SEA: Didn't drop the ball, still "Little Tencent"

On the evening of March 4th, Beijing time, Southeast Asia's small Tencent $Sea(SE.US) announced its Q4 2024 financial report. Overall, the growth and profit improvement of the e-commerce sector exceeded expectations, which is the biggest highlight. However, there are some hidden risks in the underlying operating indicators of the gaming and financial sectors. The key points are as follows:

1. The most critical Shopee e-commerce sector saw GMV reach $28.6 billion, a year-on-year increase of nearly 24%, significantly better than the market expectation of 18% year-on-year growth. In terms of trends, the quarter-on-quarter growth rate only decreased by about 1 percentage point, and despite entering a high base period, the growth resilience of the e-commerce business is significantly stronger than expected.

Breaking down price and volume, the order volume this quarter saw a year-on-year growth rate of 20%, slowing down by 4 percentage points quarter-on-quarter, indicating a slowdown in volume growth. However, the average order value rebounded by 3% (due to the fading impact of live e-commerce and price subsidies), which supported GMV growth.

In terms of revenue, this quarter, Shopee's revenue grew by 41% year-on-year, significantly stronger than the market expectation of 35% growth, and only decreased by 2 percentage points quarter-on-quarter. The revenue outperformance mainly stems from the transmission of GMV growth exceeding expectations.

Regarding the monetization rate, Shopee's platform monetization rate increased by only 0.1 percentage points quarter-on-quarter this season, the smallest increase since Q4 2023. However, the high-profit marketplace monetization rate still increased by 0.4 percentage points quarter-on-quarter, mainly because the monetization rate of VAS (such as delivery fees), which has a lower profit margin, decreased by 0.3 percentage points. Therefore, although the increase in monetization rate this quarter has narrowed, its impact on profits will not be significant.

2. The rising star DFS financial sector saw its core indicator -- the outstanding loan balance reach $5.1 billion, a year-on-year increase of 64%, but it was lower than the expected $5.44 billion (+75% year-on-year).

However, the sector's revenue surged by 55% year-on-year, accelerating by 17 percentage points quarter-on-quarter, far exceeding the market expectation of 36% growth. This is contrary to the growth trend of the loan balance. It can be speculated that the company's main focus in the financial business this quarter was on improving the monetization rate rather than expanding the business scale.

3. In the key operating indicators of the Garena gaming sector, this quarter, the number of active users was approximately 620 million, with 50 million paying users, while the former decreased by about 11 million quarter-on-quarter. Both indicators were below market expectations by 3% and 2%, respectively. The continued loss of active users is a bad signal.

Fortunately, the market's expectations for revenue are not high, with a year-on-year growth expectation of 18% and a quarter-on-quarter slowdown of 6 percentage points. Therefore, the actual growth of 19% is still better than expected. In terms of price and volume, the number of paying users remained flat quarter-on-quarter, but the average spending per user deteriorated from flat year-on-year last quarter to -6% year-on-year this quarter, which is the main reason for the slowdown in revenue growth Overall, the company's gaming business ecosystem shows signs of deterioration again, with poor performance.

4. In terms of profitability, the most 关注的 e-commerce segment achieved approximately $80 million in operating profit this quarter, significantly better than the expected less than $20 million. The operating profit margin reached 2.2%, clearly better than the expected 0.5%, with the profit release pace of the e-commerce business faster than expected.

However, the DFS financial segment achieved $198 million in operating profit this quarter, significantly lower than the sell-side expectation of $230 million, and the segment's profit margin was 27%, showing a certain decline compared to the previous two quarters' levels of 28%~29%. This is mainly due to the marketing expenses of the financial segment nearly doubling quarter-on-quarter this season. As the business scale grows rapidly, the necessity of expense investment seems to have increased to maintain high double-digit growth.

As for the gaming segment's profit this quarter was $270 million, better than the sell-side expectation of $250 million. The profit margin of the gaming segment reached 52%, up 0.9 percentage points year-on-year, but slightly down from last quarter's 52.7%. Overall, the profit performance of the gaming segment is relatively stable.

5. Overall, Sea achieved revenue of $4.95 billion this quarter, a year-on-year increase of 37%, with the growth rate rising by 6 percentage points quarter-on-quarter, indicating quite strong growth. However, due to the underlying operational indicators' flaws in the financial and gaming segments, the actual value is not as high as it seems.

On the gross profit level, the company's overall gross profit margin increased from 43% to 45%, mainly due to the overall gross profit margin of the e-commerce and financial segments rising by 2 percentage points quarter-on-quarter. Combined with the previous text, the rising monetization rates of both e-commerce and financial businesses should be the main reasons for the increase in gross profit margin.

