Sea is not afraid of Tencent's reduction, and three major factors will continue to push its triumphant progress
ABSTRACT: Recently, due to the reduction of "Sea", which is known as the small Tencent in Southeast Asia, Tencent's equity in Sea has been reduced from 21.3% to 18.7%. Affected by market adjustment, slow growth of game users and Tencent's reduction. Since October, Sea has dropped from the highest position of US $372 to US $187, a drop of more than 50%, and there is still no sign of stabilization in the short term. Although Sea is under short-term pressure, it has long been affected by favorable factors such as demographic dividend, high economic growth, low Internet penetration rate and younger population structure in Southeast Asia. Sea relies on the three carriages of games + e-commerce + digital payment to make rapid progress. Sea is not only a leader in Southeast Asia, but also a leader in international expansion in the field of e-commerce. Tencent's reduction will not affect the long-term investment value of Sea, and Sea deserves our attention in 2022.
Sea's three core divisions
Sea Ltd. is a company that operates e-commerce platform, makes digital games and provides online financial services. It consists of three main business units-Garena (digital entertainment), Shopee (e-commerce) and SeaMoney (digital financial services). Garena is one of the global leaders in online game development and distribution. Its most iconic self-developed game is Freefire, which is the most downloaded mobile game in the world in 2019 and 2020. Second, Shopee is Sea's e-commerce division. Shopee is the largest e-commerce company in Southeast Asia and Taiwan. In Southeast Asia, Shopee gets 343 million visits a month, while Tokopedia, the second-largest player, gets less than half of the website visits. Finally, Sea Money is the financial services and payments division of Sea. It is also currently a leading provider of financial services and payments in Southeast Asia.
In the past two years, the influence of the Internet industry in Southeast Asia in the world has been continuously improved, with Amazon, Wal-Mart, Alibaba and Tencent all increasing their capital into this market. With the blessing of external capital forces, the rapid development of Sea Limited, Lazada and local Internet companies has been promoted. Sea Limited has been actively reinvesting in its business to quickly capture market share and expand its user base in each region. Starting in Singapore, they have gained considerable influence in Southeast Asia, Taiwan and, more recently, Latin America.
Review of SEA's financial report in the third quarter of 2021
Sea's third-quarter revenue was $2.689 billion, up 121.8% year-on-year. The net loss was $571 million, compared with a net loss of $425 million in the same period last year.
Sea's revenue cost in the third quarter was $1.68 billion, compared with $805 million in the same period last year; Gross profit was US $1 billion, up 147.5% year-on-year. Adjusted EBITDA1 totals ($165.5 million), compared with $120.4 million in the third quarter of 2020.
Sea raised its e-commerce revenue guidelines this year, and predicted that the e-commerce revenue in 2021 would range from US $5 billion to US $5.2 billion, exceeding the expected US $4.7 billion to US $4.9 billion.
In 2021, from the first to the third quarters of Sea, the total revenues were US $1.76 billion, US $2.28 billion and US $2.689 billion respectively, up 146.7%, 158.6% and 121.8% year-on-year. The losses were 422 million, 321 million and 571 million respectively. In 2021, the revenue increased rapidly and the loss tended to be stable.
Sea consists of three main business units-Garena (digital entertainment), Shopee (e-commerce) and SeaMoney (digital financial services).
Garena, a digital entertainment platform owned by Sea, had 729 million active users in the third quarter, up 27% year-on-year, and 93.2 million quarterly paying users, up 43% year-on-year. Sea's digital entertainment business revenue in the third quarter increased 93.2% year-on-year to 1.099 billion US dollars.
In the third quarter, the GMV of Shopee, an e-commerce platform owned by Sea, increased by 81% year-on-year to US $16.8 billion, the total order volume increased by 123% year-on-year to US $1.7 billion, and the revenue of e-commerce and other services increased by 167.6% year-on-year to US $1.31 billion.
SeaMoney, a digital financial service platform owned by Sea, had 39.3 million mobile wallet paying users in the third quarter, an increase of 120% over the same period last year. Revenue from commodity sales business increased by 81.9% year-on-year to US $280 million.
