This article was originally published in Nikkei Asia on 30 January 2023.
The share performance of recently listed Asian tech companies has diverged dramatically this year as investors reward managements that have cut costs and committed to improving profitability and punish those with less certain prospects.
The recent winners include several companies — such as Singaporean tech platform Grab and South Korea’s top e-commerce outfit, Coupang — that soared in 2021 and then plunged in 2022 as investors shifted their focus from the long-term promise of startups to their bottom lines.
“Companies are focusing on optimizing their operations, given investors’ sharper focus on companies’ ability to generate profits or demonstrate a credible path to achieving profitability while maintaining a sustainable growth profile,” Mark Fiteny, JP Morgan head of investment banking for technology, media and telecoms in the Asia-Pacific region, told Nikkei Asia.
Grab is up 15.2% through Jan. 27 following a series of cost-cutting measures, including a freeze on most hiring, salary freezes for senior managers and cuts in travel and expense budgets.
Its stock has been on an upward trend since October, after the company announced plans to break even by the second half of 2024 on an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis.
In a Jan. 15 report, Morgan Stanley gave Grab an “overweight” rating and ranked the company as its “most preferred stock” among other loss-making Southeast Asian tech stocks including Singapore’s Sea, Indonesia’s GoTo and Blibli.
“Given the change in the capital markets sentiment toward unprofitable stocks, we believe that stocks which can show a pathway toward profitability, and achieve it faster, will be favored,” the report said.
Morgan Stanley this month also raised GoTo’s rating to “equalweight” from “underweight.” Shares of the Indonesian tech group are up 28.6% this year, following a 12% cut in workforce and selling its stake in a local retailer.
Similarly, Coupang shares are up 13.6% this year. In November, the SoftBank-backed company reported net profit of $90 million for the third quarter ending Sept. 30, a turnaround from $323 million in red ink during the same period in the previous year.
This was its first quarterly net profit since going public in 2021, and reflected the South Korean platformer’s recent efforts to focus on its bottom line and recoup investments made on expanding its distribution network, including in Japan.
But not all young IPOs have been able to shift gears quickly enough. Shares in Indian food delivery app Zomato — the country’s first unicorn to go public — are down 20.8% year-to-date. This was despite the company saying in August — at its first general meeting following its listing — that it was likely to break even within a year.
“Our checks indicate sluggish restaurant industry trends,” Jefferies said in a report on Zomato. “Coupled with an increased dine-out trend, we do see a possibility of modest growth in the coming months for [the] food delivery sector, including Zomato.”
These Asian startups rode a wave of demand during the COVID-19 pandemic for initial public offerings, as central banks’ easy monetary policy boosted markets. The tide turned rapidly last year, when soaring prices across the globe on the back of Russia’s invasion of Ukraine and rapid interest rate hikes prompted investors to shy away from bets on young companies.
Shares of GoTo and Grab are still more than 60% below their debut prices, while Coupang and Zomato trade less than 50% and 30% respectively of their listing prices.
“A record year for IPOs in 2021 gave way to increasing volatility from rising geopolitical tensions, inflation and aggressive interest rate hikes,” said Paul Go, global IPO leader at professional services company EY. “Weakened stock markets, valuations and post-IPO performance have further deterred IPO investor sentiment.”
The global IPO market nose-dived last year, with total proceeds tumbling 64% to $148 billion, according to Refinitiv data. Asian markets accounted for around 70% of the money raised, but listed companies continue to struggle after their debuts.
Spooked by market conditions, some startups delayed their IPOs last year. In Japan, marketing tech AnyMind Group called off a scheduled December debut on the Tokyo bourse, the second time it did so last year.
Indian wearables startup boAt paused its IPO plans last October and instead raised $60 million from private investors. CEO Vivek Gambhir said, “[The] intent is to do an IPO at the right time and in the near future.”
Major Hong Kong listings turned in weak trading debuts last year, dealing blows to the city’s weakest IPO market in a decade. On the first trading day, Chinese electric vehicle maker Zhejiang Leapmotor Technology tumbled nearly 34% from its debut price of 48 Hong Kong dollars ($6), while Onewo Space-Tech Service — Chinese developer Vanke’s property services arm — dropped 6.8%.
However, these recently listed shares have reversed course near the end of 2022, lately trading above their debut prices, as Chinese equities rallied on hopes that the relaxation of COVID restrictions would push up domestic consumption in the world’s second-largest economy.
“China reopened faster than anticipated — this helps stem the deterioration to the economy and corporate profits,” said Peggy Mak, portfolio manager at fund management outfit Haven Capital. “We are, however, less sanguine for China equities as the COVID restrictions in 2022 have caused some strains in the economy.”
She warned that it may not be completely smooth sailing in the Chinese market, with the reception for new IPOs largely dependent on the sector. Mak assesses that internet platform companies will continue to face greater scrutiny as the tech industry continues to downsize.
“While we expect recovery in revenue growth, margins are not expected to return to pre-COVID level due to higher input costs and cost of capital,” Mak said.
Signs point to a stretch of uneven road ahead for companies navigating wobbly market conditions, according to market watchers. Global IPO activity is expected to remain subdued at least in the first quarter, EY said, but it could “regain greater momentum by the second half of the year” with more stability around inflation and visibility on the trajectory for interest hikes.
Peter Lovelock, head of the Fair Tech Institute at technology consultancy Access Partnership, told Nikkei, “Listing valuations, particularly for high-growth tech companies, are going to continue to be hit over the next six to 18 months.”
He added, “You may see higher interest rates giving rise to companies wanting to restructure their debt, but until the economic outlook becomes a little less uncertain, new IPO prospects may not want to try their luck with poor valuations.”
Experts are unclear when the difficulties will end, as inflation and weaker growth expectations continue to cloud investor sentiments.
“Asian markets are no different from global markets — they are also aligned toward global economies,” said Indu Tyagi, chief strategy officer at the Indian corporate intelligence firm Market Research Future, noting that volatility has been stirred by a “perfect cocktail” of COVID, war and oil price fluctuations.
Still, Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management, said the region’s emerging markets “will remain resilient” in the coming year as they sustain lower inflation than most developed markets.
Mitra noted, however, that Asian markets “are not out of the woods yet,” given how the U.S. Federal Reserve is expected to continue its rate hikes and how the down cycle of corporate earnings has yet to bottom out.
“A steep downturn in U.S. macro conditions or in its equity market will no doubt hurt Asia as well,” Mitra added.