Our thoughts on Sea’s 2023 Q3 earnings

Sea shares dropped 22% after Q3 earnings, here are our thoughts.

Last night (14 November), Shopee’s parent company Sea Group released their 2023 Q3 results. After 3 quarters of positive net income – the group has swung into loss making in Q3 2023, with a quarterly net loss of US$144 million.

The share price dropped 22.07% during the 1st trading day. This is a bit awkward as the whole US equity market was rallying yesterday because of the lower than expected CPI （Nasdaq up 2.37%). Nonetheless, this drop is relatively mild compared to the 1st trading after its 2023 Q2 results, where share price dropped almost 30%.

The loss is, in our opinion, not the main concern. Here are some of our thoughts:

1. After not reporting Shopee GMV for 2 quarters,  Sea Group reported Q3 GMV of US$20.1 billion (on 2.2 billion gross orders). While this number is the highest ever reported – the YoY growth is, however, merely 5%, and if we assume similar take rates in Q2 and Q3 2023, QoQ growth is probably below 5% as well;

2. This growth is disappointing especially when the company almost doubled its sales & marketing expenses QoQ, from US$493.6 million to US$913 million. In Q2 this year, we predicted that Shopee would restart growth in the second half of the year and we felt it on the ground. However, this additional spending did not translate into top line growth;

3. There could be a number of causes to that. One key reason was Shopee was trying various ways to defend its market share against TikTok Shop, which was growing beyond expectations in Q3 this year. As the conversion happened entirely within the TikTok app, it was difficult and expensive for Shopee to fight over;

4. TikTok Shop halted its Indonesia operations only on 4 October, after the ban by the government. Therefore if this ban would benefit Shopee in any way, it would not have impacted the Q3 results;

5. And we do not see the ban leading naturally to Shopee’s growth – as Indonesia is only ⅓ of TikTok Shop’s Southeast Asia GMV, and many of the close to 3 million parcels a day on TikTok Shop before the ban were highly discretionary and impulse. It would be hard for anyone to (re)capture that lost volume;

6. TikTok Shop will find its way back to Indonesia, one way or another, sooner or later. On the other hand, Pinduoduo’s Temu, which has entered the Philippines and Malaysia, is probably busy growing its US and Europe volume during the festive shopping season and won’t be able to focus on Southeast Asia at least this year;

7. In the earnings call, Sea Group provided, probably for the first time, breakdown of the loan book of its lending (credit) business: US$2.4 billion from balance sheet (incl. Its subsidiary digital banks) and US$0.5 billion from channelling. It also mentioned that US$1.4 billion were paylater, while the remaining US$1.5 billion were cash loans;

8. Sea Group (or SeaMoney specifically) has managed to control the delinquency ratio of the loans. In the current high interest environment – this would mean that the company is cautious about growth of the lending business;

9. There isn’t anything interesting to write about Garena – Sea Group’s digital entertainment business. It is ‘stable’.

Overall, Sea Group founder Forrest Li announced in September that the group would enter “full fighting mode”. It will probably remain in this mode for a while.

At the end of the day, we believe that Shopee will put up the toughest fight. Southeast Asia is its home turf and it has nowhere else to retreat to. On the Product (and warchest) front they are facing stronger competitors, and their winning factors will lie with Leadership, People and Organisation.