Sea: Southeast Asia's little Tencent becomes "Little Sweetheart" again?

On the evening of November 12, Beijing time, Southeast Asia's little Tencent $Sea(SE.US) announced its Q3 2024 financial report before the US stock market opened. All indicators exceeded expectations, showcasing a strong performance, with key points as follows:

1. The key Shopee e-commerce segment achieved GMV of 24.1 billion, a year-on-year increase of nearly 25%, significantly better than the market expectation of 22% year-on-year growth. Moreover, on a trend basis, the growth rate decreased by about 4 percentage points compared to the previous quarter, but considering the high base effect, it can essentially be viewed as not slowing down. Combined with the company's guidance of "mid-twenties" GMV growth for the entire year of 2024, we take the upper limit of 27%, implying a GMV growth rate of about 20% for Q4, considering that GMV growth had already significantly recovered in Q4 of last year, the guidance is also quite good.

In terms of revenue, Shopee's revenue growth rate reached 43% year-on-year this quarter, significantly outperforming the GMV growth rate. Compared to the previous quarter, revenue growth accelerated by a full 9 percentage points, which is quite strong. The recent (second time this year) widespread increase in monetization rates across various markets by Shopee is a significant contributing factor. It is estimated that Shopee's monetization rate increased by about 0.6 percentage points to 11.6% this quarter, with the increase being the highest since 2023. Fundamentally, the current e-commerce competition in Southeast Asia is becoming more rational, with all players working together to improve monetization and create favorable conditions for profit.

2. The SeaMoney segment is the biggest highlight of this quarter's performance. Revenue surged by 38% year-on-year to nearly $620 million, with a sequential growth rate increase of 17 percentage points, and actual revenue exceeding expectations by nearly 13%. According to the company's disclosure, the strong performance is backed by an unrecovered loan balance reaching $4.6 billion this quarter, a year-on-year increase of 73% ( last quarter's year-on-year growth was less than 40% ), with the promotion of BNPL (Buy Now, Pay Later) business likely contributing significantly. Meanwhile, the proportion of overdue loans over 90 days continued to decrease by 0.1 percentage points to 1.2% this quarter (compared to 1.6% in the same period last year), indicating that while the loan volume has significantly increased, the loan quality has actually improved.

3. Compared to the other two major segments, the Garena gaming business's performance was slightly weaker, mainly because the active user count this quarter was about 630 million, with 50 million paying users, slightly lower than the previous quarter and below market expectations. However, the user count still showed significant year-on-year growth this quarter, and the contribution from paying users also stopped declining year-on-year, thus the most critical gaming revenue grew by 24% year-on-year this quarter, accelerating by 3 percentage points compared to the previous quarter, which was slightly higher than market expectations. Overall, although the unexpected decline in user numbers is a potential negative signal, at least the performance of the gaming segment this quarter remains relatively stable.

4. In terms of segment profitability, the most 关注 ed e-commerce segment lost $37 million this quarter, with the loss narrowing as expected and being less than the market expectation of $48 million. Although not particularly impressive, it at least confirms the trend of Shopee's business gradually turning profitable.

The profit of the gaming segment this quarter was $260 million, a nearly 25% increase quarter-on-quarter. The profit margin of the gaming business improved (from 48% last quarter to nearly 53% this quarter), likely due to a significant reduction in expense inputs.

The DFS financial segment maintained a relatively stable profit margin (28.3% this quarter vs. 29.1% last quarter), achieving an operating profit of $170 million, continuously setting new highs.

5. Overall, due to the strong performance of various segments, Sea achieved total revenue of $3.81 billion this quarter, a year-on-year increase of 31%, with a quarter-on-quarter growth rate increase of about 8 percentage points, exceeding expectations by about 6.4%.

In terms of gross profit, the gross profit margin increased from less than 42% to 43% this quarter, and the gross profit margins of all segments slightly improved quarter-on-quarter. Due to the slight increase in gross profit margin, the actual gross profit amount exceeded expectations by 7.9%.

