Southeast Asia's "Little Tencent": From "Mortal Enemy" to "Friend", Sea Rises Again?

On the evening of May 14th, before the US stock market opened, Southeast Asia's "Little Tencent" Sea announced its financial report for the first quarter of 2024. Overall, with the significant acceleration in growth and the noticeable narrowing of losses in its Shopee business, this performance was impressive. The key points are as follows:

1. Shopee's e-commerce business accelerates growth and reduces losses, entering a "sweet period": Following signs of recovery in the previous quarter, Shopee's growth momentum further strengthened this quarter, with a year-on-year GMV growth rate of 37%, an almost 9% acceleration compared to the previous quarter, significantly higher than the market's expected 30% growth. Even though expectations were not low, the actual performance was even stronger. However, the order volume growth rate was 51%, with an absolute growth rate higher, but the quarter-on-quarter acceleration rate was 3%, not as strong as the GMV performance, with higher marginal contributions on the customer price side.

As for revenue this quarter, it increased by 33% year-on-year, significantly higher than the expected 21%. It accelerated by 10% compared to the previous quarter, higher than the GMV increase, reflecting a 0.4% increase in monetization rate. Currently, top e-commerce platforms in Southeast Asia such as Shopee, Tiktok, and Lazada are all improving monetization, creating a good environment of reduced competitive intensity and everyone making money together.

Although the investment intensity is high, Shopee's business is still operating at a loss, but the amount of loss continues to narrow significantly. This quarter, the operating profit loss was 97 million, much less than the expected 260 million loss. In the EBITDA calculation, the Southeast Asian market has already turned losses into profits. Overall, while the growth is significantly accelerating, the losses are narrowing, making it the "sweetest" stage.

2. Is Garena's gaming business finally seeing the light? At first glance, Garena's GAAP revenue continued to decline by 15% year-on-year, 11% lower than market expectations. However, this is due to the impact of deferred revenue changes, and in reality, key data such as user numbers and revenue have shown signs of improvement.

Specifically, this quarter saw an increase of 66 million active users compared to the previous quarter, with a 9 million increase in paying users. Revenue from gaming this quarter finally stopped declining, with an 11% year-on-year growth, and both new and old games are believed to have contributed.

3. SeaMoney continues to grow steadily with high quality: SeaMoney achieved a revenue of 460 million this quarter, with growth continuing to trend down to 21%, largely in line with market expectations. In terms of operating data, the company changed the disclosed loan scale, which was 3.3 billion US dollars this quarter, a 29% year-on-year growth. Of this, 2.7 billion is on-balance sheet, and 600 million is off-balance sheet. The bad debt ratio of over 90 days remained at 1.4%, unchanged year-on-year. Overall, SeaMoney maintained a good growth trend this quarter with no major fluctuations 4. Overall Performance -- Revenue higher than expected, losses less than expected: Due to the strong performance of the e-commerce sector, Sea's overall revenue for this quarter reached 3.69 billion, with a year-on-year growth rate significantly increasing to 23%, 4% higher than expected.

Although the operating profit of the gaming sector also decreased by 14% year-on-year, lower than market expectations, the operating profit margin did not decline on a quarter-on-quarter basis, only affected by the decline in revenue under GAAP standards. The DFS financial sector contributed a profit of 130 million, roughly flat quarter-on-quarter. Similarly, driven by the significant reduction in losses by Shopee, the group achieved an operating profit of $71 million, significantly better than the expected loss of 180 million.

In terms of expenses, the most noteworthy point is the significant contraction in marketing expenses, with the expense ratio decreasing from nearly 27% to 21% on a quarter-on-quarter basis. The marketing expense ratio of the e-commerce sector decreased from 34% to 25%, reflecting a narrowing of competition and subsidy intensity. Although the management and R&D expense ratio slightly increased quarter-on-quarter, the impact is minimal compared to the narrowing of marketing expenses.

Dolphin Research Viewpoint:

This quarter, following the dividend period when Tiktok Shop was previously banned in Indonesia, Shopee seized the opportunity for recovery and saw continued momentum in the Southeast Asian e-commerce market. The leading e-commerce platforms in Southeast Asia, which were previously fierce competitors, seem to have become tacit friends, entering a "sweet period" of jointly increasing monetization and profit.

At the same time, the previously weak gaming sector also showed signs of improvement in key operating indicators this quarter, with significant growth in active and paying users quarter-on-quarter, exceeding expectations by 8% to 11%, and revenue finally stopped declining year-on-year, indicating that the Garena gaming sector seems to have bottomed out and started to recover.

Therefore, at the current stage, Sea is in a phase where both major business sectors are either recovering or strengthening further. With accelerating revenue and improving profitability trends, the performance is evidently good. However, the market has already had sufficient expectations for this, as evidenced by the minimal stock price fluctuations post-earnings.

Additionally, the company did not provide guidance on performance this time, and the ever-changing Southeast Asian e-commerce landscape is far from stable. It is indeed challenging to make forward-looking judgments on future performance prospects, and more can only be done by closely monitoring high-frequency third-party statistical data and adapting accordingly.

