Our thoughts on Sea group’s 2022 Q3 results

Last night Asia time (15 November), Shopee’s parent company Sea Group released its Q3 earnings. The market seems to be responding positively – with Sea’s share price by more than 36% in the first full trading day since the release. 

This contrasts to the bearish sentiment prior to this earnings report. This could be seen by the sharp drop in price in the trading day prior to the release. Did a short squeeze happen last night? 

Our thoughts:

1. There are many positive signs on improving profitability – which in the current market is more important than top line growth in the eyes of investors. The narrowed net cash reduction (factoring in termination costs) means the company now has more time to prove itself sustainable; 
2. On growth, CEO Forrest Li said in the earnings call that we may see “no growth or negative growth in certain operating metrics in the near term”. This is already obvious, in Q3 ecommerce quarter over quarter is flat in GMV and gross orders; 
3. On the ground we know that Shopee cut down marketing expenses significantly through multiple channels, while TikTok Shop stepped on the gas pedal; Recently 11.11 seemed to be lukewarm for sellers on Shopee as well. So a big question mark is what we would see in Q4, traditionally the best quarter for ecommerce top line in Southeast Asia; 
4. The capex investment into logistics could be a promising one – we have heard from multiple markets that Shopee Express is causing margins of 3PLs to drop siginificantly. This not only contributes to Shopee’s revenue per se (mentioned in the earnings), but also makes Shopee’s position stronger; 
5. The company seems to be still quite committed to Brazil, which they should be – we raised the possibility of them competing Shopee becoming a direct competitor of Nubank, but that would only work when the market gives them a chance to do so, and their organisation can support it; 
6. The company paused financial equity investments, which is probably very necessary (and goes without saying) in the current landscape. Sea Capital’s investment in Kayak and FTX were puzzling; 
7. On SeaMoney side, the drop of Shopee wallet for offline adoption was expected (Grab did the same); but they finally made headline mentions about the consumer lending business – although ‘loans receivable’ had been quite obvious on the balance sheet for a few quarters; 
8. The $2.2 billion loan receivable and an NPL of <4% makes the business quite attractive – and could potentially be a good, sustainable cash generator for the group, in lieu of Garena’s games; 
9. The games still suffer from the industry wide headwinds – while in the earnings call the management mentioned about resurgence of Arena of Valor, another of Tencent’s game, Undawn, is still not yet released by Garena, after already a few delays; 
10. Breakeven will not be fast – end of 2023 is the timeline given by the management for Shopee’s adjusted EBITDA. The change of budgeting practice helps (as we knew that spending was not really controlled in boom times) – we also know that managers have been under a lot of pressure to work on the bottom line. A few have chosen to leave – which might not be a bad thing; 

 

Also, Sea Group, and especially Shopee’s leadership, people, organisation and product (POP-Leadership) has been under severe test in the last two quarters. We should, in the meantime, also look at the market as a whole – Lazada has made a number of positive developments (finally) this year, while TikTok is (at least until now) a dark horse. 

Coincidentally, Momentum Works’s subsidiary Momentum Works Academy is hosting an online sharing “Off the record: Shopee’s turbulent 2022” tomorrow (17 November), where we will elaborate on the issues above, and discuss questions you may have. 

The session is complimentary, and you can reserve your spot here.