Sea Limited – SeaMoney [Stock Geekout Ep 5.3 – 14 August 2021]

Think Alipay… this is very likely the play strategy: one app that will provide payments, insurance, investments and what have you. Importantly, they have the advantage of Shopee and Garena. If you have not heard that, please check on Part One & Part Two. Imagine the kind of promotions and rebates that they can exploit. We will also be discussing Sea Limited’s management and give a quick way to value this company based on some of (the) parts.

If you want to get a full valuation and numbers, you will have to sign up for premium membership on SteadyCompounding.com. This is a sponsored collaboration with SteadyCompounding.com and you will be hearing from Thomas Chua, the chief editor and independent analyst. For a limited time only, all of you will get 20% lifetime discount of SteadyCompounding’s premium subscription. Their team have broken down Sea Limited, Starbucks, Facebook, Twilio and will continue to do research in some of the most interesting investing ideas out there. With 30 day money back guarantee, head over to SteadyCompounding.com and use promo code: COCONUT for 20% off lifetime subscription. 

For reference sake, this episode was recorded on the 14th of August, 2021. Our discussion for today is solely for education and entertainment purposes only. It does not serve any form of advice or recommendations. Thank you for loving what we do and empowering us financially to do more for you. Let’s geek out!

Within Sea Limited as a company, there’s of course the third part of the business with SeaMoney. All the financial stuff, all the things are here and this is an interesting part because there was a time where people thought that this will be very fast business, much like how Alipay grew their financial arm and all that. So what is your take on SeaMoney as a vertical now? 

Thomas: Yeah, SeaMoney has actually grown a lot, but it’s interesting that you brought up the China landscape because the Chinese government, they generally innovate first, regulate later. You see all the regulation coming all this year, but for the past decade, there’s been no regulation. So Alipay and WeChat Pay have really been able to grow at a very fast rate. 

But when it comes to doing business in Indonesia or India or anywhere, other parts of the world especially as a foreign company, it’s going to take a bit more regulatory concerns. When it comes to SeaMoney, Shopee has also been executing extremely rapidly because they got their e-wallet license quite early on. I think it was in 2018 and they actually rode on the success of Garena’s Free Fire and Shopee as an e-commerce platform. 

Because when you want to buy merchandise on this platform, the traditional way was cash on transaction. You see the delivery guy and you give him the money or for Garena, you have to go to 7/11, you buy the gift card, the Garena gift card then you go and top up your credit. Not exactly convenient. 

Reggie: But it still works in some parts of the world? Some parts of the world that are quote unquote “unbanked” or not as digital. There are a lot of companies that still use these strategies… you buying gift cards and all that. So it still works, but I get what you are saying. 

Thomas: That’s a good point because in countries like Philippines, Indonesia, there are more convenience stores than there are banks. When it comes to bank penetration in Indonesia and Philippines… Indonesia is about 50%, so half its population are actually unbanked, underserved. In Philippines, 60% don’t have a bank account and this is largely because… one thing, the banks don’t find it profitable to set up traditional bank branches in these areas because there’s a lot of costs and in the rural areas, people don’t have as much money. 

So a lot of people are deprived of financial services. You want to make it in life per se, you will need credit, financial services, insurance etc and these people are being deprived of all these services. This is where Sea Limited is able to make a big difference because they are getting digital banking licenses or they are taking over banks in Indonesia in order to get into this segment because everybody has a mobile phone now and the legacy players don’t know how to play this game as well.

We are going to see a lot of strategy they use for Garena and Shopee into SeaMoney whereby if you use Shopee Pay, you’re going to get rebates. You are able to see rebates of 30% on SeaMoney. So it is not just when you buy on Shopee, you get rebates. When you buy at a shopping mall, when you buy at offline merchants, your mama shop, you are going to get all these rebates in order to start acquiring a lot of these consumers.

Definitely, of course it is also a scale game. So when AliPay etc, you first start, you are going to lose a lot of money because you want to acquire customers. The way Tencent actually overtook Alipay was also through burning money. You know they have this 红包 (red packet) giveaway, this was what really gave them the leg up in Alibaba. It was quite amazing how they did it just through the red packet event which is during the Lunar New Year by using WeChat Pay to give each other 红包 (red packet). Sometimes you get bonus 红包 (red packet) from Tencent back in those days. 

