Sea was founded in 2009 by Li Xiaodong, a native of Tianjin, and is headquartered in Singapore. It started with gaming, and later expanded its business further into e-commerce and payments. Since Tencent is its major shareholder, it is also often known as the “Little Tencent of Southeast Asia.” Sea was listed in October '17, and its stock price increased by about 20x over 4 years.
The Way to Rise
As you can see in the image above, about 2/3 of Sea's revenue came from games and 1/3 from e-commerce in '19, but it is expected that by '22, this ratio will change to 1/3 vs. 2/3. Judging from the development in the past two years, there is indeed such a trend. For example, according to the latest quarterly earnings report, Sea has revenue of 2.28 billion US dollars, of which game revenue is 1 billion US dollars and e-commerce revenue is 1.2 billion US dollars, which is already 20% more than games.
It is worth noting that the e-commerce business is catching up with games does not mean that the game business is declining. On the contrary, the latest quarterly earnings report shows that the game business increased by 167% year-on-year. Currently, only Sea has no semicolon for companies with a market capitalization exceeding 100 billion US dollars that can still grow by three digits, and at the same time have no other semicolon. Such rare and good bids are particularly worth cherishing.
The picture above shows the ranking of Sea's blockbuster mobile game Free Fire in the US. It can be seen that the ranking is basically stable in the top five, and krypton's ability is steady. Furthermore, according to app data tracking, the number of monthly downloads of Free Fire remains around 13 million. Previously, the market was probably too worried about the decline.
If Sea has the genes of Tencent games, then being able to do e-commerce is a migration of this kind of gene, which eventually formed a perfect playstyle system. Tencent e-commerce has never played against Ali in China, but Southeast Asia has overtaken Lazada, which is directly linked to Ali. Since its rise in the past 2-3 years, the game has mainly relied on the blockbuster “Eat Chicken” mobile game Free Fire. The core of e-commerce Shopee is to conquer several major Southeast Asian markets such as Vietnam, Indonesia, New Matai, and the Philippines. Additionally, it only took about 1 year to conquer South America, and the pace of expansion was very barbaric.
The process of retrading Shopee's takeover of Indonesia. Shopee, which has gaming genes, mainly focuses on “fun” marketing/promotion activities, such as the Ramadhan promotion in Q2 in '19, the announcement of Ronaldo as an ambassador in July, the 9.9 promotion, the Double Eleven promotion... These styles of style of play can also be found in the top three e-commerce companies in China.
Relatively speaking, Southeast Asia is a younger incremental market and is more suited for Shopee to show off. The e-commerce penetration rate in Indonesia was 7.8% in 2018, and this figure is expected to triple this year. In terms of categories, consumer electronics, clothing, beauty, skincare, etc. have the highest penetration rate. In many fields, CAGR > 100%. This phenomenon is very similar to when Taobao first became active. In such a young, high-growth market with low penetration and consumption levels, Shopee's style of play similar to Taobao and Pinduoduo is more aggressive (crazy shopping, promotion, price reduction as much as possible when quality is acceptable, etc.) The chivalry spirit of founder Li Xiaodong is suited to overcome difficulties in this market. However, the biggest competitor, Lazada, is more similar to the style of play of Tmall and JD. In the long run, it will also have a market and profit, but it is difficult to become a phenomenon. Furthermore, Shopee has paid more attention to localization, and some have inherited the meaning of Tencent's empowerment, while Lazada is in line with the control of the Ali Empire, and development seems to be hampered.
Judging from the number of app downloads, in an overall situation of high growth, Shopee's share continues to rise, from 35% to 38%, mainly seizing the share of the second-generation Lazada. In the field of e-commerce, which has a strong Ma Tai effect, once a leading edge is basically irreversible, the advantage will continue to expand. Typical examples include Amazon vs. Ebay, Taobao vs. other contemporaries.
Resuming the rest of Southeast Asia and South America has the same conclusion — Shopee's expansion and development is steady, and there is still plenty of room for evolution.
