Sea: How to view subsequent growth (3Q24 conference call)

The following is the summary of the Q3 2024 earnings conference call for $Sea(SE.US) . For the financial report interpretation, please refer to Sea: Southeast Asia's Little Tencent Becomes "Little Sweetheart" Again? .

1. Core Financial Report Information Review:

2. Detailed Content of the Financial Report Conference Call

2.1. Key Information Presented by Executives:

Business Progress

1. E-commerce Business (Shopee)
2. GMV (Gross Merchandise Volume) is expected to grow year-on-year by “mid twenties,” with monthly active buyers increasing by over 20% year-on-year.
3. Shopee has achieved positive adjusted EBITDA in the Asian and Brazilian markets, and is expected to continue to be profitable in the future.
4. Seller advertising usage increased by over 10% year-on-year, with advertising revenue per seller increasing by over 25% year-on-year, and the advertising commission rate increasing by over 30 basis points year-on-year.
5. Increased commission and advertising rates, with commission rates in the Southeast Asian market rising as the industry rationalizes.
6. Shopee's logistics service SPX Express has a wide coverage, and order costs have decreased in both the Asian and Brazilian markets.
7. The live streaming and content ecosystem has achieved results, with a 50% quarter-on-quarter increase in live stream hosts, and live stream buyers growing by over 15%.
8. Digital Financial Services (SeaMoney)
9. Both revenue and EBITDA achieved double-digit year-on-year growth.
10. Non-recovered loans increased by over 70% year-on-year.
11. In Q3, 4 million first-time borrowers were added, bringing active borrowing users to 24 million, a year-on-year increase of over 60%. The 90-day non-performing loan (NPL) ratio remained stable at 1.2%.
12. Further expanded business scale through non-Shopee platform loans in Indonesia (such as large loans for offline retail consumption).
13. Digital Entertainment Business (Garena)
14. Free Fire's bookings are expected to grow by over 30% this year, with global daily active users exceeding 100 million, a year-on-year increase of 25%.
15. Free Fire has once again become the most downloaded mobile game globally. The sales of virtual goods during the anniversary celebration have driven an increase in average revenue per user (ARPU)
16. Garena launched "Need for Speed Mobile" and achieved the number one ranking in specific markets; partnered with Tencent to launch the new shooting game "Delta Force," expanding into Southeast Asia, the Middle East and North Africa, and Latin America markets.

2.2 Q&A Analyst Q&A

Q: What is the current competitive landscape in the e-commerce sector for the fourth quarter? We have noticed that your social e-commerce competitors are increasing their commission rates, while cross-border e-commerce competitors are deepening their regional penetration. How do you think these changes will affect the company's revenue and profit growth expectations? What is the company's overall strategy?

A: Regarding the competitive landscape, we observe that the market competition is relatively stable. From our growth performance, while achieving profitability in Asia and Brazil, our growth situation is performing well. Despite the competition, we expect a good performance in the fourth quarter, and will maintain the guidance of 20% GMV growth in the mid-range for this year. Additionally, since most of our sellers are selling local products in local markets, the impact of cross-border competitors on us is relatively small.

Q: Regarding the advertising business, you mentioned that the advertising take rate has increased by 30 basis points year-on-year. What different measures were taken for this increase? Furthermore, what is your view on the potential upper limit of the advertising take rate and its growth timeline?

A: Regarding the advertising take rate, compared to the same period last year, this quarter's advertising take rate has increased by approximately 0.3%. Over the past few quarters, we have made significant improvements to the advertising system from a technical perspective, one of the main optimizations being more precise ad placements through improved algorithms to enhance ad conversion rates and seller return on investment. At the same time, we have improved the traffic distribution algorithm for ads, allowing for more flexible choices on when to display organic search results and ad products.

Additionally, we have optimized the advertising product experience on the seller side, making it easier for sellers to use our advertising services. This has also driven more sellers to use our advertising products, expanding the advertising pool and thereby improving ad matching efficiency. We expect the improvement potential of advertising products to continue to manifest in the coming quarters, although it is still too early to comment on the upper limit of the take rate. In the future, we will continue to improve technology, launch new products, and implement these improvements in various markets.

Q: How should we view the performance of Shopee's business entering 2025, especially in the context of robust economic growth in Southeast Asia and a low-interest-rate environment? Additionally, do you expect competition in the Southeast Asian and Brazilian markets to intensify in 2025? If competition intensifies, how will management balance Shopee's market share growth with profitability?

A: It may be too early to comment on the specifics for 2025, as we are still observing trends in the fourth quarter and plan to provide more accurate guidance in the coming quarters.

Overall, our strategy is to first ensure growth while achieving profitability; while maintaining profitability, we aim to expand growth as much as possible. This is our overall approach in the coming quarters Regarding the competitive situation, as previously mentioned, we see that the competitive environment in South Asia is relatively stable. In the Brazilian market, we have not observed significant changes in the competitive landscape either. Indeed, some players have entered the market through cross-border business models, but cross-border business accounts for a small proportion of our overall business and is also a small percentage of the entire market, thus having limited impact on us. Even when observing the cross-border products offered by these competitors, we still maintain a strong price competitive advantage compared to the products on our platform.

