Sea: Believes that e-commerce competition will no longer be extreme

The following is a summary of Sea's first quarter financial report conference call in 2024. For financial report analysis, please refer to " Southeast Asia's Little Tencent: "Mortal Enemy" to "Friend", Sea Rises Again? "

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

1. Highlights of the First Quarter Business:

① E-commerce (Shopee):

• Order volume increased by 57% year-on-year, GMV increased by 36%, and revenue increased by 33%.

• Adjusted EBITDA loss reduced to $22 million, with Asia achieving positive adjusted EBITDA of $11 million.

• Operational focus: Enhancing price competitiveness, strengthening content ecosystem, improving buyer service quality.

• Logistics capability significantly improved, with SPX Express becoming one of the fastest and most intensive logistics operators in the market, delivering 70% of orders within 3 days, with costs decreasing year-on-year (15% decrease in Asia, 23% decrease in Brazil).

• Introduced on-time guarantee program and optimized return and refund process, resolving time increased by 30% year-on-year, 45% of cases resolved within one day, enhancing customer experience and operational efficiency.

② Digital Financial Services (SeaMoney):

• Active users of consumer and SME loans increased by 42% year-on-year; outstanding loan principal reached $3.3 billion, up 29% year-on-year.

• Credit business is the main growth driver, with strong growth in non-Shopee loans, accounting for over 40% of total loan balance.

• Maintaining a cautious risk management approach, loans overdue by more than 90 days stable at 1.4%, starting with low credit limits and short-term loans, gradually increasing credit limits and loan terms.

③ Digital Entertainment (Garena):

• Reservation volume increased by 11% year-on-year, Free Fire performed strongly, with average monthly active users increasing by 24% year-on-year.

• Operational focus: Enhancing user acquisition, engagement, and retention, launching Chaos and Mechadrake versions.

• Continuously introducing new gameplay and content, maintaining high player engagement.

• Free Fire has become the most downloaded mobile game globally, confident in making it a perennial brand.

2.2. Q&A Analyst Questions and Answers

Q: How do you ensure sustainable growth as subsidies decrease? What is your strategy if competitors become more aggressive?A: For us, the long-term competitive advantage in e-commerce is crucial. Our main goal is to reduce service costs to ensure that we can provide cost-effective transaction services for both buyers and sellers. We are also committed to price competitiveness by closely collaborating with sellers to ensure that our product prices are always superior to other platforms. Furthermore, we continuously improve service quality, including delivery services, return services, and customer service experience. These three factors will collectively enhance the long-term competitiveness of our e-commerce business and create more value for the market, consumers, and sellers.

We will closely monitor market competition dynamics, evaluate competitors' actions market by market and category by category, and adjust our strategies to maintain a competitive edge. While there may be fluctuations in the short term, we firmly believe that a positive long-term outlook will keep us in a leading position in the market.

Q: Given the strong performance of the gaming business in the first quarter, what are your views on the trends for the second quarter and the full year? Can you share growth strategies? What are the profit margin expectations for the future?

A: In terms of gaming, we are very pleased with the achievements in the first quarter. It is a quite strong result and trend, and we see these trends continuing into the second quarter so far. We are very optimistic about the remaining time of this year, and we expect "Free Fire" to achieve double-digit growth for the full year. The past growth and trends reflect our efforts over the past quarter and two years. Despite facing some challenges, especially post-COVID, we have always believed in the vision of making "Free Fire" a timeless brand. Therefore, we are very focused on user experience, not rushing to monetize the game, but continuing to fine-tune the product in a user-centric way. We have conducted a lot of research and surveys, continuously adjusting the game based on feedback. Another factor is that the market has shifted post-COVID, with gamers re-engaging with the gameplay of "Free Fire," which is evident globally. In conclusion, we will continue to work hard, aiming to grow the user base and monetization of "Free Fire" by the end of the year.

Q: Regarding Shopee, if competitors become more aggressive, would you consider re-incurring losses to maintain market share? Besides maintaining profitability, what other measures can you take to sustain market share? Additionally, apart from advertising, to what extent can we increase commission rates in various countries?

A: Regarding commission rates, we believe there is still room for improvement, although the growth may not be as significant as last year. At the same time, we also see potential for improvement in advertising revenue. Our advertising revenue rate is still slightly lower than that of market peers, so there is room for improvement.

In terms of competition, we believe that focusing on long-term core competencies is crucial, including costs, price competitiveness, and service experience. These factors will help us maintain a long-term advantage in the market. Currently, we observe a relatively stable competitive environment, but if the situation changes, we will evaluate and take appropriate measures for each country and categoryQ: Regarding the growth of GMV in e-commerce, how much of it is due to seasonal factors? The GMV growth expectation remains in the high single to double digits, how do you consider this?

