Sea rolls with Garena’s gaming business but e-commerce unit Shopee remains in the red
When Shopee was launched four years ago, the event was held at a second-floor café with about 30 people attending. On Sept 3, the e-commerce subsidiary of New York-listed, Singapore-based Sea officially opened for business in its own brand-new six-storey building, with Deputy Prime Minister Heng Swee Keat as the guest of honour.
To add further glitz, and as a demonstration of its marketing muscle, Shopee engaged Cristiano Ronaldo, one of the most famous footballers in the world, to be its brand ambassador. A YouTube video of the Portuguese star prancing to the children’s tune, Baby Shark, has chalked up about five million views in less than a week since it was uploaded.
Shopee is Sea’s big push into e-commerce, as a way to build another business besides the original game publishing under Garena. With online shopping becoming increasingly popular, Sea aims to capture a slice of the growing pie. In addition to Singapore, Shopee has expanded to six other markets in the region: Indonesia, Malaysia, the Philippines, Taiwan, Thailand and Vietnam. For the quarter ended June 30, the Shopee platform sold about US$3.8 billion ($5.24 billion) worth of merchandise, up 72% from the year-earlier quarter.
For the recent 9.9 Super Shopping Day promotion, Shopee saw a threefold increase in orders compared with last year, with sales by top-performing brands growing 339 times.
Localised strategy
To be sure, the regional e-commerce market is crowded. There are deep-pocket regional players such as Lazada, backed by Alibaba Group Holding; and homegrown upstarts with regional ambitions such as Singapore-headquartered Carousell. There are also homegrown market leaders in each country, such as Tokopedia in Indonesia, Rakuten in Japan and Gmarket in South Korea. How can Shopee differentiate itself from the others? According to Zhou Junjie, Shopee’s chief commercial officer, its strategy is to be localised in each country.
“If you compare us with the regional players, we are quite proud to say that we actually do very well in terms of localisation. The app, in terms of marketing, seller engagement and system management, is almost entirely done by the locals in each country,” says Zhou in an interview with
The Edge Singapore. Shopee has an app for each market it operates in rather than a centralised app, to ensure that the user experience is relatable and engaging.
The localisation also gives Shopee a better understanding of the region, and it is able to share its experiences in the various countries. “Certain things that you do well in one country could be relevant to other markets,” Zhou says.
In addition, Shopee has set up a tech centre in Singapore to grow its technical capability. “That is something we think we can do a lot better than some local players that might not have the resources to do so,” he adds.
In the four years since its launch, Shopee has changed its strategy quite a bit. In the early days, Shopee’s CEO, Chris Feng, mentioned search placement and advertising as monetisation options for the platform. Today, Shopee’s revenue comes from a mix of seller services, search placement and advertisements.
The results
In 2Q ended June 30, Sea reported adjusted revenue of US$665.4 million, up 203.1% from the year-earlier period. Adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) were negative US$11 million, significantly lower than the US$161.9 million in red ink incurred in the year-earlier period.
The company’s earnings come from two businesses. The first is the core games publishing business, including Garena. For 2Q ended June 30, this segment reported adjusted revenue of US$443.2 million, up 218.6% y-o-y. Thanks to better operating margins of 59.5% versus 34.9% a year ago, adjusted Ebitda in the period was US$263.8 million, an increase of 442.6%.
Garena’s growth can be attributed to its hit mobile game, Free Fire, in which players engage in a mass shoot-out and try to eliminate one another. It is ranked among the top 10 grossing mobile games in markets such as Brazil, Mexico, India and Indonesia. “We expect Free Fire to continue to be the key engine of growth for Garena over the next two to three quarters as the game reaches its peak stage of monetisation,” writes DBS Group Research analyst Sachin Mittal in an Aug 21 note.
Meanwhile, e-commerce and other services, mainly from the Shopee platform, reported adjusted revenue of US$177.4 million, up 201.7% y-o-y. However, adjusted Ebitda for the period was negative US$248.3 million compared with negative US$188.3 million a year ago.
The jump in revenue has been attributed to the growth of the e-commerce marketplace, as well as positive developments in transaction-based fees, value-added services and advertising. However, costs such as marketing — Ronaldo’s fees, for example — surged as well. Higher transaction fees and staff costs weighed down the bottom line too. Overall, Sea’s net loss was US$280 million for 2Q2019, up 11.7% from US$250.8 million a year ago.
Shopee’s Zhou is unfazed by the losses. He says Shopee is prepared to play a longterm game in e-commerce, as online shopping continues to grow faster than physical retail. The company is ready for some short-term pain as it spends to build up its ecosystem in the targeted markets. “The percentage of online retail [compared with] the entire retail space is still quite small, but it is growing much faster, and is forecast to grow four times by end-2025,” he explains.
Shopee claims growing traction as well. Zhou says according to statistics from e-commerce aggregator iPrice and app analytics firm App Annie, Shopee has reached the top position in the e-commerce app space in the following metrics: monthly active users, highest number of downloads and most time spent on the app.
“The long-term growth in terms of size and scale is something we should prioritise [over] short-term profitability. We will continue to stay very focused in the next few years in the region, and make sure we strengthen our position in e-commerce to grow much faster and bigger. That is our priority,” he adds.
Zhou is careful to point out that Shopee is aiming to grow in a sustainable manner. While the company is keen to increase its revenue, it is mindful of the bottom line. Many e-commerce sites, in their hurry to grow, have resorted to offering free vouchers, attractive discounts off products sold via their platforms or perks such as free delivery.
“We felt that growing sustainably also means spending [wisely]: Are we achieving more scale and getting more users and retaining them? We want to make sure that we [consider all these factors],” he says.
The key is to grow Shopee’s user base and ecosystem of merchants and resellers and logistics providers. Scale, the company believes, will lead to market leadership and translate into long-term profitability. In certain markets such as Taiwan, where Shopee has already attained a certain scale and maturity, its operating profit has turned positive, says Zhou.
Market takes
Sea went public in October 2017 at US$15 a share. Its pre-IPO investors included major names such as Tencent Holdings and Hillhouse Capital. With losses mounting in the initial quarters, its share price dropped to as low as US$10.34 on May 9, 2018.
However, as the company grew and its revenue momentum picked up, investors began to turn positive on the stock. The stock hit a peak of US$37.71 on Aug 2, 2019. Year to date, Sea’s share price has gained 168% to close at US$30.34 on Sept 10, valuing the company at US$13.5 billion. Forrest Li, founder and CEO of Sea, was recently named the 21st richest Singaporean by Forbes, thanks to his 13.8% stake in the company.
After the company announced its 2Q earnings on Aug 20, all analysts with active coverage on the stock kept their “buy” or “outperform” calls, with Piper Jaffray’s price target of US$49 being the highest.
Mittal of DBS, for one, had expected Sea to lose US$43 million at the operating level for 2Q. However, because of better-than-expected margins generated by Free Fire, the company incurred just US$11 million in losses at the Ebitda level. With growing competition, Mittal warns that there could be a slowdown in the gaming business. Coupled with relentless competition in the e-commerce segment, there could be a correction in Sea’s share price. His price target for the company is US$36.75. E