Introduction:
The company has a very strong gaming branch (like Tencent) called Garena, an online shop (like Alibaba) called Shopee, and a payment solution (like WePay and Alipay). But the good news is that Sea is much earlier in its development than those giants.
The Pitch:
This is simple. If you could’ve invested in Activision, Amazon, and Square when they first IPO’d, would you have? Well, here is your opportunity. Sea is a combination of these companies all in one, but with much more growth opportunities.
Of course Sea isn’t as developed as these companies, but with outstanding management and a region that has 2-3x the growth rate of the American GDP, Sea is excellently positioned to thrive for a long time.
What does the company do?
Sea mostly operates in South East Asia: The Philippines, Indonesia, Thailand, Malaysia, Vietnam, Taiwan and Singapore. It combines three businesses under one roof. The biggest part of the company's business (for now?) is gaming with the Garena brand. Gaming is also where it all started. Sea is a holding company of the three branches and SEA, the name of the holding, is an acronym of South East Asia.
Garena (which stands for global arena) was started in 2009 and is still the biggest branch. But there is also Shopee, Sea's e-commerce arm that is growing fast and therefore making Sea's revenue stream more diversified. The third business is SeaMoney, which was first known as AirPay. It was started in 2014. In 2019, Sea changed the name Airpay to SeaMoney. It already serves 8 million customers and it could become a major digital payment solution.
In the rest of the thesis, we will dive deeper into each one of the three branches.
Garena
Garena is where it all started for Sea in 2009. Garena was founded in Singapore by Forest Li.
In 2010, Garena+ was launched. It's a platform for gaming and social interaction where people can find, download, and play online games. The platform was able to publish a lot of premium games over the course of the next years. Garena publishes some really famous games for the region: League Of Legends, Call Of Duty Mobile, Fifa Online 3, etc
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Garena+ was built out not just with games but also with social features. BeeTalk, comparable to Tinder, was integrated in addition to TalkTalk, where live shows are broadcasted of over 3,000 DJs. You can chat with the celebrities and send them virtual gifts. This is, of course, a very high margin business. You can also use TalkTalk to chat with friends in a private room.
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In Garena, you can make friend lists, chat with friends, form clans, and see what progress and achievements you and others make in the games. Gamers can customize their avatars. Again, this is something that Tencent has introduced very successfully (and profitably) in China. Inside Garena+ you can use a virtual currency called Garena Shells.
In 2012, the Garena Premier League (GPL) was launched. It was a professional e-sports league with more than 100 matches over 6 months. The game that was played was League of Legends, and GPL matches were broadcasted live with commentators, just like ordinary sports games.
In 2018, the GPL was replaced with League of Legends Sea Tour, and in September 2019 this was replaced by the Pacific Championship Series or PCS. The competition was postponed because of the coronavirus, but it began on February 29.
Ten teams compete in this competition: 4 from Taiwan, 2 from Hong Kong, and 1 from Malaysia, the Philippines, Singapore, and Thailand. These e-sports events are very popular. And aside from a great marketing machine for Garena, they also bring in revenue: the operating income of 'other revenue' of Sea increased by 40.2% to $6.0M in Q4 2019 and the main contributor to the jump was increased sponsorship from sponsors of the gaming events and tournaments. With the huge interest in e-sports, the PCS may be another landmark for Garena.
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In November 2018, Garena obtained the first right to publish all Tencent games in Indonesia, Taiwan, Thailand, the Philippines, Malaysia and Singapore, which is very important, as Tencent is the biggest gaming company in the world.
A pivotal moment for Garena was the launch of Free Fire in December 2017. It's a battle royal game that was not only published by Garena, but this time it was also developed for Garena. Free Fire is a massive success and is still extremely popular. It was the most downloaded mobile game of 2019. Mind you, not in South East Asia, but worldwide.
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Garena is currently working on an enhanced version of Free Fire for high-end mobile phones. It will be called Free Fire Max and at this moment, the game is being tested by some selected beta players, which means that the launch will probably be for one of the next weeks.
In the last quarter, Garena's revenue was $479.9mm, up 107.4% and that was, of course, mostly due to Free Fire. With total revenue of $909.1mm for Sea, Garena accounts for 52.8% of Sea's total revenue. That percentage has come down a lot, despite the huge success of Free Fire. The reason is that other highly successful Sea branch: Shopee.
Shoppe
Shopee was founded in 2015. Shoppe was first launched in Singapore, but has now expanded to Malaysia, Thailand, Taiwan, Indonesia, Vietnam, the Philippines and finally Brazil in October 19’.
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The Brazilian launch was the first one of the e-commerce branch of Sea outside of the South East Asian market. Brazil is an interesting but very competitive market due to MELI and AMZN. The launch has not been a full-blown dive, though. Management is simply testing the water to see if Shopee can carve itself a place in this competitive landscape outside of its core region. This is what Yanjun Wang, the Chief Corporate Officer (comparable to the COO role) had to say about Brazil on the last conference call after an analyst said that the company seemed to hire more people in Brazil:
“In terms of e-commerce in Brazil, we’re – this is a cross-border project and by popular demand of our cross-border sellers who, of course, would always prefer the platform can offer more markets to them for the same amount of work they pretty much need to do, integrating with the platform, and the fact that we have already operational capabilities from the game side and understanding of the market give us a competitive advantage in serving them in this regard.”
