9 minute read
Southeast Asia’s Digital Goldrush
For the past two decades, China has presented a unique opportunity for emerging market investing at scale.
This is in large part due to its massive population, growing middle class, and a high rate of digital services adoption. Early investors in companies such as Alibaba, Tencent, and JD.com made fortunes as they leveraged their access to global capital markets to become digital goliaths dominating online shopping, entertainment, payments and woven into Chinese consumers’ daily lives. But tighter regulation over overseas listings have many investors asking, “What is the next China-like opportunity?” While no country can match the impact that China has had on the global economy, I believe Southeast Asia will be the next frontier. It will become a major focus of investor attention and new public company listings over the coming decade.
In fact, MarcumBP is actively working to expand into Singapore - with more updates to come. We already employ nearly 200 staff, the vast majority of which are in Asia. As early entrants in China, MarcumBP has been at the forefront of the intersection of the U.S. and Asia markets for 20 years. Now, we are eying Southeast Asia as we expand in line with the opportunities for high growth emerging companies.
What is driving the emergence of Southeast Asia?
1. Favorable Demographics – If “demography is destiny,” then the center of energy in Asia will be shifting southwards as North Asia’s industrial powerhouses of China, Japan, and Korea all begin to experience dramatic declines in their working-age populations and overall population.
Southeast Asia has a population of 589 million, with 274 million in Indonesia, 110 million in the
Philippines, and 97 million in Vietnam, with significantly lower labor costs than other Asian economies. The region’s median age is 30 years old, and 50% of Southeast Asia’s population lives in urban areas, which will provide additional impetus to growth as urbanization continues. This large, relatively young labor base makes many countries attractive to Western enterprises seeking to build resilience into their global supply chains and mitigate the risks of the growing rivalry between China and the U.S. While the region has an enormous dispersion of incomes, ranging from GDP per capita of $60,000 in Singapore to under $3,000 in Vietnam, there is a growing middle class with a ravenous appetite for consumer goods and services. This transition from subsistence to an urbanized middle class with disposable income is a powerful catalyst for economic growth.
2. rapid Digital adoption – Increasingly, Southeast
Asia’s consumers are turning to digital platforms to satisfy their needs. A recent report put out by
Google, Temasek, and Bain Consulting entitled
“Roaring 20s: The SEA Digital Decade” forecast that the size of the region’s digital economy will grow from $170 billion in 2021 to $1 trillion by the end of the decade. While the pandemic battered the region’s travel industry, it drove consumers and businesses to accelerate the transition to digital shopping, food, transportation, and payment services. Forty million new internet users came online in 2021 alone, bringing the region’s internet penetration to 75%. Southeast Asia’s small and medium businesses have also embraced digital, with 80% saying that they expect more than 50% of sales to come from digital in the future; one in three say that they would not have survived the pandemic without the reach of digital channels.
3. venture capital pours in – These trends have not gone unnoticed by venture capital investors, who have been increasing their bets on emerging leaders of Southeast Asia’s digital economy.
According to Deal Street Asia, investment in the region’s startups nearly tripled to $25.7 billion in 2021, resulting in 25 new “unicorns” with valuations above the $1 billion mark – more than all the prior years combined. Singapore birthed ten new unicorns last year, Indonesia had seven, and Malaysia, the Philippines, and Thailand all had their first. These deals were funded by a combination of global private equity investors and many family-owned conglomerates that have long dominated Southeast Asia’s economy. They now want to establish a foothold in fields that will define the future, including digital services, logistics, robotics, and fintech. Just as importantly, Southeast Asia now has a vibrant culture of entrepreneurship, with the younger generation embracing the risk and reward of innovation and the private sector. Four hundred eighty alumni from just one tech company, the e-commerce platform Lazada now controlled by Alibaba, have gone on to found or lead new startups of their own.
4. investments in infrastructure – Not to be left behind, global digital giants are racing to con-
nect Southeast Asia’s young and mobile population to their services. Facebook plans two major new cables connecting the U.S. with Singapore and Indonesia and is laying 3,000 kilometers of fiber optic cable to connect its 140 million users in Indonesia, its third-largest market worldwide. Google, Amazon Web Services, and Alibaba are all building out data centers in the region to localize cloud services. As broadband becomes ubiquitous, this will increase video streaming, edtech, gaming, and more bandwidth-intensive applications. Investments in logistics infrastructure are also continuing apace, with 28% of the region enjoying same-day delivery service.
5. regional integration – One of the biggest challenges for Southeast Asia is its diversity, encompassing a range of countries with different stages of development, regulatory approaches, languages, and aspirations. But increasingly, technology companies are adopting a panregional approach to provide sufficient scale to compete with global players. Singapore provides an efficient finance and administrative hub for companies in the region, with mature financial markets and a strong tradition of the rule of law.