On the expense side, the total expenditure of four operating expenses was nearly $1.95 billion, a year-on-year increase of 19%, indicating a certain rebound in expense investment. The total expenses accounted for 39.5% of revenue, slightly up from last quarter's 39.3%.

Specifically, the growth of marketing expenses accounted for approximately 0.9% of revenue, rising to 21.2%. By segment, the marketing expense ratio of Shopee's e-commerce business actually decreased by 0.7 percentage points quarter-on-quarter. However, the gaming marketing expense ratio increased by 48% year-on-year, showing a relatively significant growth, and the marketing expenses of the financial segment nearly doubled from last quarter's $66 million to $120 million, with a relatively noticeable increase in marketing expenses.

Although the overall operating expense ratio slightly increased by 0.2 percentage points quarter-on-quarter, due to the rising monetization rate, the gross profit margin increased by a full 2 percentage points quarter-on-quarter. Therefore, Sea's overall operating profit margin still rose to 6.2% (vs. last quarter's 4.7%), with actual operating profit of approximately $310 million, about 18% higher than the expected $260 million, and the profit release speed is still better than expected.

Dolphin Research Insights:

After nearly tripling in market value over the past year, investors are inevitably faced with the question: "Is there still investment value in the company after such a significant increase?"

To answer this question, it is essential to understand what performance expectations are implied by the current valuation, in order to make a reasonable judgment between "high valuation" and "good performance."

Using a simple and direct group-wide PE valuation method, Sea's pre-market valuation corresponds to a PE multiple of just over 30x for net profits in fiscal year 2026. Dolphin Research does not definitively conclude whether this is expensive or cheap, but the reflected expectation is that the company will maintain a profit growth rate of 20% to 30% or higher after fiscal year 2026.

From a segment valuation perspective, the market generally values Garena's gaming business at around 10x to 12x PE based on net profits, corresponding to an approximate valuation of over $10 billion. There is not much attention or disagreement from sell-side analysts regarding this segment.

The elasticity of the valuation mainly comes from the e-commerce and financial segments. Currently, the market values the e-commerce business slightly below $50 billion, with implied expectations that the e-commerce segment will achieve over $1.5 billion in adjusted EBITDA in 2026 (corresponding to a profit margin slightly above 1% of that year's GMV), and an EV/EBITDA valuation multiple around 30x. Dolphin Research believes that a slightly over 1% EBITDA/GMV profit margin is not considered high from a ceiling perspective, and compared to leading e-commerce companies in China and the U.S., a 2% to 3% profit margin is not unattainable. Of course, the 30x valuation multiple also implies expectations that Shopee's profit margin will continue to rise rapidly after 2026.

Therefore, Dolphin Research believes that the market's valuation and expectations for Shopee are not absolutely very expensive or unattainable. Rather, it is a matter of how to transition from the current breakeven point to achieving a profit margin of over 1%. Continuous attention and verification of Shopee's quarterly profit margin improvement progress are necessary.

The DFS financial business may be a potential source of valuation increment that the market has not fully recognized. The current market valuation for this segment is based on achieving approximately $1 billion in adjusted EBITDA in 2026 (corresponding to about 25% CAGR), giving it a valuation of around 10x, corresponding to a market value of $10 billion, which is only comparable to the gaming segment's valuation. A growth expectation of over 20% corresponds to only around a 10x valuation, which is clearly disconnected. We believe that as the market's understanding of this segment accelerates, along with the enormous potential market size of Fintech, DFS could bring unexpected surprises.

Based on the performance expectations implied by the stock price prior to the earnings report, we can see that the biggest highlight of this quarter's performance lies in the growth of the critical e-commerce business and the unexpected improvement in profit margins. Since the adjusted EBITDA/GMV for e-commerce this quarter has already reached 0.5%, the market's current expectation of achieving a profit margin of over 1% in 2026 seems "easy" rather than overly optimistic. This will likely induce the market to further raise expectations for the pace of profit improvement in the e-commerce business.

However, beyond the unexpected performance of the e-commerce business, Dolphin Research, after more detailed observation, also found that the performance of the gaming and financial businesses did not appear as strong as indicated by the revenue guidance. Both the number of users and the average payment amount for the gaming business have declined, indicating a weakening ecosystem The underlying loan growth of the financial business was slightly below expectations, while expenses exceeded expectations, dragging down profit growth. This may also be the reason for the significant narrowing of the company's post-IPO price increase compared to pre-market.