Entering Poland
On September 22nd, Shopee officially entered Poland. The size of the e-commerce market in Poland is about 18 billion US dollars in 20 years. According to Euromonitor, this figure is expected to increase to 32 billion US dollars by 25, with a CAGR of 12.2%. Furthermore, the e-commerce penetration rate in Poland is low, at 14% in 20 years. There is still a lot of room for improvement compared to China reaching 28% in '19. In particular, the pandemic has accelerated this process, and the penetration rate is expected to reach 19% in '25. Although Polish tam isn't that big, its potential appeal is that if Shopee succeeds, it will pave the way for further expansion into other parts of Europe.
Another company that coincides with Shopee's idea is Amazon, but it was one step ahead and entered Poland in March of this year. Currently, the main player in Poland is Allegro, with a market share of about 36.2%. According to Similarweb data, 39% of adult Poles (16 years old +) shopped on this platform in 2020, and more than 20 million people visited the website every month. The rest of the market was relatively fragmented, with no other players accounting for more than 3% of the market.
Allegro is certainly the best quality player in this market. As shown in the figure above, Cohort (new users added back then) spending on the platform is increasing year by year. In other words, the platform's user stickiness is strong, and the user LTV (lifetime value) is very high. To put it off topic, all of the business models that have this Cohort model are among the best. As you can imagine, whether it's Amazon or Shopee, they will face a tough battle in this market.
Price is probably the toughest battleground. As previously analyzed, Shopee's style of play is similar to Pinduoduo, frantically cutting prices and subsidies to increase market share, and then increasing the take-rate and profit margin. From the ultimate point of view of how fast and easy it is to save, Shopee is certainly the most important “saving”. However, in the Polish market, Allegro also takes “province” to the extreme. According to 20-year data, 84% of the products on the Allegro platform are the lowest prices on the entire network. It will monitor 135,000 of the most commonly used products. If it is discovered that the selling price may be higher than other places, then the company will take steps to reduce the seller's price, such as reducing the take rate. Local supply also gives Allegro a price advantage over international competition, and the competitive environment Shopee faces is not optimistic.
Also, Allegro is in a unique position when it comes to fulfillment — 75% of products are delivered within 48 hours, and 29% are delivered the next day. In 2020, Allegro launched same-day delivery in 6 cities, and about 53% of products were shipped free of charge. Judging from the NPS (NetPromoter Score) indicator, Allegro is as high as 51, while Amazon is only 6. This is also quite a challenge for Shopee, but fortunately, the logistics infrastructure in Poland is quite complete (Allegro relies on third-party logistics), which lowers the entry threshold for Shopee. Looking back at Shopee's style in Southeast Asia, it also uses third-party logistics to quickly expand the scale at a low price, rather than building its own logistics system like Amazon (there are also reasons why Southeast Asia has an innate environment, such as the many islands in Indonesia). According to InPost, Poland's largest logistics provider, Shopee has signed a cooperation agreement with it.
From the perspective of product/service provision, Allegro has 117,000 merchants providing more than 160 million products, with the largest categories being home improvement, electronics, and automobile/accessories. The share of this category is a typical Western developed country model, but its relative weakness in the women's clothing and cosmetics categories gave Shopee an opportunity to take advantage of — these can be described as Shopee's ability to look at home (advantages drawn from Taobao and Pinduoduo, in addition, the light industry in China and Southeast Asia still has a comparative advantage).
Overall, Allegro has deep roots in the Polish market and can achieve a take rate of about 10%. According to Morgan's speculations, Allegro's EBITDA may be as high as 40% in '21 (market profit potential is high). Shopee's core in gaining a foothold in this market is transplanting its rising system in Southeast Asia and South America, cutting into categories such as women's clothing, which has a comparative advantage, and paving the way with extensive marketing to ignite consumer mentality and merchant stickiness and ecology. At the same time, benefiting from the expansion of the overall e-commerce market in Poland, Shopee will share a share of the pie with its excellent operating capabilities.
