Sea gets a taste of profitability

Written by Kapronasia || March 13 2023

Sea Group surprised many of us with its swing to profitability in the fourth quarter, the first time the Singaporean company ever recorded positive net income. The company is much better known for losing money than making it. In the fourth quarter, Sea made a profit of US$422.8 million, compared to a loss of US$616.3 million in the same period a year earlier.

So how did Sea do it? First and foremost, it slashed sales and marketing expenses by US$746 million, froze hiring and salaries and cut some jobs. The company has wound down ill-advised expansion efforts in Europe borne of excessive ebullience and is focusing – at least for now – on its core Asian markets as well as Brazil.

Interestingly, Sea’s erstwhile main breadwinner appears to be atrophying. Its Garena gaming unit used to effectively subsidize Shopee and SeaMoney, its e-commerce and fintech units respectively, but that is no longer the case. In the October to December 2022 period, Garena’s revenue fell 32.9% to US$948.8 million, compared to US$1.41 billion in the fourth quarter of 2021.

Things just haven’t been the same for gaming after lockdowns ended and people stopped spending all of their time at home. That pandemic-driven trend temporarily boosted Garena’s performance in 2020-21. There are also issues with the gaming pipeline and of course, the ban of Sea’s Free Fire in India.

We had thought Sea was composed of a trifecta but going ahead it seems like the one-two punch of Shopee and SeaMoney will be paramount. Gaming doesn’t naturally sync with e-commerce and fintech, while the latter two digital services are fairly symbiotic.

With that in mind, Sea’s strategy will be to grow both Shopee and SeaMoney, with the potential for the latter to be used widely by both buyers and sellers on its e-commerce platform. The troves of user data gathered by Shopee will be useful as Sea grows its fintech business; for instance, the data can be used to evaluate borrowers’ creditworthiness. It’s a proven business model under the right circumstances. Indeed, Alibaba first made Alipay a household name on its e-commerce platform and later developed it into a full-fledged digital financial services business.  

At the same time, Sea has digital banking licenses for Singapore, Malaysia and Indonesia. The first two markets are both mature, and for Singaporeans and Malaysians, Sea’s bank is going to be a novelty more than a necessity. When consumers are well banked, they don’t switch their primary accounts easily, and what it probably will come down to is offering a lot of subsidies and seeing who signs up – hardly a formula for long-term success.

Indonesia offers much stronger potential for Sea given the estimated unbanked population of 181 million and the fact that the Singaporean company bought a local incumbent lender and rejigged it as a digital bank: SeaBank. Because Sea purchased a local lender in its entirety, the new entity SeaBank is entitled to 100% of the profits earned, which is not the case for several of its competitors. For instance, GoTo owns just 22% of Bank Jago while Bukalapak has an 11.49% share of Bank Allo.