SEA: Don't get caught up in short-term profits, focus on long-term gains.

Below is the minutes of the 1Q23 conference call of Winter Sea Group SEA. For the review of the quarterly report, please refer to "Is SEA, Tencent's Southeast Asian Arm, Going to be Dragged Down by Games Again?"

1. Management Statement

In the first quarter of 2023, we continued to see significant improvement in the profitability of Shopee and SeaMoney compared to the same period last year. We also achieved positive total cash flow for this quarter. Our cash and cash equivalents increased by $258 million compared to the previous quarter.

At Shopee, we are pushing for improvements in logistics service levels and speed, while enhancing the user experience at key touchpoints to deepen user stickiness.

At Garena, we are optimizing various aspects of gameplay and game mechanics based on user feedback to ensure that players continue to enjoy highly engaging and social experiences related to our games. In April, we began to see signs of recovery in the active user base of Free Fire.

At SeaMoney, we are expanding the supply and functionality of our products so that users can enjoy more comprehensive products and services to meet their unmet financial needs.

1. E-commerce Business:

In the Asian market, we achieved adjusted EBITDA of $276 million this quarter, a significant improvement compared to a loss of $408 million in the same period last year. In other markets, adjusted EBITDA losses were $68 million, significantly narrower than the $335 million loss in the same period last year. In Brazil, the profit loss per order decreased by 77% to 34 cents compared to the same period last year, reflecting better monetization and higher sales and marketing efficiency.

This quarter, we focused on several specific areas:

First, we continue to improve our logistics cost leadership and delivery experience by increasing our capabilities and integrating our in-house logistics department, while continuing to work closely with our third-party logistics partners to launch more automated delivery services. As a result of these efforts, delivery times in all our markets were shortened by more than half a day in the first quarter.

We are also expanding the buyer coverage of our logistics services in various markets. In Indonesia (which consists of more than 10,000 islands), 95% of buyers are covered by our delivery services. In Brazil, we already have eight distribution and sorting centers. In the past few months, we have opened 50 new hubs to further strengthen our logistics capabilities.

We have started to pilot on-site returns in some markets to better serve buyers. We have also started to handle returns on behalf of some sellers, and our team directly contacts buyers to improve their experience.

We are deepening our artificial intelligence capabilities. AI helps recommend more relevant and personalized products to users. We have also adopted large language models to improve our AI chatbot's ability to understand users of different languages and return the most relevant solutions based on context. Although the macro environment is more uncertain, we continue to diversify our local seller base. In Brazil, we have achieved over 3 million registered local sellers on our platform, who now account for around 85% of our Brazilian orders.

We continue to see growth in the number of brands joining Shopee Mall, and the percentage of GMV contributed by our mall sellers is also increasing. In Thailand, we partnered with the Italian embassy and Italian trade office to bring "Made in Italy" brands closer to Thai consumers. In Vietnam, we became the exclusive partner of the Canadian government to launch a campaign to provide high-quality Canadian food to local consumers.

2. Digital Entertainment: Garena will continue to focus on improving gameplay and creating a stronger community. Although our profits have been weakened due to the low proportion of paying users, there are some initial signs of improvement in our quarterly active user base. In April, we also observed positive user trends.

Our second largest game, "Arena of Valor (King of Glory Overseas Version)," performed strongly, especially during the Lunar New Year period. After more than 6 years since its release, the game's quarterly active users and bookings reached new highs. This further demonstrates our ability to attract users in the long term and achieve stable profits.

We will be launching some new games in the coming months. We have opened pre-registration for "Undawn," an open-world survival game that we will be releasing in Southeast Asia in the coming months.

We will also be releasing "Black Clover Mobile" in multiple markets worldwide. This is an RPG mobile game based on the popular anime series "Black Clover." After the closed beta test ended last year, pre-registration is expected to open in the first half of this year.

3. Digital Financial Services: We are strengthening our operational and risk management capabilities while diversifying our fintech products, including on the Shopee platform and in different markets, to increase user stickiness.

In terms of digital wallets, we continue to expand the use cases of Shopeepay. It has recently become a payment method for Apple services in our Southeast Asian markets.

This quarter, we continue to diversify the funding sources for our credit business. In addition to our own bank deposit financing, we have seen an increase in the number of asset-backed financing through channels or local banks. Currently, most of our loans are funded by sources other than cash on our balance sheet.

We have piloted new insurtech products and expanded use cases, features, and services in our banking application. In addition, we further integrate these products into our broader ecosystem, enabling seamless integration between Shopee and SeaMoney's user experiences.

We are confident in the long-term potential of SeaMoney and are managing the business very cautiously in the face of macroeconomic uncertainty. ** 二、Q&A**

Q1: Will Shopee's growth momentum in GMV slow down further this quarter? What is the current growth rate trend? What is Shopee's strategy for the rest of the year? Should we expect Shopee to reinvest to achieve more growth or focus on further marginal spending?

