Quick Deal Recap TikTok is set to invest over USD 1.5 billion and will subsequently hold a 75.01% stake in Tokopedia. The transaction comprises: 1) TikTok will spend USD 840 million to acquire newly issued shares by Tokopedia, 2) Tokopedia will receive USD 1 billion from TikTok in the form of promissory notes, and 3) Tokopedia will purchase the exclusive rights to own and operate TikTok Shop in Indonesia from TikTok for USD 340 million. GOTO will retain a 24.99% stake in Tokopedia, which won’t be diluted even if Tiktok provides additional funding for Tokopedia in the future. In addition, GOTO will still receive a steady revenue stream from Tokopedia.

What are Our Thoughts on This? Contrary to many views, we see this move as a positive signal for GOTO as Tokopedia has been the bulk of GOTO’s costs (31.5% of total costs) and contributed to 23.6% of total net loss in 9M23. We have always argued that Tokopedia has somewhat reached its peak, especially without external funding, while its closest competitor in Indonesia (SEA Group-backed Shopee) still has lots of capital to spend. However, live commerce is starting to consume the e-commerce space, and with TikTok Shop as the leader in the space, GOTO might have just found the perfect partner. Furthermore, we see this move will enable GOTO to really focus on its hidden gem, GoTo Financials (GTF), which offers high scalability, and with TikTok coming into Tokopedia, we might just see new product offerings, which should help boost transactions and upscale GTF’s take rate further.

What's Going to Happen to GOTO’s Books? With 75% of Tokopedia being acquired by TikTok, Tokopedia will surely be excluded from GOTO's revenue line, and we will see this in the company’s 4Q23/1Q24 earnings report. However, this will enable  GOTO will write off Tokopedia from its consolidated P&L, which should help reduce its net loss going forward. And with TikTok coming in, we hope Tokopedia can post a positive EBITDA, which will then contribute to GOTO's bottom line. However, there’s also a downside to this transaction: GOTO might have to impair its goodwill, hurting its book value further.

Upgrade to BUY, TP IDR 120. With the upcoming investment from TikTok, we will have to revisit our model, which can be done in 1Q24 at the earliest. We have to take out Tokopedia from GOTO’s revenue line and apply the equity method accounting to get an accurate value. Thus, we currently provide GOTO’s model as it is. However, we upgraded our rating for GOTO to a BUY with a SOTP-based TP of IDR 120, reflecting FY24F EV/sales of 11.69x (ex. Tokopedia). We believe the premium valuation is justified, as both Bytedance and GOTO will dominate the SEA market. Main Risk: Lower-than-expected take rates and prolonged net loss.