Singapore has been ranked as the top jurisdiction globally for multinational corporations to establish subsidiaries based on its governance and regulatory regime. It has no capital gains tax, making it an attractive venue for investment firms. And it was ranked #1 worldwide for crypto-currency regulation by Coincub due to its
“robust economy, positive legislative environment, and high rate of cryptocurrency adoption.” 43% of Singaporeans own cryptocurrency, compared with just 10.5% in the U.S. Against the background of a trillion-dollar market opportunity, it seems inevitable that Southeast Asia will produce its fair share of new public companies that combine disruptive business models with a powerful demographic tailwind.
One of the first names to catch the attention of American investors is Grab, the ridesharing, and food delivery “super app” that completed a SPAC merger that netted $4.5 billion and had an initial valuation of $40 billion. Grab’s stock has tumbled since the completion of the merger, but the company still has a market capitalization of $22 billion and remains the largest SPAC deal ever completed.
Two of Indonesia’s eCommerce leaders, Gojek and Tokopedia, merged to form GoTo Group and completed a $1.3 billion pre-IPO round in November of 2021 with backers including Google, Tencent, and Temasek. GoTo is said to be planning on an IPO on Indonesia’s stock exchange later this year. Other unicorns from Southeast Asia, including travel tech company Traveloka, online property marketplace Property Guru, and logistics player J&T Express, have been weighing IPOs or SPAC mergers as a path to public status.
As Southeast Asia’s tech tigers build scale, they will likely consider tapping the U.S. equity markets to enjoy higher valuations and deeper pools of liquidity than what local stock markets can offer. Several U.S.-listed SPACs have been in active discussions with companies from the region. NASDAQ and the Singapore Stock Exchange have announced a partnership to facilitate dual listings on the two exchanges.
As the business models of the current crop of venture-funded businesses mature, dozens of new public companies may be coming to U.S. shores. Of course, some may stumble along the way, given how competitive many verticals in e-commerce and digital services have become. The young management teams will also face a steep learning curve to meet international accounting, governance, and investor transparency standards that public shareholders rightfully expect. Rolling lockdowns due to the spread of variants of the COVID virus suppressed the revenue trajectory of many companies in 2021, but demand is expected to snap back in 2022 as vaccination rates in the region increase.
Seasoned emerging markets investors are fond of the saying: “Pioneers get arrows. Settlers take the land.” Early investors in Southeast Asia’s digital gold rush will need to be prepared to dodge a few arrows. But the land is rich with opportunity.
Drew Bernstein, Co-Managing Partner Marcum Bernstein & Pinchuk (MBP)– a leader in SEC audit, accounting and consulting services to Chinese companies seeking access to capital markets.
In 1983, Drew Bernstein co-founded Bernstein & Pinchuk. Additionally, he co-founded MarcumBP, which is a member of the Marcum Group and an affiliate of Marcum LLP, a leading U.S. accounting and advisory firm. Both firms have multiple offices within the United States and Asia.
Bernstein is a distinguished expert with deep knowledge of the China and U.S. financial ecosystem with experience extending across Asia, Europe and Africa. Industry experience encompasses technology, retail, manufacturing, hospitality, pharmaceutical and real estate. Bernstein directs a global team, featuring highly trained PCAOB and SEC accounting experts and financial consultants working in New York as well as Beijing, Tianjin, Shanghai, Shenzhen, Hangzhou, and Guangzhou. Additionally, Bernstein is considered a valuable thought leader and news commentator. He has published articles for Forbes.com and China Daily and is a frequently called upon source by prominent media such as China Global Television Network, CNBC, Bloomberg TV, The Financial Times, The South China Morning Post, The Wall Street Journal, Yahoo! Finance, and more regarding Chinese IPOs, China’s economic growth, investment appetite, innovation trends, corporate governance, SEC regulations and more.
Bernstein graduated from the University of Maryland with a B.S. in Accounting. Currently, he resides in New York City with his wife and children. About MBP
Marcum Bernstein & Pinchuk LLP (MBP) offers specialized audit and advisory services to support SPAC sponsors and SPAC targets in Asia. MBP and its parent company, Marcum LLP, have been involved in more SPAC transactions than any other audit firm. MBP is the only audit firm to have a dedicated SPAC team for Asia. MBP performs all audits for Marcum in Greater China, and MBP is a top-five auditor for Chinese companies listed in the United States.
The dedicated SPAC team has worked with SPAC sponsors, underwriters, and targets. MBP draws on wide-ranging experience with the initial public offerings and subsequent business transactions forged by such companies. MBP has designed its audit platform to deliver the technical expertise, efficiency, and urgency required by SPAC IPOs. This includes high-quality, PCAOB-compliant audits for private Asian companies that are contemplating entering a SPAC merger.
Website: U.S.: https://www.marcumbp.com; China: https://cn.marcumbp.com
Drew Bernstein does not own shares in any companies mentioned.