Three major factors will promote the triumph of Sea2022
Internet coverage in Southeast Asia accelerates penetration, and games become a cash cow for steady growth
According to DataReportal, with the rapid popularization of mobile Internet, more than 90% of Internet users in Southeast Asia use smart phones to surf the Internet. In 2021, the Internet coverage population of six Southeast Asian countries reached 440 million, compared with 40 million new Internet users in 2020, and the Internet coverage rate increased to 70%. Affected by the epidemic period, users' time on the Internet will increase, and users' Internet usage habits will be further strengthened.
According to reports,In 2020, the growth rate of the mobile game market in Southeast Asia will exceed 30%, and it is expected to maintain a high growth rate in the future.On the one hand, the demographic dividend of the game market in Southeast Asia is sufficient. In recent years, although the scale of mobile game users in Southeast Asia has grown rapidly, it accounts for less than 30% of the total population. In contrast, the scale of game users in China, the United States, South Korea and other countries with high game income accounts for more than 45% of the total population. On the other hand, the growth potential of Southeast Asia's economic level will also drive the growth of payment ability. After COVID-19 pandemic is gradually controlled in the future, the economy of Southeast Asia is expected to further develop, and the payment ability of game users will also be enhanced.
Garena, owned by Sea, is the largest game distribution company in Southeast Asia. Tencent is the largest shareholder of Sea, and Garena has gained a lot of money
Authorization from Tencent Games, including "League of Legends", "Legend Duty", "Call of Duty", "Speed Field" and so on. Garena is the main profit contribution of Sea, with an operating profit margin of nearly 60%. The company has benefited from Tencent Games going out to sea for a long time, and at the same time accelerated the transformation of self-research. It is estimated that the average annual compound growth will be 40% in the next three years.
According to App Annie data, "Free Fire" is the most downloaded mobile game in the world in 2019 and 2020, covering more than 130 markets around the world. Although the growth rate of sea game users slowed down in the third quarter, Free Fire has undoubtedly become a cash cow for sea.
E-commerce penetration rate in Southeast Asia is still extremely low
According to the forecast of IMF in 2021, the population of Southeast Asia will reach 670 million, accounting for 8.6% of the global population, ranking third among the global economies. Due to the impact of the "COVID-19" epidemic, e-commerce has experienced relatively rapid growth, and the annual GMV has increased by 63% compared with 2019, reaching 62 billion US dollars. According to the latest report, the scale of Internet economy in Southeast Asia has been further expanded in 2021, with GMV reaching 120 billion US dollars and expected to reach 234 billion US dollars by 2025.
With the advancement of Internet infrastructure construction, the scale of e-commerce continues to grow, and the compound growth rate in the past five years has reached 26%; However, at present, the penetration rate of e-commerce in Southeast Asia is still extremely low, with an average of only 2.5%. Compared with China (the penetration rate of e-commerce is 25% as of July 2020), there is much room for improvement. E-commerce in Southeast Asia is still in its early stage, and e-commerce is still the biggest driving force for growth, which may last until 2025.
Shopee has become the largest e-commerce platform in Southeast Asia.According to the report, it is estimated that the total amount of digital payment transactions in Southeast Asia will reach more than 1.1 trillion US dollars by 2025 and 707 billion US dollars in 2021. The compound annual growth rate is still expected to exceed 12% in five years by 2025. Sea's Shopee is also entering new e-commerce markets in Latin America, India and Europe, creating an international expansion story, with early signs of encouraging results for Sea.
Southeast Asia is the fastest growing market for digital wallets
China is still the largest mobile wallet region in the world, and the saturation of the market has led to a slowdown in China's economic growth, with a compound annual growth rate of only 2.2%. Due to the consumption trend brought by the control measures during the epidemic, people's use of e-commerce and mobile wallets increased exponentially. Between 2020 and 2025, the use of mobile wallets in six Southeast Asian countries will increase by 311%. In Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, the use of mobile wallets will increase from 141.1 million in 2020 to 439.7 million. Mobile wallet lowers the threshold of digital payment, and at the same time brings billions of new consumers to e-commerce.