A: Regarding GMV, we achieved strong growth in the first quarter, partly due to seasonal factors such as the Lunar New Year and Ramadan falling in the first quarter. However, this is not the sole reason, as our work over the past few quarters has also started to have a positive impact on revenue growth and profit improvement. Although it is difficult to quantify the specific contributions of seasonal factors and our efforts, I want to emphasize that this is not just a seasonal issue, our efforts are also benefiting revenue and profit.

Q: Regarding logistics strategy, please share some data on the proportion of orders delivered through your own platform's SPX service, and how do you expect this proportion to change in the medium to long term?

A: In terms of logistics, over half of the orders in Asia are delivered through our own SPX service. For example, in Brazil, this proportion now exceeds 70%, and we plan to increase this proportion over time.

Q: In terms of e-commerce business, what are the main reasons for the 23% decrease in sales and marketing expenses compared to the previous period? How is this related to the unit economic efficiency (UE) of live e-commerce and market platforms? Under what circumstances can we return to the profit level of over 1% GMV at the beginning of last year?

A: E-commerce sales and marketing expenses have significantly decreased, partly due to the improvement in UE brought by live streaming and the overall market performance. Live transaction volume has grown in most markets, with a significant increase in UE, and it is expected that the UE of live streaming will continue to improve in the coming quarters. For GMV EBITDA, we are confident in reaching the level of over 1% at the beginning of last year, with a long-term target of 2% to 3% being reasonable. Regarding the guidance of high double-digit growth in e-commerce GMV, the strong performance in the first quarter has strengthened our confidence in achieving the full-year high single-digit growth target. We will update forecasts based on market conditions, while considering the impact of factors such as seasonality and exchange rates.

Q: Regarding Digital Financial Services (DFS) business, marketing expenses remained high this quarter. Where are these funds mainly allocated within SeaMoney? What results have been seen so far? Will the revenue growth of DFS differ from the e-commerce business growth trend as new use cases are built?

A: In terms of DFS, credit services remain a major part of revenue, especially Shopee PayLater, which grows with the growth of the Shopee platform. In addition to Shopee PayLater, we have also introduced other financial products such as Buy Now Pay Later (BNPL), as well as new use cases like offline payments and mobile loans to expand the range of financial services.

In terms of sales and marketing, our business has fairly good margin profits, and we see potential for growth over time, especially in the field of digital financial services. Actual marketing expenses will fluctuate based on factors such as new user acquisition costs and UE in different marketsQ: Shopee has achieved EBITDA breakeven in Southeast Asia, is this sustainable? Will future EBITDA improve, fluctuate, or continue to grow?

A: EBITDA is partly affected by seasonal factors, as most markets have positive marginal contributions, driving revenue growth and also contributing to EBITDA improvement. We are confident in achieving our previous guidance as we are one and a half months into this quarter. If there are any changes, we will update the market promptly.

Q: The average user revenue of the gaming business is lower than historical trends, is this a quarterly specific situation or does it indicate a new trend?

A: The decrease in average user revenue of the gaming business is mainly due to the large number of new users attracted by "Free Fire". Despite the game being released for seven years, we are still effectively attracting new players, whose average spending is usually lower than long-term players. As players' engagement in the game increases, so does their spending potential. Therefore, this trend reflects the strong growth in "Free Fire" users in the first quarter, rather than an issue with monetization capabilities.

Q: Considering Shopee's strong performance, why hasn't the forecast for positive EBITDA in the second half of the year been raised? Are fluctuations expected in future quarters? Can you comment on the competition between Indonesia and ASEAN after the merger of TikTok and Tokopedia, is the guidance unchanged due to intensified competition?

A: In terms of competition, the current market competition remains stable, and we have not observed any significant changes in the competitive landscape. While we cannot predict the actions of competitors, we have not seen any particular changes in the current competitive environment.

Regarding performance guidance, we are encouraged by the first-quarter performance and are confident in achieving our set goals. We are now in the middle of the second quarter and will further observe the market situation. Once we have a clearer understanding of the data, we will update our forward-looking guidance to the market, and currently, there are no specific reasons to adjust the guidance due to competition or other factors.

Q: In Digital Financial Services (DFS), what has led to the decline in profit margins? Is it due to increased customer acquisition costs or rising funding costs? Can you share the future outlook for DFS profit margins?

A: The fluctuation in DFS profit margins is mainly due to customer acquisition costs rather than funding costs, in fact, funding costs have been decreasing quarter by quarter. Customer acquisition costs depend on market conditions, the investments we make to attract users, and the long-term value these users bring. Additionally, it is also influenced by the introduction of new products in different markets.

Q: Sales and marketing expenses for the e-commerce business have decreased to 2.9% of GMV, based on your view of competition, will the expenditure level in the second quarter remain the same?