Therefore, unless there is a significant change in the price competitiveness of these cross-border competitors, we believe that it will not have a major impact on consumers' purchasing preferences on our platform.

Q: What is the current proportion of orders in the Asian and Brazilian markets handled by SPX? What are the key drivers for reducing logistics costs per order in the short term? What are the future goals?

A: Regarding SPX business, we are expanding SPX coverage and its delivery share on the Shopee platform. Overall, the current proportion of SPX order deliveries in the Asian market has exceeded 50%, and in the Brazilian market, it has surpassed 70%, and we expect it to continue to grow in the coming quarters. Not only are we enhancing coverage, but we are also working to reduce costs and improve service quality. In the Asian market, more than half of the orders can be delivered within two days.

To reduce SPX costs, we are optimizing every link in the entire value chain. For example, at the initial stage, we optimized the handover process of goods from sellers to the delivery team, improving efficiency through effective management of sellers and logistics teams. In terms of sorting centers, we have increased the level of automation and strengthened the correlation between employee performance and productivity. In the transportation phase, we improved the utilization of long-distance transportation, ensuring efficient loading of trucks. As for last-mile delivery, we innovated the setup of last-mile delivery centers, such as introducing more mobile delivery centers in remote areas. At the same time, we leverage technology to enhance the work efficiency of delivery personnel, helping them optimize delivery routes and reasonably arrange package sequences.

Q: Compared to competitors, what is the unit economics of the company's live streaming business, and how has the feedback from merchants been after Shopee increased the commission rate? Are there plans to further increase the commission rate in the future?

A: In terms of live streaming business, the proportion of live streaming orders on the platform has gradually increased each quarter, and the economic benefits have also improved significantly. This trend is evident across all markets. We expect the economic model of live streaming to continue to improve, ultimately aligning with the overall economic benefits of the platform. Compared to competitors, Shopee's live streaming business performs relatively well in terms of economic benefits. We do not have a fixed timetable for increasing the commission rate; instead, we focus on enhancing platform value while maintaining the balance of the seller ecosystem.

Q: What are the latest developments in the payment business and how is the lifecycle of Free Fire? Are there any new games set to launch soon?

A: Regarding Free Fire, we are very excited about its growth, especially after facing challenges post-pandemic. Over the past two years, we have continuously improved the game through a user-oriented approach, and we are beginning to see results Since the beginning of this year, we have shown outstanding performance and continued throughout the year. We prefer to view the lifecycle of Free Fire as a service or platform rather than a single product. We are confident in building Free Fire into a "timeless" game and platform, and there are currently positive signs. Despite Free Fire being seven years old, it continues to grow, with the growth rate of new users even accelerating, and various metrics showing strong user engagement and retention. This gives us confidence to continue driving the long-term development of the game by enhancing user interaction and optimizing the gaming experience, while continuously updating content to improve user stickiness and meet local user needs.

Q: Regarding the e-commerce business, can you share the latest situation on logistics investment expenditures and their impact on EBITDA margins in the coming quarters?

A: Regarding logistics investment, our logistics business is primarily driven by operating costs rather than being capital-intensive. Core capital investments are focused on sorting equipment and some improvements to distribution and sorting centers. Therefore, this portion of investment accounts for a relatively small share of overall expenditures and is included in the overall EBITDA. We expect that from this perspective, the impact on EBITDA margins will not be significant.

Q: Regarding the e-commerce business, can you explain the reason for the 13% quarter-on-quarter increase in sales and marketing expenses? If viewed as a percentage of GMV, this ratio has also slightly increased by about 10 basis points. Considering your comments on the stability of the competitive environment, when can we expect sales and marketing expenses to start declining? What is the outlook for this figure next year?

A: The increase in sales and marketing expenses in the third quarter was driven by two main factors: first, the increase in investment driven by revenue growth. As the company raised the commission rates for sellers, some of the increased revenue was invested in sales and marketing to compensate for the higher seller rates. Second, the third quarter is a peak promotional season for e-commerce compared to the second quarter, which is a low season, so the marketing expenses resulting from promotional activities naturally increased. These changes in expenses are more related to the business rhythm rather than competitive factors.

Q: Regarding the digital financial services (DFS) business, how is the growth situation in markets other than Indonesia? What specific measures has the company taken to drive significant growth this quarter?

A: The digital financial services business is not only growing well in Indonesia, but also shows good momentum in Thailand, Malaysia, and Brazil. Shopee's "SPayLater" product has achieved good user penetration in these markets, helping to drive the growth of the digital financial services business. At the same time, the company is optimizing existing products and launching customized products such as risk pricing and new installment loans for high-quality users. In addition, Shopee has also expanded "SPayLater" to offline payments, supporting large consumption scenarios including mobile phones and home appliances, and is gradually promoting it to the Philippines and Malaysia. In the future, the company will continue to expand the countries and user scenarios covered by its products, further broadening the user base for digital financial services Q: What are the key business objectives for 2025? What measures have been taken in the Digital Financial Services (DFS) sector to promote user growth and deepen product penetration? What are the growth and profit margin expectations for the DFS segment?