A1: As far as Shopee's growth is concerned, although we have not disclosed the GMV for each quarter, overall we see a consistent quarter-on-quarter trend compared to the first quarter of last year.

Indonesia has performed relatively strongly in Asia, and there has been quarterly growth in Thailand and Malaysia. Of course, the market will continue to face tough competition. Other markets are consistent with the overall seasonal trends we observe in Asia. Brazil remains our main market.

We see huge opportunities in Brazil. We have only been there for 4 years, but as one of the leading e-commerce participants, we have achieved a very large scale, and we believe we can achieve a balance of payments at any time. But we may continue to choose to invest in the market to seize the significant long-term opportunities we observe in the market.

As far as e-commerce strategy is concerned, we believe that the long-term opportunities in the Asian and Latin American markets are very important because they have strong and positive demographic characteristics that can promote penetration, and the underdeveloped infrastructure provides more opportunities for digital market penetration, even beyond what is seen in the early stages of some developed markets.

We are very focused on working with brands and SMEs in our community to bring more types of products and more personalized shopping experiences. At the same time, we are also paying attention to the cost of the ecosystem. We strive to continue to reduce costs in logistics, payments, and other infrastructure.

Q2: What is the profit margin strategy and outlook for the gaming business? What is the overall strategy? When will it hit bottom?

A2: It is gratifying to see signs of quarterly active user growth in our games, especially our largest game, Free Fire, which has seen growth in different markets. The recent focus is on continuing to improve and enhance our user experience, retaining and re-attracting users to our games. This has been our focus and priority in the past few periods.

In addition, we also mentioned that our second largest game, Arena of Valor, has performed very strongly in the past quarter. In fact, both the quarterly active user base and bookings have reached new highs.

Overall, we are very satisfied with the current results, and we will continue to work towards the established direction of improving the user experience. Monetization performance - I don't think this is a top priority. That being said, our profit margin remains unchanged, and compared to industry standards, the EBITDA profit margin is still high, and has actually improved this quarter. We will strictly control the bottom line and efficiency of any investment in this area.

We also mentioned some new products that may be launched in the coming months. We will also closely monitor the development trends of these new games. Q3: Regarding Seamoney's currency business, why does the income continue to grow while the loan balance remains stable? Why do we also see an increase in savings credit loss reserves on a month-on-month basis?

A3: With regards to Seamoney, we have been diversifying our funding sources and partnering with third-party financial institutions to provide funding for the growth of our loan book. Therefore, the increase in income has actually exceeded the increase in loans. As for the increase in reserves, I believe the trend is similar to that of the previous quarter. Our products have expanded in terms of functionality, tenor, and loan types. Therefore, there have been some changes as the loan portfolio grows. However, overall, our non-performing loans have remained at a very stable and low level.

Q4: Regarding e-commerce, can you tell us whether the industry GMV growth trend in Asia and Brazil markets has started to improve? When do you expect it to accelerate? What is the impact of TikTok on competition? How are you trying to defend market share?

A4: Considering Shopee's relative scale, the overall industry trend is consistent with what we have observed on our own platform. On the one hand, I believe that Southeast Asia's economy is still relatively resilient so far. We have not seen more crazy inflation trends that have caused significant damage to the economy. At the same time, we continue to see a trend of reopening. However, the economies of many of our markets are export-oriented and will also face risks under the influence of global economic uncertainty.

Therefore, our strategy is to remain agile and flexible, which has always been our strength because we are close to each market and have operational advantages and profitability in all markets, allowing us to invest more flexibly between different periods or markets.

However, the focus of long-term investment is on infrastructure. When people think of investment, sometimes they overemphasize subsidies or transportation subsidies. I think this is an unfair description of our investment focus. Instead, our focus will be on investing in long-term infrastructure.

Q5: Regarding logistics, what is the overall strategy? What percentage of orders are fulfilled through Shopee Express and completed within 24 hours? Are there any goals?

A5: In terms of Shopee logistics, we have taken a very pragmatic approach. If we can do it more efficiently in any market, at any time, and at any time, we will allocate more resources to our own logistics services.

On the other hand, in markets where third-party logistics competition is fierce, we are also happy to allocate more funds to third-party logistics. This is a highly dynamic process.

We do not have a specific KPI, and everything is based on the quality and cost of service we provide to our users and continues to optimize long-term operations. We are very eager to work with all partners who are willing to cooperate with us in this regard.

Q6: In growth investments, what is your capital allocation focus? Will you restart growth investments in the Brazilian and Latin American markets, or what level of confidence will you have to restart growth investments? Q7: Regarding the growth of active users in the "Free Fire" quarterly, will this trend continue into the next quarter? Is it driven by new user marketing activities or the content itself?