A: Sales and marketing expenses for the e-commerce business decreased in the first quarter, mainly due to the investments in live streaming starting to yield benefits and an overall optimization of market spending. We expect to continue optimizing these expenses in the next quarter, and the overall trend may continue to decrease. However, there may be some fluctuations between months due to factors such as foreign exchangeQ: Can you explain the percentage of Brazil in the loan book in terms of financial technology, and considering the strategies of competitors in the market, will this be a focus of your loan business?

A: For the loan business, we have high expectations for Brazil and believe it can be a very good market for our digital financial services. Although our business in Brazil is just starting, we believe that over time, Brazil's loan book will be a potential driver of good growth.

Q: Can you talk about the improvement in economic performance this quarter? What is the current percentage of live streaming orders? Why has the breakeven point not been reached in the second quarter?

A: The percentage of live streaming orders is the same as last quarter, around 15% in South Asia last quarter. This quarter, the growth in order volume is due to our optimization of product category mix and unit economics (UE). In addition to improvements in live streaming and general market trading, the reduction in logistics costs is also one of the driving factors for UE improvement.

Q: Over 50% of orders in Asia and over 70% in Brazil are completed through SPX. Do you have a target percentage? How does the unit economics or profit contribution margin of orders completed through SPX compare to the average situation?

A: Specific targets for the percentage of orders completed through our own logistics system may vary by market, and we may not set fixed targets for all markets. Overall, we expect to see more orders completed through our own SPX rather than third-party logistics (3PL). While we may not set specific targets for each market, we anticipate more orders being completed through our own logistics system in the future.

In terms of unit economics of orders, since the cost of each order through our own SPX is lower than that of third-party logistics, we save some costs for each internal order delivered, contributing to the improvement in unit economics you see here. Although there are slight differences in unit economics between markets, we expect to further improve this trend in most markets over time.

Q: How do you achieve better unit economics and efficiency than third-party logistics (3PL) with SPX?

A: Firstly, we are able to retain profits compared to third-party logistics companies, which is a factor. Even without considering this, we still have several advantages. Firstly, we can better plan capital expenditures in the long term because we can predict the development of the business, including the distribution of transaction volumes in different regions and routes. This helps optimize long-term capital expenditures and operational models. Secondly, we have good forecasting capabilities to plan order volumes in the short term, helping to improve daily operational efficiency. Thirdly, we can optimize logistics by influencing seller behavior, such as adjusting pickup times, packaging product times, and choosing delivery methods. Fourthly, as a technology company, we have better technical capabilities to optimize the supply chain through tools, automation, and predictive models, improving efficiency. This allows us to collaborate with market departments to launch new services and control costsI believe one example is on-time delivery guarantee. In theory, everyone can achieve this, but how to achieve it economically is a big issue. We need to ensure good predictions for every step of the delivery process, from the buyer placing an order to the final delivery. We achieve this through jointly planning across the value chain, allowing us to operate more economically efficiently, provide better service levels, and differentiate services for consumers.

Q: It was mentioned earlier that Shopee's advertising revenue rate has room for improvement compared to global peers. Could you share Shopee's current advertising revenue rate and your expectations for the long-term target?

A: Regarding the advertising revenue rate, we do not intend to disclose specific numbers, but compared to global peers such as companies in China or the United States, our advertising revenue rate is still significantly lower, with several percentage points to catch up on. We have a lot of room to increase the advertising revenue rate. We can achieve this in several ways: first, increase seller exposure to promote product diversity. To do this, we must develop simpler advertising products for sellers, especially for those who are not familiar with the application. Secondly, improve advertising efficiency through technology, focusing on increasing the conversion rate of advertising products. Finally, find a better balance between organic traffic and advertising traffic, enhance products, balance organic and advertising products within a common framework, and dynamically adjust advertising loads based on conversion rates and product displays.

Q: Your cash position is strong and continuously growing, with some peers discussing or even implementing stock buybacks. What are your thoughts on using cash balances?

A: We currently have no plans for stock buybacks or similar intentions. Our operational performance is strong, and we are quite confident in the prospects of each business line, so we will focus on these businesses.

Q: In terms of Digital Financial Services (DFS), could you share the ranking of each product or service line this quarter in terms of growth and revenue or profit contribution?

A: In our Digital Financial Services (DFS), the main products include Shopee PayLater and Buy-Now-Pay-Later (BCL). In terms of outstanding balances, Shopee PayLater is currently the largest product. However, in terms of EBITDA contribution and unit economic benefits, BCL has a higher UE than Shopee PayLater.

Q: Regarding the re-launch of "Free Fire" in India, if successful, what potential positive impact on user growth could it have?

A: We are actively communicating with regulatory authorities and potential local partners to seek the best solution for re-launching "Free Fire" in India. If successful, given the huge potential of the Indian market, it is expected to bring significant user growth and increase in bookings. It should be noted that our double-digit growth expectations for the remaining year do not take into account the impact of the re-launch in the Indian market. Our guidance and outlook are based on current business conditions and forecasts of existing market trends

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