, when the first pioneer
Gen-1 companies in Southeast Asia (SEA Ltd., Lazada, Grab, Go-Jek, Tokopedia, Traveloka) became Unicorns. As a result, venture capital flows have increased since then manifold. After the critical mass of eight to ten private unicorns was created, the U.S. entered the inflection point in 2013 and China in 2014, respectively, which was also the case for SEA in 2019, indicating the entering of a new phase of growth in the region.

In this fertile environment, where Gen-1 companies figuratively serve as seeds for subsequent startups, second-generation companies can now thrive without having to “slog” through many years of waiting for the market to be ready, unlike the Gen-1 companies had to go through.

SEA is likely to go through this transition from Gen-1 companies to Gen-2 companies in the next few years.

The combination of these ingredients makes the Southeast Asian market interesting today, which is why I dove deeper.

This Special research report is not an analysis of one specific company but takes a top-down view of the key determinants of the region’s success or failure over the next few years.

Chapter 2 focuses on the determinants that may be critical to the emerging success of the SEA region and Chapter 3 tries to find antithesis that might kill the initial thesis. Aware that people tend to learn more and more but end up knowing less due to information overload bias, the analyses mainly focus on capturing the big picture rather than being obsessed with small details. Chapter 4 provides a brief overview of companies or ideas where to start digging deeper.

As you may have noticed from the title of this report, this Special Research Report is Part 1. The goal is to further research for investable companies. So, at least Part 2 will follow with a specific analysis of a company that will benefit from the developments uncovered in this Special Research Report. Stay tuned!

I think the whole corporate landscape is still in its infancy and companies will reach a critical size to go public afterward. The upcoming IPOs such as Grab or GoTo Group break the first ground, likely providing investors with plenty of investment opportunities over the years to come.

Unfortunately, I missed out on Sea Ltd. last year which rose 20x from 2019 pre-COVID levels and is now the most valuable public company in the region with a market capitalization of $140 billion, but one cannot have one’s eyes everywhere at the right time. I remain confident that there will appear other good opportunities.

Furthermore, with more and more Tech-related IPOs in SEA, anyone betting on the stock market on the rapidly growing digital economy in Asia’s emerging markets is no longer dependent on the goodwill of the Chinese Communist Party amid the Chinese regulatory uncertainty that has risen over the last couple of months. For Example, only recently the two U.S.-listed Chinese education stocks TAL Education and New Oriental Education tumbled by 71 % and 54 %, respectively, after Chinese authorities stepped up restrictions in recent months on the private education industry. Another example is Didi Global (China’s version of Uber). Just days after it IPOed in early July 2021 in New York, the Chinese cyberspace regulator effectively ordered it removed from app stores in its home markets, citing security risks, leading to a declining share price by about 50 % within three weeks after the IPO.