Key Takeaways
- South and Southeast Asian unicorns are finding it difficult to turn around their operations, given a prolonged COVID impact and stiff competition; and funding is more challenging.
- The major startups still have ample cash balances to support their ramp-up schedules and are focusing on cost cuts among other initiatives to achieve financial sustainability.
- U.S.-based Uber highlights a path to stronger creditworthiness that is driven by operational improvements and a strong cash balance.
Unicorns in south and southeast Asia are stuck between the devil and the deep blue sea. After first focusing on rapid growth, the major start-ups are now following traditional firms in cutting costs and rationalizing or exiting business segments where they have little competitive advantage. It won't be easy to become cash flow positive. Consumption is likely to remain stifled, given higher global interest rates, associated capital flow constraints, and a subdued economic outlook.
In recent quarters, unicorns have taken initiatives to achieve financial sustainability, such as centralizing or rationalizing operations. And some of the startups have taken dramatic steps to rein in spending, including layoffs (see table). Cash preservation has become a top priority as fund raising has become challenging.
Singapore's Grab Holdings Ltd. is just one to have had a rocky ride. We don't expect the mobility, delivery, and digital financial services platform provider to turn EBITDA positive until 2025. The company's cash burn remains sizable because of stiff competition and the stalled recovery of its ride-hailing business due to the prolonged COVID impact.
But S&P Global Ratings forecasts Grab's EBITDA will become profitable within the next three years, driven by lower incentives per active user, disciplined spending, and cost cuts. This expectation is in line with management's emphasis on cost-cutting measures and the CFO's focus on cost management and prioritizing cash preservation.
In view of the struggles, we expect Grab's cash balance to have declined to US$5.9 billion by end-2022, from US$8.2. billion in 2021. The balance will likely remain at least US$3 billion until EBITDA turns positive in 2025, given we anticipate cash leakage will narrow. Cash flows from operations should turn positive during the same period.
We could consider lowering the rating on Grab (B-/Stable/--) if we believe the company won't be able to maintain an ample liquidity buffer, and its cash balance falls below its expected cash burn over the next 24 months.
India-based ANI Technologies Pte. Ltd. (B-/Stable/--) has also taken decisive action to turn around operations. The company, which operates a ride-hailing platform, has scaled back its growth aspirations overseas and non-mobility expansion to achieve profitability. The mobility business has surpassed pre-COVID levels and maintained profitability on a segmental basis.
A further pivot came only months after ANI Technologies undertook a US$500 senior secured loan in January 2022. In August 2022, it repurchased US$350 million of the loan to reduce the negative carry on the back of lower capital requirements.
These developments suggest to us that more unicorns could focus on turning around core operations at the expense of expanding their presence in new markets or vertical segments.
A Cash Bridge Too Far
South and Southeast Asian unicorns require an abundance of cash to expand businesses and eventually achieve sustainable operations. The cash can be viewed as pre-committed capital spending to some extent. Given the limited funding options available in the market, unicorns must of course use their cash efficiently. (See chart 1.)
Chart 1
GoTo Gojek Tokopedia Tbk. PT has bucked the trends. The Indonesia mobile on-demand services and payments platform raised US$961 million in cash from its IPO earlier this year. GoTo aside, late-stage investments, IPOs, and post-IPO financing deals were limited in 2022. And funding is likely to remain challenging for some time. Unicorns' cash balances have notably declined in recent quarters, which reflects the managements' need to change business strategies to conserve cash. (See charts 2a and 2b).
Chart 2a
Chart 2b
Singapore-based Sea Ltd. is doing just that. The online gaming and e-commerce company has already announced that it will prioritize becoming cash flow positive. The founder, Mr. Forrest Li, says Sea's executives will forgo salaries until the company becomes self-sufficient. Other initiatives include the closure of its Shopee branches and operations in Argentina, Columbia, Chile, and Mexico as the company focuses resources on core operations. Sea's unrestricted cash balance fell by US$2.4 billion to US$7.8 billion during the first nine months of 2022, from US$10.2 billion at the end of 2021.
The Road Forward For Uber
U.S.-based unicorn Uber Technologies Inc. has steered a path to stronger creditworthiness. On June 29, 2019, S&P Global Ratings assigned its 'B-' long-term issuer credit rating to the mobility, delivery, and freight platform provider. We upgraded the company to 'B' on Feb. 17, 2021, and then revised the stable outlook to positive on June 7, 2022.
The outlook revision reflects the possibility of a further upgrade if Uber can achieve EBITDA of around US$1 billion and adjusted free operating cash flow that nears breakeven in 2022, with potential further improvement in 2023. (See "Uber Technologies Inc. Outlook Revised To Positive On Expected Positive Cash Flow; 'B' Rating Affirmed," published June 7, 2022.)
Chart 3
The rating transition highlights Uber's improving operating metrics and its ample liquidity. Typically, it's difficult to assess the credit quality of early-stage companies due to the evolving competitive landscape, regulatory framework, and consumer preferences. We therefore look for a sustainable track record of positive EBITDA and operating cash flows to assess the sustainability of operations.
Uber is achieving this. Following its third-quarter results, the company has now reported four quarters of breakeven or positive EBITDA--notable improvements from a year ago. At the same time, Uber has lowered its customer acquisition costs and driver subsidies.
Uber also made drastic shifts in business direction to exit geographies and businesses in which it was not making enough progress against competitors. These include operations in China, Russia, and Southeast Asia. More recently, it divested Uber Eats India, its electric bikes and scooters businesses, and autonomous driving research unit. During the pandemic, Uber took significant steps to cut costs, totaling more than US$1 billion on an annualized basis.
And Uber has maintained strong liquidity by ensuring that it has a strong cash balance by raising new capital well in advance of needing it. The company also has diversified funding sources, including term loans, a revolving credit facility, convertible notes, and the proceeds of its IPO.
Cash Burn Can't Continue
South and Southeast Asian unicorns are at a crossroads. They need to choose between aggressively expanding to reach economies of scale or focusing on reigniting their businesses. Cash does not last forever. The startups can't continue spending if operational turnarounds are delayed and cash balances are narrowing while fund-raising remains difficult. The unicorns will be prioritizing now.
Related Research
- Grab Holdings Ltd., Nov. 4, 2022
- India-based ANI Technologies 'B-' Ratings Affirmed On Adequate Liquidity; Outlook Stable, Aug. 9, 2022
- Uber Technologies Inc. Outlook Revised To Positive On Expected Positive Cash Flow; 'B' Rating Affirmed, June 7, 2022
- The Rise Of South And Southeast Asia Unicorns: Cash Burn Disrupts Credit Quality, Feb 21, 2022
Editor: Alison Dunn
Digital Designer: Halie Mustow
This report does not constitute a rating action.
| Primary Credit Analyst: | Shawn Park, Singapore + 65 6216 1047; shawn.park@spglobal.com |
| Secondary Contacts: | Ker liang Chan, Singapore (65) 6216-1068; Ker.liang.Chan@spglobal.com |
| Simon Wong, Singapore (65) 6239-6336; simon.wong@spglobal.com | |
| Research Assistant: | Pranali P Salgaonkar, Mumbai |
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