Sea Group eyes LatAm e-commerce in potential battle royale against incumbents

Photo: Sea Group

Banking on the success of its hit game Free Fire, which Sea points out is the most downloaded game in the world, the Singapore-based gaming and e-commerce giant has seemingly set its sights on conquering Latin American e-commerce, beginning with the region’s two largest markets Brazil and Mexico.

“They’ve dominated in Southeast Asia, and are looking for a new challenge,” says Sachin Mittal, an analyst at DBS in Singapore who tracks Sea Group. “The gaming business is pretty hot in Latin America.”

On Tuesday, Sea reported strong fourth-quarter results buoyed by its e-commerce operations, the bulk of which are in Southeast Asia. 

For the three months ended Dec. 31, 2020, the peak holiday shopping season, Sea’s e-commerce unit Shopee registered GAAP revenue of $842.2 million. That is 36% up from the previous quarter, and 178% higher than in the same period a year ago. 

For the full year 2020, Shopee’s gross orders totaled 2.8 billion, up 133% year-on-year, and gross merchandise value (GMV) doubled to $35.4 billion. Analysts are estimating that Shopee could achieve EBITDA-breakeven in FY2023. 

As Sea put it in a statement accompanying the results: “We have cemented Shopee’s position as the favourite e-commerce platform for both buyers and sellers across Southeast Asia and Taiwan.”

“We believe Sea’s ability to generate organic cashflows from its gaming business (which continues to grow), gives it a unique competitive advantage in being the leading internet company in Southeast Asia,” wrote Credit Suisse analyst Varun Ahuja in a March 3 report on the company.

LatAm playbook

Sea is now turning its sights to Latin America, where it has made a name as a top game developer. Just over a week ago, Shopee launched with an app in Mexico, even as operations in Brazil are slowly gaining traction.

“We already have established operations on the gaming side in the markets. So, it’s generally efficient for us to offer additional value-adding to our sellers,” said Sea Group’s chief corporate officer Yanjun Wang in an earnings call with analysts on Tuesday. 

Wang reiterated that Shopee’s foray into Brazil, beginning in October 2019, was to open up more markets for sellers on its platform. Since then, local sellers have joined the platform. “It’s well-received. We think that, of course, is a positive sign.”

The potential for growth is clear. 

Brazil, with a population of 211 million, half of whom are 33 years old or younger, is Latin America’s largest economy. 

In the first five months of 2020, e-commerce sales reportedly rose 57% from the year before to top $20.5 billion in sales revenue, as consumers stuck at home turned to online shopping. In 2019, while e-commerce accounted for less than 5% of total retail spend in Brazil, the country accounted for about 42% of all e-commerce sales in Latin America. 

Meanwhile, Mexico, the region’s No.2 economy, is witnessing double-digit growth in its e-commerce market, albeit from a low base.

“They’re building on the success of Free Fire, and to some extent cross-border sales,” says DBS’s Mittal. He estimates that Latin America could account for as much as a third of Sea’s gaming revenues.

Free Fire was the most profitable mobile game in Latin America and Southeast Asia in 2020, according to App Annie.

“[The Latin American market] is presently not significant to overall GMV, but Sea sees growth opportunities in the region given its relatively low e-commerce penetration,” notes Credit Suisse’s Ahuja. “But it is still evaluating the market for more concrete data points before making meaningful investments.”

Formidable incumbents

Shopee may have succeeded in operating in various markets of Southeast Asia, with varying regulatory and operating environments. But it needs to establish itself in a market dominated by strong regional incumbents, led by Argentinian marketplace MercadoLibre, and B2W — an online retailer formed by the merger of Lojas Americanas and Submarino, that was the first to trial drone deliveries.

Further, Latin America is a tricky market to operate in. “Latin American markets are known for pretty bad third party logistics,” Mittal says, noting the frequency of labour strikes and inefficient postal service. “That is why MercadoLibre, the incumbent [e-commerce] companies have their own logistics network. They have their own very dominant payment network.” 

Analysts note that e-commerce contributions from Latin America are immaterial at this point. At the same time, ramping up activities in the region is likely to weigh on the group’s profitability in the short term.

Nevertheless, Mittal expects investors to give Sea a long runway to become successful. “I think the market is willing to allow them to grow, rather than worry about profits in such a high growth environment.”

New York-listed Sea’s ability to raise capital for expansion also stands them in good stead. Its current market capitalisation of over $130 billion, following the five-fold rally in its shares in the last 12 months, surpasses that of its rivals.

Market leader MercadoLibre, listed on Nasdaq, has a market capitalisation of $82 billion, in comparison. 

“Sea Ltd trades in line with MercadoLibre Inc under current estimates from an EV/sales basis and is forecast to achieve similar rates of sales growth for FY21E and FY22E but MercadoLibre Inc is expected to breakeven in 2020.  It does not however have the cash cow and funding source that Sea Ltd (SE US) has in its gaming business or indeed the increasingly global reach”, Angus Mackintosh, an analyst who publishes on Smartkarma, wrote in a March 3 note.

On its part, Sea remains reticent about its plans for the Latin American market. “It is still very preliminary for us and we’ll continue to observe the market,” Wang said. He added that Shopee’s experience in Southeast Asia does not necessarily apply to its Latin American ventures. 

“I think these are very different markets and we wouldn’t presume that we know those markets very well at this point.”

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.