According to Bain Consulting data,By 2025, the scale of digital payment in Southeast Asia is expected to reach 1.17 trillion US dollars, with a compound annual growth rate of 13%; Digital borrowingThe scale of loans, digital investment and digital insurance has an average annual high-speed growth of over 30%, and the overall market development space is large.,
Because of the great growth potential of the industry, it also attracted many participants. At present, Grab is the largest, accounting for about 20% of the market share, while SeaMoney mainly relies on ShopeePay and AirPay to gain about 9% of the market share in Southeast Asia. The overall market is scattered, and there are regional leaders in various regions, so the competition is fierce. With the leading position of game platform Garena and e-commerce platform Shopee in Southeast Asia, SeaMoney's biggest advantage lies in its mature potential user base. Games and e-commerce business can guide digital financial business, which can effectively reduce the overall customer acquisition cost. At the same time, the improvement of SeaMoney utilization rate can also reduce the payment channel cost of games and e-commerce business, and realize effective collaboration among businesses.
Tencent reduces sea
On January 4th, Tencent announced that it was conducting a transaction to reduce its holdings of 14,492,751 Class A shares in Sea, reducing Tencent's equity in Sea from 21.3% to 18.7%. Tencent will reduce its voting rights in Sea to less than 10% by converting all its Class B common shares into Class A common shares. Tencent intends to maintain its majority stake in Sea for a long time, and will continue to maintain its existing business cooperation relationship with Sea. Tencent will be subject to a lock-up period and will not be able to sell further shares in Sea for the next six months. As a result, the voting rights of the founder, chairman and CEO of Sea will increase from the current 52% to 57%.
First of all, because of Sea's global expansion goal, I think it is only a matter of time before Sea reduces Tencent's control over Sea. Earlier there were reports that Sea planned to reduce Tencent's control of the company as it set goals for global expansion. Second, with the decrease of Tencent's voting rights in Sea and the further increase of the voting rights of its chairman and CEO, Sea is in an ideal position for the next stage of expansion. Third, unlike reducing JD.COM, Tencent only reduced its Sea shares by 2.6%. Tencent is changing its portfolio and investing more in hard technology because it is regulated by Chinese policies. It can be said that reducing its holdings of Sea and JD.COM is also a wise move for Tencent to avoid anti-monopoly policies. At present, the long-term impact on Sea is not great, and it is conducive to accelerating the globalization of Sea.
Sea's founders are native Chinese, who have worked in Southeast Asia for many years and have some understanding of local culture. However, its operation mode and business model are mainly inspired by Chinese mainland, and its investors are mainly capital from Chinese mainland, which is undoubtedly almost a replica of the Chinese model. Especially backed by Tencent, the business model has basically matured.
At present, Sea is making rapid progress by relying on the three carriages of game + e-commerce + digital payment. Sea is not only a leader in Southeast Asia, but also a leader in international expansion in the field of e-commerce. Its popular Free Fire game and game business Garena seem to continue to succeed with the high participation of a large number of MAUs, and it seems that they will continue to provide necessary funds for Shopee to expand into new markets and strengthen its position in the e-commerce market in Southeast Asia. Finally, many new initiatives outside the Sea Money wallet business seem to further strengthen the flywheel effect and create a competitive advantage unmatched by other global peers.
There are three core logics for investing in Sea: ① Emerging market countries represented by Southeast Asia benefit from dividends such as high economic growth, increased Internet penetration and younger population structure, and breed an e-commerce market with more potential than Europe, America and China; ② Core business games and e-commerce models have been verified in China, and the market space is huge; ③ Core business games and e-commerce bring horizontal regional expansion and vertical business expansion, providing new growth points for the future. At the same time, the overseas policy risks of the Internet industry are relatively small, and it is estimated that the company's revenue will grow at a compound annual rate of 66% in the next three years, maintaining strong growth.
Since October, Sea has dropped from the highest of 372 to 187, a drop of more than 50%. On the one hand, due to the excessive increase in the previous period, and the large inflow of funds into technology giants in the second half of the year, growth stocks have greatly killed the valuation. On the other hand, Sea reported in the third quarter that the growth of game users in its core business showed signs of slowing down. Recently, it was affected by Tencent's reduction, which led to a drop of more than 50% in Sea. At present, there is still no sign of stabilization. After a sharp drop, Sea also provides investors with good opportunities. I am still optimistic about Sea in 2022. Although I have received the impact of Tencent's reduction in the short term, I have received the benefits of Southeast Asia's demographic dividend, high economic growth, low Internet penetration rate and younger population structure in the long term. It is expected that Sea will have a good opportunity in 2022, which deserves everyone's attention.
Modify on 2022-01-10 01:42
Disclaimer: The above content represents only the personal views of the poster and does not constitute investment advice on this platform.