Reggie: Yes, and it has become a cultural thing. I actually received very big 红包s (red packets)… I know what you mean, the 红包 (red packet) event. Everybody comes into this group then trrrrr, and then it goes out. Then you pick it out and then whatever 红包 (red packet) you use, WeChat will give you extra random one. It has overtime became a thing that people actually give e-红包 (red packet) through the WeChat Pay. It’s pretty crazy, so that’s quite cool. 

Thomas: Yeah man. When we look at how much WeChat pay and Alipay is charging merchants for these transaction, it is only around 0.5%. But when you look at the very developed markets like US or Singapore, when we buy products on e-commerce platform, the banks would actually charge anywhere between 3.8-5%.

It is super inefficient and the thing about developed countries is that consumer habits are super entrenched already, so they often have difficulty changing. Is it possible to change? It is actually, and it would be better for the consumers actually because of lower transaction fees, then you are able to pay lower prices for your merchandise. But merchants who go out of these payment platforms, they’re are going to see a drop in their sales because consumers are very used to getting credit card rewards, for example. 

But when it comes to Indonesia, because they are so underbanked, there is a very big opportunity for Sea Limited to come in and create Shopee Pay as the primary mode of payment today. If you are able to get yourself entrenched within these consumers for both online and offline payment, there are many other verticals that you can slowly branch towards, much like Alibaba has done for Ant Financial. 

You start to see them offering insurance. You start to see them offering wealth management and the reason why it actually took off in China was because the lower income consumers, users of Ant Financial, they are not able to invest money using a traditional bank because there are minimum size to start investing. Even in Singapore, I think the minimum sum you want to start investing on platforms such as Fundsupermart, for example, is US$50. 

The poorer consumers in Indonesia, they will not be able to afford that amount. Even if they recognize that it is important to start getting insurance, it is important to start investing, they are not able to do so through the traditional banking players. But Alibaba, what they enabled in China was that even with 10 cents, 20 cents, you are able to start investing today. The banks are offering about 2%, I’m able to offer a 4% and if you withdraw at any time, there is no penalty, unlike what traditional banking players are doing… not just they have very long account set up process, they have a lot of fees and the minimum sum required is going to put off 50% of the population in Indonesia, in Philippines and in Brazil. 

The way fintech is able to do it is they are able to lower the amount of costs incurred for doing business with these rural consumers because the platform is in their mobile phone. You don’t have to set up an actual banking branch, which is why this area is an exciting one. When we look at what they are able to achieve, we just have to look at Ant Financial. When they are about to come IPO last year, you look at the valuation they are able to command. 

When we look at the total addressable market Sea Limited is going after, Indonesia has about 200-300 million people. Brazil, same thing 200-300 million. The total addressable market is huge in this case and even for Ant Financial, when they are charging at 0.5% transaction fee, they are highly profitable. The laws set by the Indonesian government is (a) maximum transaction fee of 0.7%, slightly higher than what Ant Financial is charging. But I would think that Shopee is going to underprice everybody in the market.

Reggie: Just because they can. 

Thomas: This is actually a competitive advantage because when Shopee first came… Tokopedia and Lazada, they had to start satisfying their investors. For Tokopedia, their venture capitalists were pressurizing them to start being profitable and for Lazada, Hangzhou was also pressurizing them to start being profitable and you see them start removing a lot of rebates. That is where Shopee came in and took a large chunk of market share. When these players haven’t established scale yet, at 4-5% e-commerce penetration rate, there’s still a long runway and it is not right yet for them to start monetizing but because of external pressure, they can’t do what is right for the company because they have to satisfy this external investor.

But for Sea Limited, just because they have huge amount of funding, they are able to really think for the long term and do the right thing for the platform, which brings us back to the first point you mentioned: am I worried? Garena Free Fire, if it’s gone? Yeah. If it’s gone, investors need to be cognizant that Shopee and SeaMoney will likely take a big hit.

So it’s important for investors to understand that there’s this risk, that there’s a huge capital concentration, revenue contribution from Free Fire at the moment. I’m at ease that they are executing well at the moment, but investors need to continuously monitor how well this segment is doing because this is the pipeline of cash for Shopee and SeaMoney.

