The Ten­cent of South-East Asia isn't like Ten­cent at all

The Star Malaysia - StarBiz - - Digital Trend -

SIN­GA­PORE: Sin­ga­pore’s Sea Ltd ini­tially mod­elled it­self on Chi­nese In­ter­net colos­sus Ten­cent Hold­ings Ltd and is of­ten called the Ten­cent of South-East Asia. Now that Sea has filed for an ini­tial pub­lic of­fer­ing and given a peak at its fi­nan­cials, the re­sem­blance is start­ing to break down.

The com­pany, seek­ing to raise about US$700mil as it goes pub­lic in New York, does of­fer games and dig­i­tal en­ter­tain­ment like Ten­cent. In fact, the Chi­nese com­pany li­censes hit games like League of Leg­ends to Sea, and owns about 40% of the smaller firm’s stock.

But where Ten­cent is im­mensely prof­itable, Sea is im­mensely un­prof­itable – with signs that losses may grow deeper. Ten­cent’s net profit mar­gin in the first half of the year was 31%, with net in­come of US$4.76bil on rev­enue of US$15.5bil. Sea has a neg­a­tive net mar­gin of 84%, with a loss of US$165.2mil on rev­enue of US$195.5mil.

Of course, star­tups of­ten lose money be­fore they ham­mer out lu­cra­tive busi­ness mod­els. Think Google or Face­book. But Sea is los­ing more money as it grows. In 2015, the com­pany lost 37 US cents for each dol­lar of rev­enue. That rose to 65 US cents in 2016 and 84 US cents in the first six months of this year. All that spend­ing isn’t buy­ing faster growth: Rev­enue growth slowed from more than 80% in 2015 to 17% in the first half of this year.

That may make it a stretch for Sea to hit the US$4.45bil val­u­a­tion it’s seek­ing at the top of the IPO range, up from US$3.75bil in its 2016 fund-raising. The of­fer­ing will be a test case for star­tups in the re­gion look­ing to go pub­lic one day, in­clud­ing the ride-hail­ing ser­vice Grab.

Sea was founded by For­rest Li as an on­line gam­ing com­pany in 2009 and orig­i­nally named Garena. He re­branded the com­pany to re­flect its re­gional am­bi­tion and di­ver­si­fi­ca­tion. Sea branched out with a dig­i­tal pay­ments ser­vice called AirPay in 2014 and the mo­bile shop­ping busi­ness Shopee in 2015. The ser­vices are sim­i­lar to Alibaba Group Hold­ing Ltd’s e-com­merce plat­form and pay­ments busi­ness, Ali­pay.

Sea’s games busi­ness, which re­tained the Garena name, still ac­counts for more than 90% of to­tal rev­enue. Like Ten­cent, the com­pany of­fers games for free, then col­lects money when play­ers buy vir­tual items like ar­mour, weapons or spe­cial skills. It makes money in e-com­merce from com­mis­sions and ad­ver­tis­ing, while col­lect­ing fees from pay­ments.

With Ten­cent’s sup­port, the startup has at­tracted mar­quee back­ers. They in­clude the On­tario Teach­ers’ Pen­sion Plan, Malaysia’s sov­er­eign wealth fund and sev­eral Asian bil­lion­aires. Gold­man Sachs Group Inc, Mor­gan Stan­ley and Credit Suisse Group AG are lead­ing the pub­lic of­fer­ing.

“You don’t buy a com­pany like this be­cause of its fi­nan­cials; you’re buy­ing the dream of what it can be­come,” said Keith Pog­son, global as­sur­ance leader for bank­ing and cap­i­tal mar­kets in Hong Kong at con­sul­tant EY. The com­pany’s mar­ket value could rise to about US$5.5bil if op­tions, re­stricted stock and con­vert­ible se­cu­ri­ties are in­cluded.

Sea has ways to go be­fore it looks any­thing like its role model. When Ten­cent went pub­lic in 2004, it had al­ready proven it could make money: it re­ported net in­come of about US$39mil in 2003 on rev­enue of US$89mill.

Ten­cent has also been able to pro­mote its games busi­ness through mes­sag­ing ser­vices with more than a bil­lion users. Sea set up Beetalk Pri­vate Ltd as an op­er­at­ing en­tity of its on­line mes­sag­ing busi­ness in 2012, but it hasn’t caught on.

Li is aim­ing to reignite Sea’s growth with its ex­pan­sion in e-com­merce and pay­ments. The on­line gam­ing busi­ness that gen­er­ated 92 per­cent of to­tal rev­enue in the first half of this year slowed to a 12% in­crease in the first half of the year. The still-nascent e-com­merce busi­ness is grow­ing faster, but the firm’s sales and mar­ket­ing ex­penses con­sumed 71% of to­tal rev­enue.

E-com­merce is fiercely com­pet­i­tive in South-East Asia. Alibaba ac­quired con­trol of Sin­ga­pore’s Lazada Group to draw more con­sumers in the re­gion, while In­done­sia’s Toko­pe­dia just raised US$1.1bil.

Lazada poked fun at Sea for claim­ing that it’s the No. 1 e-com­merce in “Greater South-East Asia,” a far from stan­dard term be­cause it in­cludes Tai­wan.

“This is the first time I heard about the ‘Greater’ South-East Asia,” said Lazada Group CEO Max­i­m­il­ian Bit­tner, adding that his com­pany is the leader in “ac­tual” South-East Asia. “Why did they not call them­selves Gsea?”

In the end, Sea’s prospects may de­pend not on how much it re­sem­bles Ten­cent, but how well it can work with the Chi­nese part­ner. EY’s Pog­son points out the larger com­pany could strike deals with Sea to pro­mote its own mes­sag­ing and pay­ment ser­vices, and it could boost its stake if it wants more in­flu­ence in the re­gion.

“There are plenty of op­por­tu­ni­ties for Sea and Ten­cent to ben­e­fit each other,” he said.

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