Below is a detailed interpretation of the financial report:

I. Shopee welcomes another dividend period, leading growth strongly

Following the previous quarter, after Tiktok Shop was banned by the Indonesian government, Shopee's growth began to visibly recover. This quarter, Shopee's recovery momentum further strengthened, with GMV growing by 37% year-on-year, accelerating by nearly 9 percentage points quarter-on-quarter, also significantly higher than the market's expected 30% growth Despite the market expectations not being low, the actual performance is still much stronger.

Breaking down the price and volume, the growth rate of orders this quarter is 51%, although the absolute growth rate is higher, but the sequential acceleration rate is 3pct, indicating that the acceleration rate of volume is not as strong as the GMV performance, with price factors having a greater impact.

The unit price decreased by 9% year-on-year to $9.1, although the decline narrowed by 4% due to the lower year-on-year base. Overall, it still reflects the main promotion of "price power" by exchanging price for volume, but the prices have already shown a period of price repair in the handshake of e-commerce competition.

The acceleration rate of revenue is stronger than GMV, with revenue growing by 33% year-on-year this quarter, significantly higher than the expected 21%. The revenue growth rate accelerated by 10pct sequentially, stronger than GMV's 8.7pct rate. Behind this is the continuing increase in monetization rate.

According to our calculations, the monetization rate of the platform business increased by about 0.4pct to 10.3% sequentially. We understand that Tiktok Shop and Shopee have recently increased their monetization rates in Southeast Asian countries. Alibaba's latest financial report also indicates that Lazard's current focus is on increasing monetization and reducing average losses per order. In other words, Southeast Asia's leading e-commerce platforms such as Shopee, Tiktok, and Lazard are working together to improve monetization, creating a good environment where competition is easing and everyone is making money

2. Player Return, Garena Finally Sees the Light?

Garena's gaming sector, which has been dragging down the group, seems to have truly seen a turnaround this season. At first glance, Garena's GAAP revenue continued to decline by 15% year-on-year, 11% lower than market expectations. However, this is mainly due to the impact of deferred revenue changes, and in reality, there are signs of improvement in user data and revenue.

Specifically, this season saw an increase of 66 million active users compared to the previous quarter, with a 9 million increase in paying users, reflecting a trend of user return. According to Sensor Tower, the monthly active users of its flagship product, Free Fire, increased by 40 million compared to the previous quarter.

Therefore, the most crucial revenue stream finally stopped declining this season, with an 11% year-on-year growth. Both core legacy products and new game products are believed to have contributed.

3. SeaMoney Growth Slows Down, But Remains Stable

SeaMoney achieved revenue of 460 million this season, with the growth rate continuing to trend down to 21%, roughly in line with market expectations. In terms of operating data, the company changed the disclosed loan scale to 3.3 billion USD this quarter, a 29% year-on-year increase. Of this, 2.7 billion is on-balance sheet, and 600 million is off-balance sheet. The bad debt ratio over 90 days remained at 1.4%, unchanged year-on-year.

Overall, SeaMoney's business maintains stable and healthy growth.

4. E-commerce Sector Increases Revenue and Reduces Losses, Other Sectors Maintain Stable Profits

In summary, in terms of growth, the e-commerce sector, with the overall industry competition easing, Shopee delivered strong growth through investments in live streaming and fulfillment, continuing to lead the group. Garena's gaming sector also finally shows signs of user and revenue recovery, while SeaMoney continues to maintain a high-quality growth trend As for profitability, the key e-commerce sector, although still incurring losses this quarter due to high investment, has significantly narrowed its losses. The operating loss this quarter was 97 million, much less than the expected 260 million loss. With a noticeable acceleration in growth and narrowing losses, it is the "sweetest" outcome.

The gaming sector saw a year-on-year decline in GAAP revenue, leading to a 14% year-on-year decrease in operating profit, below market expectations. However, the operating profit margin did not decline on a quarter-on-quarter basis, which is not a major issue given the improved actual operating data.

The DFS financial sector contributed a profit of 130 million, roughly flat quarter-on-quarter, with a slight decrease in profit margin, slightly below expectations.

Overall performance: higher revenue, lower losses

Thanks to the strong performance of the e-commerce sector, Sea achieved a total revenue of 3.69 billion this quarter, with a year-on-year growth rate significantly increasing to 23%, exceeding revenue expectations by 4%.

At the gross profit level, although the Garena sector's gross profit margin is still declining due to new game investments, the group's overall gross profit margin remained roughly stable at 42% due to support from the e-commerce and financial sectors. As revenue exceeded expectations, the final gross profit value was also 3% stronger than expected.

On the expense side, the most significant contraction was in marketing expenses, with the expense ratio decreasing from nearly 27% to 21% quarter-on-quarter. By business segment, the e-commerce sector's marketing expense ratio decreased from 34% to 25%.

Although the management and research and development expense ratios slightly increased quarter-on-quarter, reflecting Sea's increased internal spending after operational improvements, compared to the significant savings in marketing expenses, management and research and development expenses could not change the overall trend of expense contraction. As a result, the company achieved an operating profit of 71 million, significantly better than the expected loss of 180 million