Before the US stock market opened on the evening of August 13th Beijing time, Southeast Asia's "mini-Tencent" Sea announced its financial report for the second quarter of 2024. Compared to conservative expectations, the actual performance was better, with the following key points:

1. The most crucial Shopee e-commerce sector had a GMV of 23.3 billion this quarter. Although it slightly decreased compared to the previous quarter due to seasonal factors, it exceeded the more conservative market expectations by about 430 million. The price-volume driving force maintains the trend of trading volume for price, with no significant changes compared to the previous two quarters. However, looking at it on a quarter-on-quarter basis, Shopee's GMV has not shown significant growth for three consecutive quarters. It is necessary to pay attention to whether Shopee's growth has once again entered a bottleneck period.

On the revenue side, the monetization rate continued to increase by about 0.5 percentage points to 10.8% quarter-on-quarter, with a 34% year-on-year revenue growth, significantly higher than the GMV growth rate. Moreover, with an accelerated quarter-on-quarter growth, actual revenue exceeded expectations by about 8%. We noticed that e-commerce platforms such as Tiktok Shop and Shopee in Southeast Asia are still "collaborating" to improve monetization. The increase in monetization rate is obviously beneficial to the company's performance, but its sustainability and potential reversal need to be monitored.

2. Garena gaming sector: At first glance, revenue under GAAP decreased by 18% year-on-year to 436 million, significantly lower than the market's expected 510 million. However, this is mainly due to the impact of deferred revenue changes. Excluding this impact, revenue actually increased by 16% year-on-year. Also, key operating indicators show signs of continued business recovery. This quarter, active users increased by 53.3 million quarter-on-quarter, and paying users increased by 3.6 million. Gaming revenue also increased by 5% this quarter, reflecting that the performance of the Garena sector is not poor.

3. SeaMoney maintains a high-quality growth, achieving revenue of 520 million this quarter, with a growth rate remaining at 21%, seemingly entering a growth plateau. In terms of key operating indicators, the outstanding loan balance under the new criteria this quarter was 3.5 billion US dollars, an increase of 200 million quarter-on-quarter. The bad debt ratio decreased from 1.4% last quarter to 1.3%, indicating good risk control.

4. In terms of segment profitability, the most crucial e-commerce sector incurred a loss of 85 million this quarter. In a situation where the market is generally concerned about the possibility of expanding losses, the actual loss narrowed quarter-on-quarter, stronger than expected in terms of revenue and profit. Due to the lower revenue recognized under GAAP in the gaming sector, operating profit also decreased by 11% quarter-on-quarter, about 20% less than market expectations. We believe that this is also due to the mismatch in revenue and expense recognition cycles, but it is necessary to monitor whether the trend of a 3.4 percentage point decrease in the gaming sector's profit margin this quarter will continue. Although the DFS financial sector's revenue growth was slightly lower than expected, it contributed an operating profit of 150 million, better than the expected 6%. Moreover, the profit margin also increased by nearly 2 percentage points quarter-on-quarter, with continued operating leverage.

5. Overall, mainly due to the stronger-than-expected growth of the e-commerce sector, Sea's overall revenue this quarter reached 3.81 billion, a year-on-year increase of 23%, which is consistent with the previous quarter and did not slow down, exceeding market expectations by 3 percentage points.

On the expense side, the total expenditure on four operating expenses amounted to 1.59 billion, slightly higher than the 1.56 billion in the previous quarter, but the increase was not significant. In comparison, the market originally expected greater investment intensity this quarter under competition, but the actual expenditure was slightly lower than expected by 1%.

The company's operating profit for this quarter was 83 million, an improvement from the 71 million in the previous quarter, without a significant decline as some sellers were concerned about.

Dolphin Research View:

From the performance of the quarter, Shopee's e-commerce business showed a lower sequential decline in GMV compared to expectations, with higher monetization rates and stronger revenue performance. It also did not incur larger losses as feared due to increased investment, but instead narrowed. The gaming business, in terms of operating indicators such as user numbers and revenue, also shows signs of stable recovery. As for the financial sector, it is the least worrisome with stable and relatively high-speed growth, and a slight increase in profit margins.

In other words, most of the previous concerns have not materialized, and the performance continues to show signs of stability and improvement. At the same time, the company has raised its full-year GMV growth rate guidance from 15%-19% to mid-double digits, indicating that the growth rate in the second half of the year will also be maintained at slightly below 20%. Therefore, from a short to medium-term perspective, based on the current good performance trend, we believe that the stock price trend will not be poor given the current valuation not being significantly expensive.

However, from a long-term perspective, we believe that the competitive landscape of Southeast Asian e-commerce is unlikely to remain in its current relatively peaceful state forever. Shopee, Lazada, Tiktok, and Temu are all players with strong shareholder strength, and the ultimate winner will be determined. The current sustained increase in monetization rates for over a year is also ultimately unsustainable. Dolphin Research has not yet seen a clear long-term outlook that can establish lasting faith.