A7: As far as the trend of "Free Fire" is concerned, I think we have seen some preliminary signs from the active user base, and we are still observing the trend. Looking ahead, we hope to stabilize the active user group as soon as possible.

As for profitability, this is not our focus. For large DAU games, once you have a huge user base, profitability usually follows. I don't think the user profile has changed much, and it is the same as our initial target users, because Free Fire is a game with a very large DAU. Its target audience is very wide and has a very diverse community.

So as we focus on better user stickiness, user experience, community building, and responding to user feedback on features, rather than marketing efforts. As you can see, our EBITDA profit margin has not actually changed much, and has actually increased slightly this quarter.

Q8: Regarding the overall strategy, how to maintain a sustainable EBITDA profit margin, and how to reinvest strategically to drive revenue growth while maintaining a certain level of cost and profit margin?

A8: As far as the EBITDA profit margin of e-commerce is concerned, although we did not immediately target maximizing the profit margin, as a leading market participant, even in the early stage, we only achieved profitability in a few quarters, and we saw a very healthy EBITDA profit margin, which now exceeds 30% to 40% in some markets. Therefore, the profit margin is not our top concern. If we want to achieve a high profit margin, we can do it at any time. The problem is how we can maximize our long-term profitability and seize the opportunities available in all markets.

Therefore, our focus is on long-term rather than immediate profit expansion. With healthy profit support, we have more resources to allocate in different markets, invest in different markets, and even further strengthen our ecosystem. Our long-term goal is to build and expand the profitable TAM, strengthen our competitiveness, and respond to market dynamics in each market in the short term.

Q9: You mentioned that the GMV for this quarter is consistent with that of the fourth quarter of last year. Are you referring to the calculation in US dollars or at a fixed exchange rate? How does foreign exchange affect this quarter's GMV or revenue? Can you share the number of orders in Asia and Brazil?

A9: We do not specifically discuss quarterly GMV figures. I mentioned the overall trend. Our observation results for this quarter compared to the previous quarter are consistent with the quarter-on-quarter results for the first quarter of 2022 and the fourth quarter of 2021.

On a fixed exchange rate basis, our e-commerce revenue will grow by 41.7%, and on a US dollar basis, it will grow by 36.3%.

As for our order quantity, it roughly follows the trend of GMV.

Q11: Regarding games, can you provide more information about Tencent's right of first refusal? How should we view this agreement and its potential impact?

A11: I believe your first question is about our commercial agreement with Tencent's game publisher. It will automatically renew unless terminated by either party, and the agreement is publicly archived, so you can refer to the terms there.

Q12: Considering that some games and their marketing expenses will be released in the second half of the year, how should we consider Garena's profit margin?

A12: As far as the profit from the release of new games is concerned, I think there will be some marketing expenses in the initial stage, but we will still maintain a high degree of self-discipline and strictly control it based on the overall performance of the game. So we do not currently believe that this will have a significant impact on market marketing.

Q13: In terms of e-commerce, what are the expectations for the entire Latin American market? Will you reinvest in markets where export business is still operating? How to treat free cash flow?

A13: As far as Shopee's potential plans are concerned, our focus is still on Brazil, which is the largest market in the region, and we have established an important leadership position in our target areas. Obviously, Brazil is our local commercial market, mainly local sellers selling products to local buyers on our platform. For other Latin markets where we still retain some business, we do not have immediate plans to actively develop these markets and will maintain efficiency in these markets.

Q14: What is the total loan amount?

A14: Currently, the disclosed loan amount is the amount on our balance sheet, so it does not reflect the entire loan amount. But you can refer to the information disclosed in the past. We do not expect the loan amount to increase significantly. Overall, our credit business approach focuses on risk management, establishing flexible underwriting capabilities, and better user experience.

Q15: Are you discussing self-developed games or games published for others in the second half of the year?

A15: The new games we mentioned are all third-party published games, not developed by ourselves.

Q16: What is the growth and profit strategy for e-commerce business? How to achieve market share growth?

A16: As for the strategy for growth and profit, in the long run, we will invest in long-term growth opportunities in a profitable and sustainable way, while hoping that we can extend our regional profitability time by focusing on user experience and cost service.

However, in terms of short-term profit and growth, we are not focused on maximizing profits in every period and every market. We pay attention to closely observing market trends, flexibly allocating resources, and adapting to local market conditions. This will be a bottom-up decision-making process. We do this to strengthen our market leadership position, but in the long run, it is more important to expand our total market profit and become a powerful market leader.

Q17: What can be seen from the contribution of Singapore's digital bank? Will regulatory requirements become a priority area?

A17: It is still in a very early stage, so there will be no substantive contribution, whether it is revenue or profit.

Risk Disclosure and Statement of this Article: Dolphin Analyst Disclaimer and General Disclosure