The following is a detailed interpretation of the financial report:

1. Growth and Profit Increase, Shopee Truly a Pillar

In the key Shopee e-commerce segment, GMV reached 28.6 billion, a year-on-year increase of nearly 24%, significantly better than the market expectation of 18% year-on-year growth. In terms of trends, the quarter-on-quarter growth rate only decreased by about 1 percentage point, and despite entering a high base period, the growth of the e-commerce business has shown almost no signs of slowing down, demonstrating resilience significantly stronger than expected.

Breaking down price and volume, the order volume this quarter saw a year-on-year growth rate of 20%, a quarter-on-quarter slowdown of 4 percentage points. The growth rate of single orders has indeed shown a significant and sustained slowdown over the past three quarters, but similar to last quarter's situation, as the growth of volume slows down, the rebound in average order value (due to the fading impact of live e-commerce and price subsidies) has taken over to drive GMV growth. The average order value this quarter increased by 3%, although the absolute value is not high, compared to the average price decline of around -10% in previous quarters, the quarter-on-quarter acceleration still contributes significantly to GMV growth.

In terms of revenue, this quarter Shopee's revenue grew by 41% year-on-year, significantly stronger than the market expectation of 35% growth, with a quarter-on-quarter slowdown of only 2 percentage points. It is evident that the revenue outperformance mainly stems from the GMV growth exceeding expectations.

From the perspective of monetization rate, according to the company's disclosure, at the beginning of 2025, Shopee in the Thai and Indonesian markets implemented a new round of monetization rate adjustments, roughly raising the upper limit of the monetization rate by 1 percentage point. Moreover, major competitors Lazada and TikTok Shop have also raised monetization rates in some markets. It is evident that in Southeast Asia, raising the monetization rate remains a consistent choice across the e-commerce industry.

However, according to Dolphin Research's calculations, Shopee's monetization rate for platform business this quarter increased by only 0.1 percentage points compared to the previous quarter, which is the smallest single-quarter increase since the monetization rate resumed its upward trend in Q4 2023. Specifically, the monetization rate for high-profit marketplace services still increased by 0.4 percentage points quarter-on-quarter, while lower-profit items such as VAS (like delivery fees) decreased by 0.3 percentage points, dragging down the overall increase in monetization rate. However, since the monetization of high-profit marketplace services continues to rise significantly, the drag on the profitability of the e-commerce segment will be smaller.

II. SeaMoney's financial business continues to grow rapidly

The rising star SeaMoney financial segment saw its core indicator -- the outstanding loan balance reached $5.1 billion, a year-on-year increase of 64%, but it is still significantly lower than the expected $5.44 billion (+75% YoY).

However, the revenue of the segment surged by 55% year-on-year, accelerating by 17 percentage points quarter-on-quarter, far exceeding the market expectation of a 36% growth rate. In contrast to the growth trend of the loan balance, it can be inferred that the company's main focus in the financial business this quarter was on improving the monetization rate rather than expanding the business scale.

Additionally, the proportion of overdue bad debts over 90 days remained stable at 1.2% this quarter, indicating relatively stable credit loan quality.

III. Decline in both user numbers and average revenue per user, is the gaming segment going to cool down again?

In terms of key operational indicators for the gaming segment, this quarter, there were approximately 620 million active users and 50 million paying users, with the former decreasing by about 11 million quarter-on-quarter. Both indicators fell short of market expectations by 3% and 2%, respectively, and the continued loss of active users is clearly not a good sign.

However, the market's expectations for revenue growth are not high, with a year-on-year growth expectation of 18% and a quarter-on-quarter slowdown of 6 percentage points. Therefore, the actual growth of 19% is still better than expected. Similarly, from the perspective of price and volume, the number of paying users remained flat quarter-on-quarter, but the average payment amount per user deteriorated from flat year-on-year last quarter to a year-on-year decrease of 6% this quarter, which is the main reason for the slowdown in revenue growth Overall, the company's gaming business ecosystem shows signs of weakening again.

Due to the impact of changes in deferred revenue balance, Garena's revenue under GAAP increased by 1% year-on-year this quarter, a significant improvement from last quarter's -16%, and better than the market expectation of -1% year-on-year. However, with financial indicators affected by adjustments showing a trend opposite to the underlying operating data, the latter is evidently more important. Therefore, the overall growth of the gaming business this quarter is still leaning towards negative.

4. E-commerce turns profitable faster than expected, while the financial and gaming sectors show mixed results

In summary, in terms of growth, the most critical e-commerce business performed significantly better than expected, but the underlying operating data for the gaming and financial sectors did not perform as well as anticipated. Of course, the absolute growth of the financial business is still quite good.

In terms of profit indicators, the most critical e-commerce sector achieved approximately $80 million in operating profit this quarter, significantly better than the expected less than $20 million. The operating profit margin reached 2.2%, clearly exceeding the expected 0.5%, indicating that the profit release progress of the e-commerce business is faster than expected.