Reggie: Okay, okay. I just want to get a little bit of clarity on SeaMoney. Is Shopee Pay also part of this SeaMoney structure when you analyze SeaMoney? Is it just a payment platform at this point in time? Because I get the whole idea of Alipay, they have all these additional offerings from insurance to investments and all that stuff. But its an over time kind of thing, so we can envision Seamoney eventually becoming like that. That is the goal, but what is the current situation with the company? Is it solely a payments solution at this point in time? 

Thomas: As of now, it is solely a payment solution. The digital banking license for Singapore… just granted. It will likely come on first half of 2022. I think that is potentially where we might see a new app because ultimately they are banked by itself. Every bank will have its own platform and its own application and I see Shopee Pay as part of SeaMoney in this case. 

Likewise with their Indonesia banking license, the acquisition was only just done this year as well. Investors should also start to expect them to come up with a more comprehensive suite of solutions in 2022. Based on what management has highlighted during earnings call, they are really targeting the millennials in Singapore, Indonesia and Philippines because this is the group that’s very comfortable with doing online. 

Based on the amount of data they have on Shopee and on Garena, they are in very good position to understand consumer behaviors and… because merchants, most of the merchants are on their platform as well, they will be going into SME (Small & Medium-sized Enterprise) credit lending, that means lending money to all these businesses. They will have a very good oversight on who are going to be more credit worthy, who are going to be less credit worthy and assign the interest rate accordingly.

One thing about the insurance or banking when you are borrowing money, I would say the premium we are paying is not exactly efficient or the interest rate we are paying for a loan, it’s not exactly super efficient. What do I mean by this? The amount of segregation, for example, when it comes to buying your car insurance, It is solely based on whether you are below 25 years old or above 25 years old. Because generally, statistics will show you below 25 years old, you are more likely to get into an accident whereas if you’re above 25, less likely. 

But even within the pool of 25 years old and those above 25 years old, there are going to be people who are more likely to speed and people who are less likely to speed and if you are able to segregate this segment using data, like who is a racer, who’s not a racer… imagine if you are below 25, I’m able to offer you a lower premium because I can predict with a higher rate of certainty that you are less likely to speed and those people are more likely to speed, I charge them a higher premium. I’m going to get a lot more business just because I can segregate my audience better and my loss ratio would also be a lot lower because my predictive capabilities will be much better. 

Same thing with banks. If they’re able to tell with a higher certainty who are more likely to be able to repay and who’s less likely to be able to repay, they are in a better position to size up the amount of interest rate they should be charging accordingly. With a better interest rates solution, you are able to attract more consumers onto your platform while reducing the amount of credit loss. So having a big oversight on the merchants on your platform is going to be a huge advantage for SeaMoney. 

Reggie: Yeah, and they are not the only ones in the game, right? Whether is it Shopify or whether is it Square, they’ve already shown that this can be done very well, providing capital, especially for a lot of the smallest size merchants that will find very long tedious process with the banks or very high interest rates with P2P lending platforms. 

But because I know your transaction numbers, I know when you’re going to come in. I know your volume because I’m Shopify, you use my platform, because I’m Square, you use my POS (Point Of Sale) systems, I am able to use all this data to then be able to dish out a sufficient capital size for you to grow and for you to still be able to pay me based on the algorithms that I have. So I think SeaMoney in this case, it’s not entering into a ground that nobody has touched before, but it’s just trying to offer an additional service for people within their ecosystem already. 

Thomas: Yeah, exactly. 

Reggie: Okay, okay. That’s pretty cool. I think for SeaMoney, it is still a very young business at this point in time, because payments… essentially, they’re just providing a more efficient way of payments and payments has already at this point in time being very commoditized. It’s not saying that payments got no business to make, got no money to make, but it’s very commoditized. The returns are not as high as in the days of Visa, Master, PayPal, Square. They’re all attacking themselves, each other… everyone is trying to get the gain so margins are coming down and all, but I do think based on what you said, the interesting part will be on the capital insurance, that kind of banking financial assets that can go out centralized as a platform. How would you SeaMoney play out in your view?

Thomas: So far, when we look at the amount of data that has been put out by third parties, SeaMoney is actually the most dominant e-wallet in Indonesia at the moment. They’re still executing it extremely well. I think the got almost 40% of the market share. There’s a lot of players in Indonesia at the moment but they are willing to burn money in order to raise brand awareness. They are working with a lot of offline merchants. 