In terms of expenses, the total expenditure on four operating expenses was nearly $1.7 billion, a year-on-year increase of about 5%, with the expense ratio continuing to be passively diluted under higher revenue growth. Quarter-on-quarter, the total expense ratio decreased from 40.6% to 39.3%.

It is also worth noting that this quarter's marketing expense for Shopee (accounting for about 87% of total marketing expenditure) decreased by about 4%.

Ultimately, Sea's operating profit this quarter reached $200 million, far exceeding the expected $160 million, with an operating profit margin of 5%. According to the company's more focused adj. EBITDA metric, this quarter it was $520 million, exceeding expectations by about 8%, with the beat margin slightly larger than that of gross profit.

Dolphin Investment Research Opinion:

From Sea's performance this quarter, it is undoubtedly quite impressive. Except for the slightly higher quarter-on-quarter decline in user numbers in the gaming segment, all other indicators exceeded expectations, with basically no points to criticize.

Beyond the numbers, from the development of each segment, the financial segment, leveraging the promotion of BNPL business, currently seems to have entered another performance explosion period, with both revenue and profit accelerating growth again. Moreover, the financial lending business inherently has characteristics of "low cost, high leverage, and high profit." Although it is still unclear which new monetization channels/businesses the company will expand into, at least the potential for imagination is undoubtedly considerable Although the gaming business still heavily relies on the single game Free Fire, there is currently no bullish outlook. However, at least with the stabilization of revenue and user numbers, this segment will no longer drag down the overall performance of the group.

As for the most critical e-commerce business, while we believe that Southeast Asian e-commerce will eventually determine a winner in the long run, the current truce is only temporary and not permanent. However, looking at the present, in the past few quarters, Shopee, Lazada, and TikTok have worked together to enhance monetization, and the profits of each company have significantly improved, confirming that the Southeast Asian e-commerce industry is indeed in a "sweet period" of rational competition where everyone can make money. Recently, the Indonesian government announced a ban on cross-border e-commerce operations by Temu, Shein, and others, which also creates a temporary protection period for existing players (it is highly likely that Temu will enter Indonesia through partnerships with local platforms).

From a valuation perspective, since the Shopee segment is currently on the edge of breakeven, there is a significant gap in the market's judgment of its future profitability prospects. Using the most universal PE valuation metric, Sea's market capitalization corresponds to a PE valuation of approximately 22+ to 30+ times the net profit for 2026. Clearly, the current valuation already reflects a considerable portion of expectations for future growth. However, due to the market's lack of accurate grasp of the company's medium- to long-term profitability prospects, Sea's stock price in the short term will still depend more on the direction of marginal changes in performance.

The following is a detailed interpretation of the financial report:

1. Enhanced monetization without sacrificing growth: Is Southeast Asian e-commerce back in the sweet period?

First and foremost, the key Shopee e-commerce segment achieved GMV of 24.1 billion, a year-on-year increase of nearly 25%, significantly better than the market expectation of 22% year-on-year growth. Moreover, on a trend basis, the quarter-on-quarter growth rate only declined by about 4 percentage points. Considering the impact of a higher base, it can be said that there are basically no signs of a slowdown in growth. Combined with the company's guidance of "mid-twenties" GMV growth for the entire year of 2024, taking the upper limit of 27%, it implies a GMV growth rate of about 20% for Q4, which is still considered a decent growth guidance given that last year's Q4 base was already significantly elevated.

Breaking down price and volume, the year-on-year growth rate of order volume this quarter was 24%, which is a significant slowdown compared to last quarter's 40%. Fortunately, due to the end of the trend of declining average order value caused by live e-commerce and price subsidies, the average order value actually increased by 1% this quarter (last quarter was -8%), thus despite the significant slowdown in sales growth, GMV growth can still remain robust.

On the revenue side, Shopee's revenue growth rate reached 43% year-on-year this quarter, significantly outpacing GMV growth. Compared to the previous quarter, revenue growth accelerated by a full 9 percentage points, which can be described as strong.

