Sea Limited’s recent announcement that it has raised about $6 billion is a clear sign that the e-commerce and gaming giant is ramping up its war chest to accelerate its international expansion.
The company priced 11 million American Depository Receipts at $318 each, together with $2.5 billion in a convertible bond, making it the largest fundraising in Southeast Asia, reported Reuters citing Refinitiv data.
The Southeast Asian tech behemoth has aggressively made inroads into Latin America. In Brazil, its e-commerce platform Shopee has become the most downloaded app within just two years of its launch, posing a formidable challenge to local champion Mercado Libre. It is also planning to enter Argentina.
The hit game Free Fire, developed by Sea’s Garena gaming division, was the top-grossing mobile game in Latin America in the second quarter of this year.
But Sea’s ambitions are not limited to Latin America. It is clearing the decks to launch Shopee in Poland and India, Reuters reported earlier this month. Free Fire is a popular game in these regions and was also the highest-grossing mobile game in India in Q2 2021.
Back in its home turf of Southeast Asia, Sea is aiming to become a dominant fintech force, having acquired Indonesia’s Bank BKE in January this year and having won a digital banking licence in Singapore last year.
And though it has downplayed its food delivery ambitions, ShopeeFood is gearing up to enter Malaysia after launching in Indonesia earlier this year.
Heavy capital requirements
So far, profits from Sea’s gaming division have offset the heavy cash burn at e-commerce arm Shopee.
But analysts are unanimous that its aggressive global expansion would require even more capital.
“They already have a lot of cash-burning businesses like food delivery, e-wallet service, and Latin American e-commerce,” said DBS bank analyst Sachin Mittal. “It’s always good to have more firepower, and investors are not looking at metrics of profitability at this stage. They are looking at revenue metrics.”
Sea’s revenue has surged in the past year, up more than 2.5 times to nearly $1 billion in the second quarter of this year, compared with the same period in 2020.
Still, its entry into India and eastern Europe would require a good amount of cash, given the huge size of these markets and the competition there. Walmart-owned Flipkart is a strong player in Indian e-commerce and so is Amazon, while eastern Europe is already well-served by Allegro and Amazon.
“India and Poland look to me a little bit out of context. It seems they are just following wherever their Free Fire user base is,” Mittal said. But he pointed out that they could follow the strategy they applied to Latin America, where they started out offering cross-border e-commerce first, before opening to domestic sellers. So long as Sea tests the market with “adequate risk controls in place,” investors should be supportive.
Time for more acquisitions?
The latest fundraising will result in a 2.8% dilution at a current 384.89 million public float, which CrossASEAN Research analyst Angus Mackintosh said is small and acceptable to investors.
Apart from supporting its expansion, the fresh funds will likely go into acquisitions as well, he said. The last time Sea raised money — $2 billion in December last year — it acquired Hong Kong-based asset manager Composite Capital Management as its new investment arm and injected $1 billion into it.
While it is unclear what acquisitions the tech firm could make next, Mackintosh said it could be another bank in Indonesia, since the country’s Financial Services Authority, or OJK, is encouraging consolidation in the sector.
Sea could also look at introducing insurtech and wealth management technology services, its chief corporate officer Yanjun Wang said in the company’s first-quarter earnings call.
Despite Sea’s rapid cash burn, Mackintosh said that the company is still on the right track. Losses per order have generally gone down, and even as they are still losing money, “they’re investing for the future” by spending on promotions to capture market share.
Sea’s overall operating loss fell from $373 million in the second quarter of last year to $334 million this second quarter. On Shopee’s end, its operating loss per order dipped from $0.529 in the second quarter of last year to $0.448 in the most recent quarter, although that was an increase from $0.415 in the first quarter.
Sea is fast catching up with its international rivals. For example, Sea’s second-quarter 2021 revenue, at $999.7 million, was 42% of Alibaba’s international commerce’s $2.35 billion. Lazada is a part of Alibaba’s international commerce.
A year ago, Sea, raking in $364.7 million in revenue, was 25% of Alibaba’s $1.45 billion, show DealStreetAsia’s calculations.
Alibaba international commerce vs. Shopee (Revenues)
|Quarter||Alibaba International Commerce (Retail and Wholesale)||Shopee||Shopee's revenue as a percentage of Alibaba's|
|Q2 2020||$1.45 billion||$364.7 million||25.1%|
|Q3 2020||$1.66 billion||$467.1 million||28.1%|
|Q4 2020||$2.13 billion||$627.6 million||29.5%|
|Q1 2021||$2.05 billion ||$772.4 million||37.7%|
|Q2 2021||$2.35 billion||$999.7 million||42.5%|
|Source: Company reports|
Losses could widen
However, other analysts are warier of Sea’s growth-at-all-costs strategy.
In a note published on Smartkarma, LightStream Research equity analyst Oshadhi Kumarasiri said he expects Shopee’s quarterly operating losses to hit $1.5 billion with Shopee’s India and Eastern Europe expansion, while SeaMoney made a loss of $160 million in the last quarter.
Meanwhile, Garena only made $600 million in operating profit in the same quarter, and there is risk in its “excessive dependence” on one game.
Sea’s potential rivals in India and eastern Europe are also not shy about burning cash to protect market share. Flipkart, for example, is making annual losses in excess of $500 million, he noted.
While expecting profitability from a growth company is unrealistic, “I would have loved to see them using a more balanced approach that does not require Sea to ask for more money from investors once every 10 months,” Kumarasiri told DealStreetAsia.
“There is a possibility that the losses could scare off investors. Unless priced at a considerable discount, the subscription status of this offer could give us early indications of investor sentiment towards ballooning losses,” he said of the latest round.