Shopee has been diversifying from the competition from the start by focusing on women because the company was convinced that women decide on the big majority of the purchases, not men. The consequence was a social-first approach. Reviews are very important, of course, but that's not unique for Shopee. What is different is the social platform setup around Shoppe. On social media sites, you can see what people like and follow. Well, on Shoppe you can see which of your friends buy certain items. You can interact on there, etc. There is much more interaction on Shopee than on other e-commerce sites.
Shopee is also very mobile-centric. At launch, it even was mobile-only and that resonates well with a younger public. With the South East Asian average age of just above 30, this was a smart approach.
Another big contributor to its success, and one that sets Shopee apart from almost all other e-commerce sites, is Shopee Guarantee. It's a service that stalls the money the consumer pays until she accepts the delivery. At that moment, the seller is paid. 99% of the transactions on Shopee are with Shopee Guarantee, which shows the need for safety. One of the disadvantages of AliExpress in South East Asia, is that it's hard to return the packages if they have been damaged or are counterfeits. That's not a problem with Shopee Guarantee and that is, of course, a big advantage for Shopee.
In the last quarter, Shopee had $358.3M of revenue, up a jaw-dropping 182.3% YoY. And although Shopee still loses quite a lot of money, the trend is very promising. The adjusted revenue as a percentage of total GMV increased to 6.3% in Q4 2019, up from 3.7% in Q4 2018. Gross profits are positive, but Sea invests a lot of money to attract as many customers as possible.
Sales and marketing expenses came in at $254.7M, up 38.1% YoY, and 71% of the total revenue. But if you look at the revenue growth of 182%, then a 38% increase in sales and marketing looks like well-spent money. It's the game that has been invented by Amazon. If Shopee would stop spending so much on sales and marketing and R&D, it would be wildly profitable in a blink. But instead, it focuses on growth. Over time, sales and marketing will become less substantial on a percentage base compared to the revenue.
Another statistic that shows Shopee's strength, is user retention. It's the foundation for Shopee's exponential growth. Shopee has a 3-year order retention of 70% in Indonesia, the largest market in South East Asia with about 270 million inhabitants. What that means is that the total orders of the new buyer in the first month of the period three years ago is divided by what they bought the in the last month of those 3 years.
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In a 2018 interview with CNBC, former President Nick Nash discussed customer metrics. I’m not sure if these numbers are still valid today, but- it costs Shopee about $4 to $8 to acquire a customer. I suspect this number has gone up to somewhere between $6 and $12. But bear with me. The average buyer buys 3.6 times per month (at that time) and the average shopping basket was worth about $16. So, 3.6 x $16 = $57.6 per month. That will have gone up by now, but let's assume only to $60. Amazon's take rate is between 6% and 20% depending on the item. So, once Shopee has the maturity that Amazon has had over the last few years, it will become a contributor to the profits of Sea. And while Amazon has built out a huge logistical network that has sucked up dozens of billions of dollars, Shopee is much more asset-light. It takes the Alibaba approach by working with a big pool of independent logistical companies for distribution. I think it's logical to conclude that Shopee's e-commerce will be profitable sooner than Amazon's. Alibaba has shown the way for Shopee in that regard.
In 2019, the e-commerce market in South East Asia was worth about $40bn and it is expected to be catapulted to more than $150bn in 2025, according to a study by Google, Temasek and Bain Company. With a market growing so exponentially and Shopee doing so well, there's a huge opportunity in plain sight. This is the Amazon part of the pitch.
SeaMoney
SeaMoney is by far the smallest branch of Sea but a very promising one. In 2014, it was introduced to lessen the friction of unbanked or underbanked customers who wanted to buy online in Garena+ games. And, as management has said, it has saved the company a lot of money because Sea doesn't have to pay commissions on its transactions. Smart move.
SeaMoney was originally named AirPay until 2019. It now offers e-wallets, payment processing solutions, micro-lending and other digital financial services. We don't have a view on how much SeaMoney's revenue is since it's calculated together with Shopee. But, in the future I think this will be split out. This is what Forrest Li had to say about SeaMoney on the last conference call (my bold, DFS = digital financial services):
“Based on a recent Google, Temasek and Bain report, the DFS industry in the 6 largest economies of Southeast Asia is expected to grow at a 22% CAGR between 2019 and 2025 to reach $38 billion in revenue. Based on the report, 3 out of every 4 adults in Southeast Asia have insufficient access to financial services and a 49% are unbanked. By comparison, just 7% of people in the United States are unbanked and 20% in China, according to U.S. government and World Bank data, respectively. Similarly, the World Bank estimates that just 5% of adults in Southeast Asia have access to credit cards compared to 66% in the U.S. and 21% in China. This reflects that the region has massive untapped opportunities in DFS and these opportunities will only continue to grow as the overall digital economy of this region expands. And we believe that Sea is very well positioned to capture the most significant portion of this growing high.”