It is understood that enhancing monetization rates remains one of the common understandings among Southeast Asian e-commerce platforms. Since the beginning of 2024, Shopee has fully enhanced performance rates in various markets twice, once at the beginning of the year and another between July and September. Theoretically, continuously improving monetization rates will increase costs for merchants or consumers, which is not conducive to the growth of the platform's transaction scale.

However, as seen in the table below, even after multiple increases in monetization rates, Shopee's current take rate is generally consistent with its competitor Lazada and does not lead to a competitive disadvantage. According to research, while Shopee raised the monetization rate in the Singapore market by about 150 basis points, it lowered the service fee for Coin Cashback by 200 basis points and increased the issuance of free shipping vouchers. This indicates that Shopee is not solely raising the platform's monetization level but is reinvesting part of the incremental revenue to improve consumer experience or reduce merchants' operating costs.

Due to the aforementioned adjustments, it is estimated that Shopee's platform business monetization rate increased by about 0.6 percentage points this quarter to 11.6%, marking the highest increase since 2023. Furthermore, the increase in monetization rate almost entirely stems from marketplace services (high profit margin) rather than VAS (such as delivery fees) and other low-margin charges. Therefore, the quality of the monetization rate has also improved.

II. SeaMoney's financial business experiences explosive growth, the biggest highlight of this quarter

The biggest highlight of the company's performance this quarter comes from the SeaMoney segment. Revenue surged 38% year-on-year to nearly $620 million, with a sequential growth rate increase of 17 percentage points, and actual revenue exceeded expectations by nearly 13%, clearly making it the segment with the largest beat this quarter. According to the company's disclosure, the strong performance of the financial business this quarter is attributed to the fact that the outstanding loan balance reached $4.6 billion, a year-on-year increase of 73% (compared to less than 40% year-on-year growth last quarter) According to the company's explanation, the promotion of BNPL (Buy Now, Pay Later) business should have made a significant contribution.

In addition, the proportion of overdue bad debts that have not been repaid for more than 90 days continued to decline by 0.1 percentage points this quarter to 1.2% (compared to 1.6% in the same period last year), indicating that while the loan volume has clearly increased, the loan quality has also improved.

3. Although the Garena gaming segment is not outstanding, it is also not poor.

Although the performance of the Garena gaming business is slightly inferior compared to the other two major segments, it is still considered decent compared to expectations.

In terms of key operating indicators, the number of active users this quarter is approximately 630 million, with 50 million paying users, slightly down from the previous quarter, and both figures are slightly below market expectations of 637 million and 52 million.

However, despite the shortfall in expectations, the number of users has still shown significant year-on-year growth this quarter, and the revenue contribution per paying user has also stabilized year-on-year at $11.1. Therefore, the key gaming revenue has increased by 24% year-on-year this quarter, accelerating by 3 percentage points compared to the previous quarter, which is slightly higher than market expectations.

Due to the accelerated growth of gaming revenue, Garena's revenue under GAAP decreased by 16% year-on-year this quarter, narrowing by 2 percentage points compared to the previous quarter, and the actual revenue exceeded expectations by about 5%. The main reason for the year-on-year decline in GAAP revenue is that deferred gaming revenue has risen again. Overall, although the unexpected decline in the number of users is a potential negative signal, the performance of the gaming segment this quarter is still showing marginal improvement.

4. The e-commerce segment's losses have narrowed as expected, and profits across all segments have exceeded expectations. In summary, from the revenue perspective, the financial sector performed the strongest, while the e-commerce and gaming sectors also performed well, overall exceeding expectations. So, how did each business perform in terms of profitability?

The most 关注的 e-commerce sector lost $37 million this quarter, with the loss narrowing as expected, and it was less than the market expectation of $48 million. Although not particularly impressive, the key point is that it validated the trend of Shopee's business gradually turning profitable.

The gaming sector's profit this quarter was $260 million, with a quarter-on-quarter growth of nearly 25% (GAAP revenue increased by 14% quarter-on-quarter). It can be seen that this quarter the profit margin of the gaming business has improved (from 48% last quarter to nearly 53% this quarter). Dolphin Investment Research speculates that there should be a significant reduction in expense input.