The gaming sector's profit this quarter was $270 million, better than the sell-side expectation of $250 million. The profit margin for the gaming sector this quarter reached 52%, up 0.9 percentage points year-on-year, but slightly down from last quarter's 52.7%, and significantly better than the sell-side's conservative expectation of 48.3%. However, despite exceeding expectations, the profit rate for the gaming sector remains relatively stable.

The DFS financial sector achieved $198 million in operating profit this quarter, significantly lower than the sell-side expectation of $230 million, with a profit margin of 27%, showing a certain decline from the 28%-29% level of the previous two quarters. Combined with the expense analysis to be discussed later, the marketing expenditure for the financial sector nearly doubled quarter-on-quarter this season. It seems that after a significant increase in scale, in order to maintain high double-digit growth, it is necessary to match increased expenditure.

5. Revenue growth outpaces expense growth, profit release progress exceeds expectations

Due to the unexpectedly strong growth in the e-commerce sector, as well as the financial and gaming sectors, although the underlying operating indicators did not perform too well, the revenue perspective was also better than expected. This quarter, Sea achieved a total revenue of $4.95 billion, a year-on-year increase of 37%, with a growth rate rising by 6 percentage points quarter-on-quarter, indicating quite strong growth, but the actual value is not as high as it seems.

In terms of gross profit, this quarter the company achieved a total gross profit of $2.2 billion, with the overall gross margin increasing from 43% to 45%, a year-on-year growth of about 45%, significantly higher than the expected 30%. The gross profit performance is also quite good. Specifically, the gross profit of the gaming sector remained basically flat quarter-on-quarter, with no significant changes. The main reason is that the overall gross margin of the e-commerce and financial sectors increased by 2 percentage points quarter-on-quarter, which contributed to the group's overall good gross profit performance. Combined with the previous text, the simultaneous increase in the monetization rates of the e-commerce and financial businesses should be the main reason for the improvement in gross margin.

In terms of expenses, the total expenditure of the four operating expenses was nearly $1.95 billion, a year-on-year increase of 19%, although still significantly lower than the revenue growth rate, compared to the 5% growth in the previous quarter, it is still evident that the intensity of expense investment has slightly rebounded. The total proportion of the four expenses to revenue slightly increased from 39.3% in the previous quarter to 39.5%.

Specifically, the increase in marketing expenses accounted for a proportion of revenue that rose by about 0.9% to 21.2%. By segment, the marketing expense ratio of Shopee's e-commerce business actually decreased by 0.7 percentage points quarter-on-quarter to 23.3%. However, the gaming marketing expense ratio increased by 48% year-on-year, which is relatively significant, but since the absolute value is only $0.045 billion, the impact is not large. Among them, the marketing expenses of the financial sector nearly doubled from $0.066 billion in the previous quarter to $0.12 billion, indicating a relatively noticeable increase in marketing expenses.

Overall, although the overall operating expense ratio increased slightly by 0.2 percentage points due to the rise in marketing expenses, the gross profit margin improved by a full 2 percentage points due to the increase in monetization rate. Therefore, with growth on the revenue side significantly outpacing the growth in expenses, Sea's overall operating profit margin for this quarter rose to 6.2% (vs. 4.7% last quarter), with actual operating profit of approximately $310 million, about 18% higher than the expected $260 million. The speed of profit release is still better than expected.

Dolphin Research's past analysis on [Sea]:

November 13, 2024 earnings report commentary “ Sea: Is Southeast Asia's Little Tencent becoming 'Little Sweetheart'?”

November 13, 2024 conference call minutes “ Sea: How to view subsequent growth (3Q24 conference call)”

August 13, 2024 conference call minutes “ Sea: Will the good growth trend in e-commerce and gaming continue?”

August 13, 2024 earnings report commentary “ Sea: Strongly dispelling ghost stories, Southeast Asia's Little Tencent is still doing well”

May 17, 2024 earnings report commentary “ Southeast Asia's Little Tencent: From 'Foes' to 'Friends', is Sea rising again?”

May 17, 2024 conference call minutes “ Sea: I believe e-commerce competition will no longer be extreme”

March 5, 2024 earnings report commentary “ Tiktok's absence brings a turnaround, is SEA's spring coming?” 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 playing itself into a corner》

November 15, 2023 Conference Call 《 SEA: Seizing the time window, heavily investing 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 fixating on short-term profits, but focusing on long-term profits》

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

In-depth:

June 8, 2022 《The dual business flywheel has stopped, SEA is deeply trapped in the pain of transformation》

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

Risk Disclosure and Statement of this article: Dolphin Research Disclaimer and General Disclosure