And this also illustrates the huge opportunity of SeaMoney and the strategy that Sea will follow:
“Our quarterly paying users for our e-Wallet services have exceeded 8 million in the fourth quarter as we deepened integration of our e-wallet with the Shopee platform and further expanded our e-wallet services to third-party online and offline merchants and use cases. In January 2020, about a year after we started integrating our e-wallet with Shopee in Indonesia, more than 30% of Shopee’s gross order in that market were already paid using our own e-wallet services. Such integration has shown clear benefits in reducing payment friction and improving user experience for consumers on Shopee.”
SeaMoney could become the MercadoPago of South East Asia, a digital wallet that can be used both online and offline for mostly unbanked customers.
If you compare the numbers of South-America, MercadoPago's territory, and South East Asia, you can see that although the percentage of unbanked people is lower, the absolute number of unbanked is much higher in South East Asia. There is a population of almost 669 million people and it's still growing more than 1% per year. The average age is just 30 years, which means that a majority of the population has always had a mobile phone. In South America, there are about 430 million people, 35% less than in South East Asia, and the number is growing slower at about 0.85%. So, if SeaMoney takes off as MercadoPago has in South America, the potential is enormous.
In January of this year, SeaMoney applied for a Singapore digital full bank license. It did this all independently, not in a combination with a traditional bank. We don't know yet if it will get the license since there are only 5 to be distributed and more than 20 applicants have been registered. The licensees will be made public later this year. But even if SeaMoney doesn't get a license, I think it shows where Sea wants to go with SeaMoney.
So, this is clearly the Square part of the pitch. The big plus for me is what makes me most enthusiastic about Square-- the combination of the two ecosystems (merchants with the POS technology and customers with Cash App), is also the strength of Sea. The company has even more insight into the ecosystems because of the third-party sellers, the customers' baskets and the Shopee Guarantee system.
SeaMoney now serves 8 million customers, but I could see that explode in the next few years, giving Sea another leverage to grow the company exponentially.
Competition:
I think it's important to stress that the competition in e-commerce is brutal in South East Asia. Shopee fights to be the most important e-commerce store and goes head-to-head with the Alibaba-owned Lazada. Alibaba has poured $4B into Lazada to buy it out. It offers its Taobao marketplace products to the South East Asian consumers and the CEO of Lazada is Peng Lei, or Lucy Peng with her English name, a billionaire that was one of the 12 original founders of Alibaba. That says enough about how important Alibaba thinks Lazada is.
As if that was not enough yet, another big competitor of Shopee, Tokopedia, is also backed by Alibaba. The Chinese giant has invested over $1bn in Tokopedia in 2017 and another $1.3bn together with Softbank's Vision Fund at the end of 2018. Tokopedia is only in Indonesia, though. It's the market leader there, but it says it has no plans to expand its territory.
Shopee is not an isolated cowboy, though. It has powerful help to compete against Alibaba. Tencent owns 25% of the shares of Sea, and that helps. Despite the fact that Lazada is a few years older, Shopee and Lazada compete to be the number one in the South East Asian market. It depends on what metrics you look at to say who's the biggest, but let's keep it simple: it's close. A study of price group, App Annie, and SimilarWeb gives the first place to Shopee for the whole region in website visitors (mobile and desktop), MAUs (monthly active users) and downloads, although some other studies suggest that Lazada leads in sales. Shopee seems to grow faster. It has found an edge and became the biggest.
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There is a lot of potential for e-commerce companies in South East Asia. If you look at the e-retail market, you see that only 5% of retail is done online. In the US, e-commerce accounted for 11.4% in Q4 2019 (although that will have gone up considerably because of Covid-19). In China e-commerce already takes 20% of all retail sales.
If you look worldwide, Shopee is the fourth-most downloaded shopping app:
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So, despite the fierce competition, Shopee seems to do very well.
- It targets women, not men, because it believes that it believes (correctly, I think) that women make a huge majority of the purchases. That's why the company focuses on social features in the app.
- It has a safety policy with Shopee Guarantee. The consumer pays, the money is held by Shopee and when the buyer accepts the package, the seller is paid. In that way, counterfeits and unreliable sellers are much less a problem than on other sites.
The bottom line here is that, yes, there is competition, but Shopee has grown faster than its competitors by focusing on a few competitive advantages. In tech, a small difference can have a huge impact. Google's algorithm was just a bit better and faster than that of its competitors, but it was enough to annihilate every other player.
Conclusion:
I think Sea is in an excellent place to grab the emerging e-market for games, payments, and retail in South East Asia. I think this is still in the very early stage, and you can still get into the elevator on the first floor before it goes up.
With a visionary CEO like Forrest Li and smart backing from Tencent, I think Sea could become a $200bn+ company over time. As with all growth stocks, there will be rough times, and it's more probable than not that the stock will lose half of its value at a certain moment. But, I'm very confident that over the long run you will be happy to hold this one and you'll be able to say in, “I got in when it was just worth $75bn”
Submitted September 09, 2020 at 05:43PM by Avid_Hiker98 https://ift.tt/3bG973g