Refer to Shopee's experience in attacking Brazil: it takes about 1 year to get a 5% market share. Under neutral assumptions, Shopee's market share in Poland reaches 5% in '23, then GMV will reach about 1.3 billion US dollars. The take rate increased from 0% to 5% in the previous period (see Brazil may eventually rise to the same level as competitors). The valuation is based on P/GMV=2x, and the market value is about 2.6 billion US dollars. With the further improvement of indicators such as GMV, market share, take rate, and ARPU, and cost optimization, this market value will continue to rise.
Entering India
According to Bloomberg's news at the end of August, Shopee will enter the Indian market and has released a large number of recruitment requirements in India, involving positions such as seller operations and compliance personnel. In addition, Shopee has also launched recruitment campaigns for suppliers and sellers. Currently, Shopee declined to comment on this news, but according to analysis by relevant sources, the news may be officially announced soon.
Entering India is a good time. Currently, the Indian e-commerce market is still a blue ocean. The 20-year penetration rate is only about 7%, and the GMV is about 41 billion US dollars. Euromonitor expects this figure to grow to 129 billion US dollars by 25. Over the past 5-10 years, the corresponding infrastructure for e-commerce has continued to improve — third-party logistics and electronic payments are booming (the largest payment company, paytm, is about to go public), and is accompanied by a large number of sellers migrating online.
However, competition in this market is also fierce. The main rivals include Flipkart and Amazon. In 2020, the two had GMVs of 12.5 billion and 11.5 billion US dollars, respectively. Also, every major subcategory has a vertical e-commerce leader. In addition to this, the business environment in India is not friendly, the division between cities and states is quite serious, and there are many languages and religions. This will be a major obstacle to doing business.
According to statistics, from '14 to August '21, a total of 77 billion US dollars were invested in the Internet sector in India, of which 30% was invested in e-commerce. Morgan estimates that Amazon has invested a total of about 5 billion US dollars in India, which has increased Shopee's entry barriers.
In addition to the previous analysis of the advantages of entering Poland, Shopee's entry into India has additional potential benefits — Free Fire remains in the top three mobile game rankings after logging in to India. This will help revive Brazil's battle, that is, cross-/bundle sales of mobile games and e-commerce apps, reduce customer acquisition costs, and increase user stickiness. According to Senor Tower data, the cumulative number of downloads of Free Fire in India is about 195 million.
Under a neutral assumption, Shopee received a 5% market share in India in '23, with a GMV of about 4 billion US dollars. Considering that this market is still growing rapidly, based on P/GMV=3.5x valuation, the market value is about 14 billion US dollars. Under an optimistic assumption, if the market share reaches 15% within 5 years, about 19.3 billion US dollars of GMV. According to the valuation of P/GMV = 1.5x, the market value is about 29 billion US dollars.
valuations
Based on previous discussions, Shopee's entry into Poland and India both has great opportunities and potential. Under a neutral scenario, it will increase its market value by about 17 billion US dollars, corresponding to a stock price of about 31 US dollars.
On the other hand, Shopee continues to gain strength in the main battlefields of Southeast Asia and South America. While increasing its market share, it is expected that it will turn a loss into a profit in about 2 years. Under neutral expectations, GMV will reach about 90 billion dollars in '22. If P/GMV=1.4x is taken from other peers around the world, the market value is 126 billion dollars, corresponding to a stock price of about 220 US dollars.
The game business relies on Tencent (and has cooperation with EA) to maintain steady development. The expected net profit for '22 is about 2.7 billion US dollars, compared to P/E26x, which is slightly lower than NetEase. The corresponding market value is 70.2 billion US dollars, and the stock price is about 122.5 billion US dollars. The payment and fintech business took 10.3x EV/S with reference to other peers around the world in '21, corresponding to a stock price of about $35.
Overall, Sea's target price is 220+122.5+35 = 377.5 US dollars, and there is still a lot of room for improvement compared to now. If shopee's business in Poland and India progresses smoothly, it will strongly boost stock prices. The risk is that the macroeconomic environment fluctuates, the overall valuation of technology stocks (especially second-tier growth stocks) falls short of expectations, and business development falls short of expectations. The current position has a lot of room for upward movement and limited downside space, and is highly attractive.