Sea Limited
Background
Sea Ltd is a Singapore-based consumer internet platform, operating three core business divisions across E-commerce (as the Amazon of Southeast Asia), Digital Payments and Financial Services, and Digital Entertainment as a leading global online games developer and publisher. Sea’s businesses have quickly gained dominant positions across many Southeast Asian countries, and increasingly in Taiwan and Latin America.
Sea is supported by a structural shift in consumer behaviour which has seen increased adoption of digital services brought on out of necessity by the pandemic. This coupled with over 400 million internet users in the region, who access these services mainly through mobile phones, has led to huge growth in the internet economy including e-commerce, food delivery, media and digital financial services, as businesses have migrated online. We believe each of Sea’s business divisions are well placed to capture the shift to the internet economy and related digital payments, across all the countries and regions it operates within.
E-commerce Platform – Shopee
Shopee is the leading e-commerce platform in Southeast Asia and Taiwan by gross merchandise volume (GMV) and total orders, also ranking first for monthly active users and time spent in its app. More recently it has also taken steps to expand into Latin America establishing itself in Brazil, the largest market in the region. These regions are fast-growing markets that still have very low online shopping penetration rates relative to developed economies, and therefore have significant runway for growth.
The Shopee platform was built from the ground up in 2015 with the goal of developing an e-commerce platform that could overcome many of the roadblocks for e-commerce adoption in developing markets, such as limited logistics networks, a high reliance on cash and lack of consumer trust. Management’s hyperlocal and highly targeted approach when entering new markets and tailoring its products and services to the local nuances of each country and region where it operates, has been a key factor in Shopee gaining market leading positions. The once dominant Alibaba backed Lazada and Indonesian leader Tokopedia, have quickly been displaced by Shopee as the leading e-commerce platform in Southeast Asia, including the largest market – Indonesia.
Shopee is currently loss-making as the group invests heavily to build out its logistics and fulfilment platform and in marketing to grow its market share. The revenue opportunity for this segment lies primarily in charging transaction-based fees for sales made through the platform, as well as paid advertising by sellers. Shopee’s GMV increased 87.5% YoY in Q2 21 to US$15.0 billion, a continuation of the strong growth seen in prior quarters.
The platform has evolved from a consumer goods marketplace to adjacencies such as online groceries and food delivery services. Bain & Company estimates that these sectors alone will represent 63% of all online spend in Southeast Asia by 2025.
Overall, Shopee offers a highly scalable marketplace platform with integrated payment, logistics, fulfilment, and other value-added services. It has rapidly become the leading platform in the markets in which it operates and with the increasing adoption of its financial services platform, it is building an e-commerce ecosystem that is demonstrating strong network effects that we believe will put it in a dominant position to capture the very large and growing e-commerce market.
Digital Financial Service – SeaMoney
An ongoing study by Bain & Company has shown that the majority of Southeast Asia’s population is either under- or unbanked, with Indonesia representing the largest and most unbanked population. As a result of the high penetration of mobile-based internet access and low banking rates, digital financial services have the potential to make financial services more accessible.
E-wallet adoption is being driven by growth in the internet economy as businesses and sellers come online, many out of necessity, driving a structural and enduring change in buying habits. Thus as the Shopee platform grows and more businesses come online, demand for both services grows, demonstrating the network effects of its platforms. SeaMoney’s digital wallet reached 32.7 million paying users which is up 109% YoY and >US$4.1 billion in total payment volume for Q2 21 alone, vs US$7.8 billion for all of FY2020. Bain & Company estimates that by 2025 digital transactions in Southeast Asia will reach $1.2 trillion, or 1 in every 2 dollars spent.
These digital wallets can be used both on platform within the Sea ecosystem, and increasingly off-platform and offline in physical stores as a contactless payment and also card-not-present (CNP) transactions such as buying digital content in the Google Play store. SeaMoney’s digital wallet, known as ShopeePay in Indonesia, was the country’s most downloaded and used digital wallet, and continues to be accepted at major food and beverage outlets and convenience stores. For context, when ShopeePay was launched as a payment option at Indomart (one of the largest convenience chains in Indonesia), over 1 million transactions were processed in the first week alone.
SeaMoney is well positioned to capture the growing market for digital payments in Southeast Asia and provide financial services to the previously underbanked and unbanked population.
Digital Entertainment – Garena
Sea’s digital entertainment division, known as Garena, is an online games developer and publisher as well as leading organiser of esports events, with a global footprint across more than 130 markets. China’s Tencent is a significant shareholder, investing in the Garena gaming platform shortly after its inception in 2010. Similar to its Shopee division, Garena offers highly engaging and localised content that is adapted for each market.
Garena’s gaming ecosystem is hugely successful with over 725 million quarterly active users, and over 92 million quarterly paying users. Its flagship game Free Fire continues to be the highest grossing mobile game in Latin America and Southeast Asia for seven consecutive quarters, and in India for the last two, as well as the most downloaded game globally in 2019 and 2020.
Management of Garena also see another pillar of growth in gaming viewership, through the development of their esports and livestreaming events. This has increased the potential monetisation of the platform from user spend within gaming, to now include advertising spend related to viewers of these events. For context, participation in a recent event had 1.2 million in attendance (online) and over 40 million views.
Conclusion
Sea is a founder led and owned business, with CEO Forrest Li retaining a 25.1% shareholding, and co-founder and COO Gang Ye retaining 6.4%. Management have shown a knack for understanding the local market and taking a localised and targeted approach to each and every market and segment in which they operate. Each of their business divisions are market leaders and are displaying networks effects as users grow and utilise more of their services.
The Shopee marketplace facilitates economic participation for the sellers and businesses on the platform, many of whom are from traditionally under-served communities. Similarly, SeaMoney’s digital wallet has made financial services accessible and at the same time facilitates economic inclusion allowing the previously underbanked and unbanked to participate in the increasingly digital economy. Although the Digital Entertainment division cannot be tied to any of the United Nations Sustainable Development Goals, we think Sea is making a positive contribution to society from the E-commerce and Digital Financial Services business divisions. We are cognisant of the fact that there is a trend in developing markets towards super apps (a single app with multiple services) and they come with features that have both positive and negative impacts on society. In Sea’s case, we think that the positives more than outweigh the negatives.
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Past performance is for illustrative purposes only and is not indicative of future performance.