The DFS financial sector maintained a relatively stable profit margin (this quarter 28.3% vs. last quarter 29.1%), achieving an operating profit of $170 million, continuously setting new highs.

From an expectation perspective, except for the e-commerce sector which cannot be compared due to negative profit, the actual profit amounts of the gaming and financial sectors were about 8% to 9% higher than expected.

Five, revenue, gross profit, and profit, the beat magnitude is layered and amplified

The revenues of the three major sectors of e-commerce, finance, and gaming all exceeded expectations, especially with the significant contribution of accelerated growth in the financial sector, this quarter Sea achieved overall revenue of $3.81 billion, a year-on-year increase of 31%, with a quarter-on-quarter growth rate increasing by about 8 percentage points, exceeding expectations by about 6.4%.

In terms of gross profit, this quarter the company achieved a total gross profit of $1.86 billion, with the gross profit margin increasing from less than 42% to 43% quarter-on-quarter, and looking at the breakdown, the gross profit margins of each sector have slightly improved quarter-on-quarter. Based on the strong revenue growth and a slight increase in gross profit margin, the actual gross profit amount exceeded expectations by an amplified margin of 7.9%.

In terms of expenses, the total expenditure for the four operating expenses was nearly $1.7 billion, a year-on-year increase of about 5%, which lagged behind the revenue growth rate, resulting in a continued dilution of the expense ratio. On a quarter-on-quarter basis, the total expense ratio decreased from 40.6% to 39.3%.

It is worth noting that this quarter's marketing expenses for the Shopee business (accounting for about 87% of the total) actually decreased by about 4%, combined with the rebound in average order value, it can be inferred that the company is indeed facing reduced competitive pressure and has decreased its subsidy efforts.

Due to the passive dilution of expense spending under higher revenue growth, Sea's operating profit for the quarter reached $200 million, far exceeding the expected $160 million, with an operating profit margin of 5%.

However, according to the company's more focused adj.ebitda metric, this quarter it was $520 million, about 8% higher than expected, with the beat magnitude roughly close to the gross profit, slightly higher.

Dolphin Investment Research's past analysis on [Sea]:

August 13, 2024, conference call summary **《 Sea: Will the good growth trend in e-commerce and gaming continue?》

August 13, 2024, financial report commentary 《 Sea: Strength shatters ghost stories, Southeast Asia's little Tencent is still doing well 》

May 17, 2024, financial report commentary 《 Southeast Asia's little Tencent: "Dead enemies" turn into "friends," is Sea rising again? 》

May 17, 2024, conference call summary 《 Sea: I believe e-commerce competition will no longer be extreme 》

March 5, 2024, financial report commentary 《 [Tiktok's absence brings a turnaround, is SEA's spring coming?](https://longportapp.com/zh-CN/topics/11906556? app_id=longbridge) 》

March 5, 2024 Conference Call Minutes 《 Sea: E-commerce GMV is expected to achieve around 18% growth in 2024 》

November 15, 2023 Financial Report Commentary《 SEA: Jumping left and right, successfully played itself to collapse》

November 15, 2023 Conference Call《 SEA: Seizing the time window, investing heavily in live streaming & logistics facilities》

August 15, 2023 Conference Call《 SEA: Focusing on user scale and engagement, seizing live streaming opportunities》

August 15, 2023 Financial Report Commentary《 Little Tencent SEA: After amputating to survive, backlash surges ？》

May 17, 2023 Conference Call《 SEA: Not entangled in short-term profits, focusing on long-term profits》

May 17, 2023 Financial Report Commentary《 Little Tencent SEA: Will it be dragged into the abyss by a rotten game again?》

March 8, 2023 Conference Call《 SEA: No intention to stir again, prioritizing profits in 2023》

March 8, 2023 Financial Report Commentary《 Everything to survive! Little Tencent SEA amputates to survive》

In-depth:

June 8, 2022《Dual business flywheel stalled, SEA deeply trapped in transformation pain period》

January 10, 2022《Staying in one corner or launching across the sea? Southeast Asia remains SEA's "dragon's birthplace"》

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure