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Financial Services holds the key to Grab’s super app ambitions

  • Financial Services generated just 5% of 2020 revenue but is the glue that keeps customers engaged with Grab's ecosystem

  • GrabPay is currently the dominant financial product but lending, investment and insurance are set for explosive growth

  • We expect Grab to grow its top line by 41% pa, hitting US$6bn in 2024. Mobility, Deliveries will drive better financials

Financial Services holds the key to Grab’s super app ambitions
Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Contributors
Nirgunan Tiruchelvam
Rohit Kumar
Tellimer Research
6 August 2021
Published byTellimer Research

Grab commenced operations in 2012 and is now Southeast Asia’s leading super app, based on the US$12.5bn GMV generated in 2020. We have previously written on the super app concept in the context of Ant Group’s Alipay. In this note, we focus on Grab Financial Services. Although this division is not large or profitable, we think it is key to Grab’s efforts to lock in customers across multiple product categories, which lifts wallet share and retention rates. Further, divisional performance looks set to improve as a wide range of additional financial services are added to the current mainstay, GrabPay. Following the recent Altimeter transaction, investors can gain direct exposure to this exciting Southeast Asian growth story.

Note that we are hosting a conference call with Grab's CFO. You can sign-up here.

Grab overview

Grab operates across 8 Southeast Asian markets with a combined population of 670mn and a GDP of US$3.0tn. The firm completed 1.9bn transactions last year, generating a top line of US$1.6bn from US$12.5bn Gross Merchandise Volume.

Grab is active in 8 Southeast Asian markets

Grab has experienced strong top line growth in recent years. We forecast adjusted net revenues to keep rising, at a 41% per annum pace, reaching US$6.0bn in 2024. The take-rate should remain in line with the current level of 13%.

Grab's top line could hit US$6bn in 2024

This strong revenue momentum should allow the firm to move into profit, with the Segment adjusted EBITDA margin plateauing at 27% in 2023 and 2024.

Adjusted EBITDA could turn positive this year

Grab's products fall into four main categories:

  • Mobility

  • Deliveries

  • Financial Services

  • Enterprise

Mobility and Deliveries are the key drivers of both the top line and EBITDA and are likely to remain so in the future. However, we think Financial Services has greater strategic importance than these numbers suggest.

Grab revenue mix by division

Grab Financial Services

Grab’s financial services commenced in 2017, via GrabPay. Today, Grab covers a broad swathe of products including payments, remittances, insurance, investments, and credit.

Financial Services is more of an enabler than a direct value driver

Based on our projections, the Financial Services Division will see its share of the group's top line remain in line with the 5% recorded in 2020. Moreover, the division is expected to remain loss-making for longer than the others. From this financial perspective, the Mobility and Delivery divisions are much more important to the business. But strategically, Financial Services is key to the long-term success of the firm, in our view.

GrabPay is currently the division's main product, accounting for 94% of its revenues in 2020. The market for digital payments in Southeast Asia has significant growth potential. Based on Euromonitor data, the region's digital wallet market in 2020 was US$39bn, giving Grab approximately 23% market share. The market is forecast to increase to US$138bn in 2025 (ie 29% CAGR). Even in this year, digital payments will be dwarfed by the expected US$1.36tn volume of cash transactions ie cash will still account for 90% of all transactions at this time.

We think GrabPay has a much more important function than its raw numbers suggest. One of the key goals of the Grab business is to maintain user activity within the firm's ecosystem. For example, there is a 79% 1-year retention rate for customers using more than 3 Grab services, compared to just 47% for customers using two services. GrabPay can be considered the glue that keeps customers engaged within Grab's other services. By way of illustration, relative to non-GrabPay users, GrabPay customers make 80% more use of Grab services and spend 120% more on the platform. For this reason, GrabPay's efforts have been more internally than externally directed in the past; over half of GrabPay’s volumes have been generated within the Grab ecosystem.

Diversification away from payments should lift Financial Services’ profitability

GrabPay's take-rate has been gently declining in recent years (from 6.0 to 5.6%). But we think the ongoing shift into other financial products (lending, insurance, investments and so on) could help lift divisional profitability. Management projections point to a significant diversification of the revenue pool over the coming years. For example, we note that in Ant Group's case (before last year's regulatory crackdown), the firm's lending operations were a bigger contributor to the bottom line than its higher-profile payments business.

Grab Financial Services revenue mix

Financial Services is the biggest value-driver for Grab shareholders

Despite Financial Services' small impact on the top and bottom line, currently and over the coming years, it is the most important division at Grab from a shareholder value perspective. GrabPay is the glue that binds together Grab's full suite of products, increasing customer retention and share of wallet. Our sum-of-the-parts valuation of the firm, based on the multiples at which listed pure-play peers are trading, supports this assessment. On this basis, Financial Services could account for around one-third of the firm's overall value.

Further information regarding our financial forecasts and valuation can be found here.

Financial Services is the biggest value driver at Grab