Tuesday 14 November 2023

Sea Group: Foolishness in Fighting for E Commerce Market Share With Lower Margins

Sea's 3rd Quarter results showed it swung back to losses. Its smaller 2 segments in digital financial services and digital entertainment were profitable (on accounting basis). However, its e commerce (shopee) swung back to huge losses, clocking USD$428 million in losses on a back of 20 billion in GMV.

While Shopee has moved a larger amount of products in terms of GMV, the highest in the quarter; there is just one problem, it sacrificed margin for volume. Last quarter, shopee clocked USD$65 million in profits from 17 billion in GMV. A larger GMV should have meant scale and with it higher profits; however in 3Q it was not.

The answer was simple: Shopee dangled more rewards for its consumers. There were promotions such as "$2 off no min spend" which allowed them to churn GMV but totally ignored margins (i bought 3 in 1 USB charges and spectacles cleaning cloth at zero cost). Sales & marketing expenses for shopee grew by 49.7% as evident by its 3Q results publication.

How to Improve Share Price?

Shopee is the main problem, due to the volume of products it moves, its movement in margins will dwarf the profit/losses of its other 2 segments. Therefore, improving the margin of Shopee is important. Tik Tok shop may be fighting in South East Asia, however, I think it just burning cash and would not be able to cement a no 1 or no 2 position once it removes its incentive.

Until then Sea Group on a whole may be going down. It needs to make its e commerce profitable again and that means reducing the vouchers it is giving out to consumers. The current management is very foolish in trying to fight Tik Tok in a battle of attrition. 

For now, the conglomerate is worth about US$18 billion to account for its ability to generate USD 500 million as profits (20 times P/E) and USD$8 billion in cash. That values it at US$33 share price.

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