Monday 20 November 2023

Sea Group: Prepare for Another Quarter of Large Losses in Shopee

Despite the terrible results in Shopee, Sea Group has maintained the attractivness of Shopee by continuing its incentives to consumers. As of now, the games are generating $0.15 in free cash for shopee users per day. To add to that, cashback vouchers are still attractive going at 10% cashback.

Shopee- Low Margin Segment, Discount Abound

We all know the e commerce segment is a low margin high volume model averaging at about 1-2% of GMV as profits. Hence with shopee dishing out incentive such as 10% cashback or huge amount of shopee coins which can be used for 33% discount etc, it is definite Shopee is going to post another loss making quarter for Oct- Dec 2023.

I do not doubt this will stop. Sea Group plans to ensure self sufficiency and losses at Shopee will be offset by gains at its digital finance group and Garena. In summary, Shopee is likely going be loss making and cash burning for a few more quarters. This will drag the entire group profits

Garena- Growth Slowing

Garena is now clocking profits in the US$250-US$300 million per quarter. However what worries me is that some of this revenue clocked were from its "Deferred revenue". Basically, these are pre paid game items which may have expired or been utilised by Garena users. All this means cash flow wise, Garena result is lower than expected.

Eventually Sea Group will burn through its entire pile of Deferred Revenue and we will see an increased decline of revenue and profit. Stripping the accounting tricks, Garena is likely a US$600 million per year profit machine. Barely enough to cover 2 quarters of Shopee losses.

Prediction for Q4 results

Given the performance of the 3 segments, I am predicting an overall loss of US$30 million for Sea. The group will report a small accounting profit for the full year. But the question is it's current high market cap justifiable?

Shopee is fighting tiktok shop aggressively and Bytedance has a high amount of cash to burn. As consumers, it is a definite benefit; but those who own and invest in Sea (including I), it is painful and cash burning. I feel a US$21 billion market cap (US$37) fully values Sea at the moment. 

However, for it to justify a higher market cap, it has to beat Bytedance. That is going to be a very long and ardous battle. For me, I am contemplating selling off Sea should it hit US$50, my view is that the business has no more moat. The alternative is that Sea adopts the same approach as Lazada by ignoring tik tok price cutting tactics 

Lazada has been quietly not giving incentives while seeing the No 1 and No 3 fight. Its a benefit to Alibaba but not to Sea

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