Sea falters in the third quarter

Written by Kapronasia || November 20 2023

Across Southeast Asia, the business models of platform companies are being put to the test – and the results are still inconclusive. We can appreciate that a focus on quarterly earnings may obscure positive long-term trends – and Sea did not have the best quarter – but it is undeniable that the much-heralded ecosystem business model that emerged in the past few years could have some fundamental problems. In the case of Sea Group, it has a promising digital financial services business that grew out of its earlier ventures in e-commerce and gaming, but the latter two businesses are struggling. We still like their odds better than ride hailing and food delivery, but Sea has figure out a way to turn them around and revamp the synergies that drove the company’s share price to an apex of almost US$367 in October 2021. It has since lost about 90% of its value and trades around US$37.

Sea lost US$144 million in the third quarter, a disappointing performance given that the company had made a profit in each of the previous three quarters. Adjusted EBITDA fell significantly to US$35.3 million compared to an average of roughly US$500 million in the last few quarters even as revenue rose 4.9% to US$3.3 billion, ahead of analyst estimates.

Unsurprisingly, Shopee contributed the lion’s share of that revenue: US$2.2 billion. But Shopee remains a double-edged sword. One of the reasons Sea slipped back into the red in the July-September period is that it spent hugely on sales and marketing to ensure Shopee’s competitiveness across its many markets, from Southeast Asia to Brazil.

Sea is taking a calculated risk by ramping up its investment in Shopee, especially the bid to develop a live-streaming arm. That could potentially foment a price war with TikTok and Lazada, but more importantly, can Shopee realistically compete strongly in an unfamiliar area? TikTok, is after all, all about short videos. It makes sense for its live streamers to sell things in those videos. But Shopee is an e-commerce platform, not a lifestyle choice.  Shopee’s strengths lie more in the ability to sync the up-and-coming SeaMoney unit with its e-commerce offerings.

To that end, Sea’s fintech unit was a bright spot in the third quarter. Revenue rose 36.5% year-on-year to US$446.2 million, while adjusted EBITDA was US$165.7 million, compared to a loss of US$67.7 million for the third quarter of 2022. As of September 30, 2023, gross loans receivable increased by 5.3% sequentially to US$2.4 billion, before netting off allowance for credit losses of US$288.1 million. Non-performing loans past due by more than 90 days as a percentage of Sea’s gross loans receivable was 1.6%, improving quarter-on-quarter.

Sea has a presence in most of the key Southeast Asian digital financial services markets, from its home base in Singapore to Indonesia and the Philippines – as well as Malaysia. The main concern we have about its digital banking ventures is that it may not be able to adequately finance all four of them without a significant improvement in the performance of both its gaming and e-commerce units.

The potential for sustainable high margins is better in financial services than e-commerce or gaming, but Sea may have rejig how it approaches the latter two businesses to ensure that they do not become a drag on its growth in financial services.