A: In 2025, the key priorities for Digital Financial Services (DFS) include maintaining strong growth momentum and market penetration. We are currently on a good growth trajectory and hope this momentum continues through 2025, while also focusing on the quality of growth, not only achieving high growth rates but also ensuring profitability improvement. Each business unit has a solid foundation to provide sustainable profitable growth.

For the CMS business, we will further penetrate the Shopee user base, optimizing products to cover more users and expanding more application scenarios outside the Shopee ecosystem to better meet user needs. This applies not only to the Indonesian market but also to other countries where we conduct financial services. Currently, no significant changes in profit margins have been observed this quarter or in the coming quarters.

Q: Regarding the e-commerce business, how do you view the remaining profit growth potential in the Southeast Asian market? We believe that the e-commerce penetration rate in major Southeast Asian cities is already quite high; does this mean that after achieving profitability in Brazil, Shopee will consider further expansion outside Asia?

A: Regarding e-commerce penetration rates, if we observe the current situation in major markets, we still see considerable room for growth compared to more developed e-commerce markets. Overall, from a macro perspective, we believe that even in urban areas, there is significant potential for e-commerce penetration to improve. For example, in Indonesia, comparing the Jakarta area, Java Island, and areas outside Java Island, there is still much room for improvement in penetration rates even in the surrounding Jakarta or other cities in Java.

Some of the growth will be driven by cost optimization, such as further reducing logistics and delivery costs. Improvements in service quality and the increasing purchasing power of young consumers will also drive natural growth in penetration rates. Additionally, some users who previously did not frequently use e-commerce will gradually become regular users. Overall, we believe there is still significant room for improvement in e-commerce penetration rates.

Regarding expansion outside of Asia, our core market is Brazil, which has huge potential. In the short term, we do not have specific plans for expansion outside of existing markets.

Q: Regarding the company's cash and investments, which are close to $10 billion. How much capital does the company need to retain on its balance sheet? Is there consideration to return some funds to shareholders?

A: Regarding capital allocation, we always prioritize creating and maximizing value for shareholders. We maintain an open mindset and continuously evaluate various opportunities and options to maximize shareholder value. Stock buybacks are one way to do this, but there are also other options. When suitable opportunities arise, we will formulate plans and communicate with shareholders.

Q: Considering the investment plans in the Brazilian market, how should we view the profit margins in this market in the future? How do you view the future development of credit business in Brazil?

A: In the Brazilian market, as our newest market, we are pleased to have achieved EBITDA breakeven this quarter. Overall, we hope to further expand the market while maintaining profitability, although there may be some fluctuations during this period For the credit business in Brazil, as mentioned earlier, we launched this business a few quarters ago and achieved good penetration through the Shopee platform. At the same time, we also launched cash loan products in Brazil, which have achieved a high acceptance rate. More importantly, we are gradually optimizing the risk model in Brazil, which gives us more confidence in further expansion in this market. Therefore, overall, we are optimistic about the development potential of digital financial services in Brazil in the coming quarters.

Q: With all businesses having achieved EBITDA breakeven, what will be the main investment focus in the future?

A: In terms of investment, we have adopted a prudent strategy. For example, investments in logistics typically have a return cycle of 9 to 36 months, and such investments can quickly contribute to EBITDA by optimizing the cost structure. For digital financial services, core investments are mainly focused on user acquisition, ensuring that we attract the right users. We ensure that each new user achieves substantial profits within the next year by measuring the profitability of each user.

In e-commerce, we will also invest in user acquisition and adopt a prudent approach, comparing customer lifetime value with acquisition costs. In most cases, the customer lifetime value can achieve breakeven with acquisition costs within a year.

Q: Regarding the digital financial services (DFS) business, significant progress has been made in this area over the past few quarters, and the growth of revenue and outstanding principal has also accelerated significantly this quarter. Could you elaborate on the main driving factors behind this? What will be the main drivers of growth for this business in the coming years?

A: In the digital financial services (DFS) business, the main sources of growth include user growth and product expansion. First, we plan to convert more e-commerce users into digital financial services users and gradually attract non-e-commerce users to become DFS users. Second, by optimizing existing products to better serve user groups with different risk preferences, we will also expand the product portfolio to meet the diverse needs of users at different stages of their lifecycle. In terms of national layout for DFS, we started in Indonesia, and other countries are also benefiting from the experience of early markets, allowing us to attract users more efficiently and launch targeted products.

Q: Regarding the leverage effect of the e-commerce business, will the improvement in profitability be a gradual process? Or will the leverage effect quickly take effect after reaching a certain scale, leading to significant profit increases?

A: Regarding the profitability of the e-commerce business, profit increases can be both gradual and may also see significant jumps when the market stabilizes. In an environment without external shocks, we expect profitability to gradually improve as the ecosystem expands and the costs of upstream and downstream services decrease. Additionally, we have optimized internal operating costs; for example, we have maintained the same number of customer service team members even as orders increase. All of these will help gradually improve profitability. However, with further market stabilization, there may also be significant profit jumps in the future

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