GOTO - Big leap towards profitability

GOTO has been included in MSCI Global Standard effective in June '23, which was widely expected. In order to stay in path of profitability, Tokopedia has raised platform fee to IDR2,000-IDR3,000, on top of continued cost efficiency that have resulted in CM positive in 1Q23, one quarter faster than we expected. Beside efficiency, GOTO eyes to expand consumer lending that will play important role in maintaining customer spending and loyalty across its platforms. Maintain BUY Expects more influx from MSCI inclusion GOTO has officially got added in Morgan Stanley Composite Index (MSCI) Global Standard on the latest quarterly review on May 11. The inclusion of GOTO in the index was widely anticipated in line with rebound of stock price +19.8% in 1Q23/+28.6% YTD, boosting its market cap. GOTO's inclusion in the index should bolster more inflows amid higher of confidence, along with potential The Fed’s policy pivot expected in 3Q-4Q23. Increasing fee is just normal part of business Tokopedia has raised platform fee to IDR2,000 for less than IDR1 mn worth of transaction and IDR3,000 for transaction valued IDR1mn and above starting May 1 from previously flat fee of IDR1,000 for all transactions. This is on top of IDR1,000 service fee for non-Gopay payment. Previously, it has also increased commission fees from C2C and B2C merchants in Jan-Mar '23, lifting e-commerce take rate to 3.6% from 3.4% in 4Q22 and CM of +0.3% in 1Q23 (VS -0.7% in 4Q22). While we haven't seen any similar move from its closest competitor, Shopee, except for top-up fee adjustment on its e-wallet platform for VA and instant debit from IDR0-IDR500 to IDR1,000, we expect hike of platform fees are likely followed in the near future. Shopee's flat platform fee is currently retained at IDR1,000 per transaction. Fruitful cost efficiency GOTO achieved CM positive in 1Q23 or one quarter faster than we have anticipated, supported mainly by e-commerce and fintech that also recorded CM positive for the first time on the back of significant cuts in operational costs esp. sales and marketing from 1.4% to GTV in 4Q22 to 0.9% in 1Q23. As a result, Adj. EBITDA improved to -1.1% in 1Q23, helped by improvement in on-demand service that recorded +976bps YoY. On flip side, however, GTV dropped 8.3% qoq to IDR161.9 tn, especially on e-commerce. Meanwhile, it is worth noting that financial technology segment have shown significant progress and we believe it will play an important role in GOTO's push toward profitability, banking on its superior AI technology to optimize credit scoring, strong ties with Bank Jago (ARTO) and multiplier effect it brings across its platforms. GOTO's consumer lending rose 40% QoQ to IDR831bn in 1Q23 with manageable asset quality, according to management. Maintain BUY on improvement towards profitability Reiterate our BUY call with a BUY and target price of IDR150/share as we have factored in inclusion of GOTO into MSCI index. We note several upside risks to our recommendation include 1) easing competition, thus providing headroom for more commission hikes; and 2) better-than-expected cost efficiency.