SE deep dive

Sea Limited will be reporting earnings tomorrow. Linked below is a recent free deep dive. I have no prior knowledge of DJY Research although they appear to have capability for conducting surveys as well as evaluating tech and financial indicators. Among those thanked at the end of the article for providing feedback is Muji, well-known to this forum.

Forum posters have to date pretty well summarized what SE is about (online gaming, eCommerce, digital financial services). My main take-aways from this dive along with some quotes:

  • Gaming: Their Garena gaming arm continues to reach new highs with “Free Fire”, which is now moving into the mobile gaming environment and is a new opportunity. “While Free Fire is clearly a knockout success, having the majority of revenues predicated on a single game seems like a precarious position. However, a popular gaming franchise is much more durable than one might think.”

  • eCommerce: Shopee continues to run buyer and seller discounts and to market heavily to try to achieve dominance. It continues to “hyperlocalize” to the diverse markets in South-east Asia, and to take a “move fast and break things” approach. Lazada appears to be on the back foot, however Tokopedia has become a serious competitor, particularly if they merge with the delivery giant Gojek. Their progress in South America has some impressive numbers but this is mostly fueled by promotions. Progress remains to be seen, and it might be diverting attention from their key market area, South-east Asia.

  • Digital financial services: As with Shopee, they are more focused on adoption than monetization at this point. "On the eWallet front they are marginally ahead with many competitors like GoPay (GoJek), OVO and GrabPay very close behind. Given how underbanked a lot of South-east Asia is there is still ample opportunity to gain share (or lose it). It also isn’t a winner-take-all market with opportunity for a few players to be leaders in the space and eWallet usage not being mutual exclusive.

“The most important thing to building enduring value for a company is that your customers do not leave. In marketing this is referred to as a “leaky bucket”, where you pay handsomely for a customer just to have them leave because of a bad experience or poor value. This is why capital is not a moat, it is a bridge – capital can help you get somewhere but does not insulate you from competition. Critically, our survey work has shown that of the 40% of customers across all of South-east Asia who do not check more than one platform before buying, virtually all are shopping exclusively on Shopee. This is the strongest piece of data that we have found that supports Shopee is “winning” South-east Asia eCommerce.”

" Sea would be in a better position if they made progress on their own logistics network and fulfillment, creating something that is hard for competitors to quickly emulate. Shopee Pay helps adoption, but the proliferation of other eWallets and fintech’s means that it is a rather trivial friction reduction. Having said that, as long as they can continue to outrun the competition, they will stay in the lead."

The article provides “build scenarios” for future progress in e-commerce and digital financial services. “There is a path to Sea being a $250bn+ business with some upside to that within their preexisting business lines…however, their growth and success in these markets are hardly guaranteed, and investors will have to judge for themselves whether or not they believe they are being adequately compensated for these risks.”


"1) Competition. Even benign competition can materially stymie profitability, requiring them to offer their services for less to be competitive. Competitors can leverage other assets they have (super app, messaging apps with high usage, social media, etc) to cross sell similar services and may be able to offer overall better customer and merchant experiences.

2) Churn. Many users were enticed to join the platform through limited time promotions where the ultimate customer life is unknown. Shopee and SeaMoney may only seem to be good values to customers at these discounted prices and usage could drop off materially when subsidies are rolled back. Competition may also entice users to leave with minimal lock in.

3) Steady state margin structure not achieved. We value SE at margins of a more mature business but it is possible the competitive environment does not allow this margin structure to be realized or there is less operating leverage in the model than anticipated. Furthermore, perhaps promotions rather than only being a strategy to collect users become necessary to retain them, depressing steady state margins.

4) Free Fire popularity fades. Video games like other media can come in and out of vogue. As this is a material source of cash flow for the company’s investments, losing this cash flow would be detrimental for their other businesses and could require a large capital raise in order to continue growing at the same speed.

5) New financial and possibly gaming regulation. There were financial regulations in the past that materially altered SeaMoney and there could be more changes in the future. Most of South-east Asia has a very young financial system that will likely vary from what it looks like when the region is more developed. While the governments are different, we saw game restriction in China on Tencent and perhaps some governments could take similar action or Chinese regulations could affect gamers in South-east Asia."

My take: This is the most in-depth assessment of SE that I’ve yet seen. What comes across repeatedly is how ultra-competitive their environment is, and how diverse the opportunities and risks are. I feel like I’m “riding the tiger” with this investment. I remain optimistic but will not be increasing my position, and might trim it to fund opportunities among the many winners featured regularly on this forum.



Thanks for posting this. It’s the best analysis I have seen on SEA and South East Asia internet e-commerce, perhaps ever.

I personally think that the article overplays the competitive risks given the history. SEA is the only player to have ever achieved any scale across so many markets. That alone is a huge advantage as they can provide access to the widest range of markets from a single entity. I also think their secret sauce is an ability to optimize for older model phones, that competitors won’t spend the money or effort on. They didn’t go into much detail either. However, the point that they need to increase their moat and the next leg up to $250 billion won’t be easy is spot on.

Thanks again, long SEA.