Below is a detailed interpretation of the financial report:

I. Shopee's Growth Slowing Again? At Least Better Than Expected

This quarter, Shopee's GMV reached 23.3 billion, slightly lower than the previous quarter due to seasonal factors, but within market expectations. In actuality, it exceeded market expectations by approximately 430 million. However, in terms of trends, after the rapid growth period from 2Q to 4Q last year, Shopee's GMV volume has almost stagnated for three quarters. It is worth noting whether after the end of the dividend period when Tiktok Shop was banned, Shopee's growth has once again encountered a bottleneck.

Breaking down the price and volume, this quarter's order volume is 2.5 billion, slightly lower than the previous quarter, but with a year-on-year growth rate of 40% on a lower base, still significantly outperforming GMV growth.

The average order value is still down by 8% year-on-year to $9.3, continuing the "cost-effectiveness" route of trading price for volume. However, looking at it on a quarter-on-quarter basis, the average order value has seen a slight increase, and it is worth noting whether this trend will continue.

Revenue growth remains significantly stronger than GMV, with a 34% year-on-year increase, while revenue is accelerating as GMV growth slows down. Actual revenue is about 8% higher than expected, reflecting that Shopee's monetization rate is still significantly increasing.

According to our calculations, the monetization rate of the platform business has continued to increase by about 0.5 percentage points to 10.8% on a quarter-on-quarter basis. We understand that e-commerce platforms such as Tiktok Shop and Shopee in Southeast Asia are still "collaborating" to improve monetization. We believe that the increase in monetization rate is obviously beneficial to the company's performance, but from a competitive perspective, the increase in monetization rate ultimately comes at the expense of higher burdens on merchants and cannot be sustained indefinitely.

II. The gaming business performance is not bad, and user revenue continues to recover.

At first glance, Garena's GAAP revenue in this quarter decreased by 18% year-on-year to 436 million, significantly below the market's expected 510 million. However, this is mainly due to changes in deferred revenue, with an additional 100 million in deferred revenue this quarter compared to the past few years of continuously "drawing water" from the deferred revenue pool.

In terms of operating metrics, this quarter saw an increase of 53.3 million active users quarter-on-quarter, with 3.6 million more paying users, both significantly higher than expected. The trend of user return is still ongoing.

With strong user growth driving it, the key game revenue this quarter continued to increase by 5% to 540 million. Therefore, the performance of Garena's gaming business this quarter is not bad, showing a gradual recovery trend.

III. Financial business risks are under control, steadily growing

SeaMoney achieved revenue of 520 million this quarter, with a growth rate of 21% this quarter, after a continuous steady slowdown, it seems to have entered a growth platform stage in the low 20s. In other key operating indicators, the new loan balance unrecovered this quarter under the new criteria was 3.5 billion US dollars, an increase of 200 million from the previous quarter. The bad debt ratio has decreased from 1.4% last quarter to 1.3%.

Overall, SeaMoney continues to grow at a high rate under controllable risks.

IV. E-commerce sector losses have not widened, attention needed on the decline in gaming profit margins

In summary, in terms of growth, although the e-commerce sector's growth has stalled compared to expectations, it is stronger. While Garena's gaming sector revenue seems weak, users and revenue continue to recover, and SeaMoney maintains a high-quality growth trend. Overall, the growth side may not be outstanding, but at least it is not bad.

In terms of profitability, the most critical e-commerce sector continued to lose 85 million this quarter, although the market generally worried that the losses might expand, they actually narrowed compared to the previous quarter, which is a significant highlight.

Due to lower revenue recognized under GAAP, the operating profit of the gaming sector also decreased by 11% compared to the previous quarter, significantly lower than the market's expectation of nearly 20%. In addition, due to mismatched revenue and expense inputs, partly due to the company's increased investment, the profit margin of the gaming sector decreased by 3.4 percentage points this quarter, and this trend needs to be monitored.

DFS financial sector revenue growth was slightly lower than expected, but contributed an operating profit of 150 million, better than the expected 6%. Moreover, the profit margin also increased by nearly 2 percentage points compared to the previous quarter, with operating leverage continuing to be released.

V. Overall performance slightly better than conservative expectations

Mainly due to stronger-than-expected growth in the e-commerce sector, Sea achieved a total revenue of 3.81 billion this quarter, a year-on-year increase of 23%, which is in line with the previous quarter and did not slow down, exceeding market expectations by 3 percentage points.

At the gross profit level, this quarter the company achieved a total gross profit of 1.59 billion, with a gross profit margin roughly stable at 42% compared to the previous quarter, without the expected increase in margin. However, looking at the breakdown, the gross profit of the gaming and self-operated retail businesses increased compared to the previous quarter, while the gross profit of the e-commerce and financial businesses remained stable. In other words, the gross profit margins of each segment actually remained stable or improved, but the overall gross profit margin of the company remained stagnant due to the increasing proportion of low-margin businesses in the revenue structure.

On the expense side, the total expenditure on the four operating expenses was 1.59 billion, slightly higher than the 1.56 billion in the previous quarter, but the increase was not significant. In comparison, the actual expenditure this quarter was 1% lower than expected, as the market originally expected greater investment intensity under competition.

Finally, the company's operating profit for this quarter was 83 million, an improvement from 71 million in the previous quarter, without a significant decline as some sellers had feared.