As of now, the total payment value, when we look at the total amount of money that’s transacted on Shopee and SeaMoney, it is currently the highest of all its competitors in the region. They are also experiencing a huge uptick in its new market in Latin America. But so far, the management haven’t really provided a lot of clarity in Latin America because it’s still very nascent. When you look at the traffic from Google trends, when we compare Shopee and Shopee Pay against its competitors, they have actually overtook its competitors when it comes to traffic early this year.

Just within one year, they are able to win their competitors in terms of the amount of traffic. So it’s just insane how fast they execute in each new market, be it for Free Fire, everywhere they go, they start hitting number one… Shopee, everywhere they go, they start hitting number one and same thing for SeaMoney.

I don’t see them establishing a foothold in Singapore when it comes to Shopee Pay because consumers in developed countries are just used to… 

Reggie: Too many options. 

Thomas: … too many options, and in order to play the reward game, you have to charge a huge take rate. For SeaMoney, I don’t think it is what they are looking at. They are not planning to charge 4-5% on the merchants. They are really looking at lowering the amount of transaction costs for merchants so they won’t be able to keep burning cash on giving rewards for Shopee Pay. Not that they’re not able to, but it doesn’t really make sense because consumers here are very addicted. You see a lot of articles on Seedly, MoneyWise like “the best ways to get your credit card”. Consumers like playing that game. It gives them that dopamine… hunting for the best deal. 

Reggie: Shout out to MileLion. He can sell a course to teach people how to play this game. I’m quite amazed, and apparently (the) feedback is very good. So shout out to him. 

Thomas: Yeah. So it is a dopamine game, right? Consumers like to do it. I sidetrack a bit… same thing for Shopify. I found one thing the CEO said very interesting: “as Shopify, we don’t make it the easiest for merchants to set up their own website. That is not our intention, but we make it fun.” Usually, you take a few hours to set up your website. But he said “if I want to, I can actually make it within a few minutes,” but he intentionally make it slightly more complicated. So when the user, when he’s first starting out his website, he start reaching this first milestone, second milestone then dopamine starts to kick in and that’s where the experience of making a new website becomes gamified. 

Reggie: Yes.

Thomas: And there’s this IKEA effect. The thing that you make, the furniture that you build up on your own when you buy from IKEA, you like it a lot more and you’re more likely to continue subscribing to Shopify if you’re already putting so much effort in building the website.

So when it comes to the credit card game in Singapore, I also think consumers is after this gamified experience which as a whole, we are worse off because of the 5% transaction fee, but it is what it is now. It is very entrenched in Singapore and in the Western society to use credit card as a first mode of payment. 

Reggie: I mean you see a lot of the SaaS (Software as a Service) players. At the top of the website, there’s always that bar of completion, right? You know, 10%, 20%, 30%, those things are small little things that are being added onto the UI, the user interface to create that gamified process of… “okay, yeah, yeah. I’m going to the next one. Yeah, I’m going to the next one.” 

Then once you’re there, then they will tell you “click this, this, this. Set up your bio, add three friends…” It’s a lot of these things that are already very entrenched in a lot of SaaS products also out there. So yeah, it’s all part of trying to make life a little bit more enjoyable at the end of the day. 

Thomas: A bit more fun. 

Reggie: Yeah, a bit more fun. So yeah, not bad, set up a website… so yeah, I get what you’re saying. So in that sense, overall, I think we have already established that Sea Limited as a company has quite a big flywheel and very dependent on Free Fire as a current main strategy to generate money to keep and build everything else. In closing, any other things you want to add for Sea Limited as a company and how would you valuate the company, for people listening? 

Thomas: So the best way to valuate the company is you have to use sum of parts when it comes to your valuation, meaning you have to value Garena, Shopee, SeaMoney separately because they are very different businesses with different growth, different margin profile. 

When we look at Garena, you can actually use its peers as a benchmark. So when you look at the other gaming companies and then you take a look at their enterprise value over their EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple. EBITDA in short ,is just the amount of cashflow the company is generating and when we compare it to its peers like Take-Two and EA, for example, we are able to see the EV over EBITDA multiple of between 15-25.

So if we give Garena a multiple of 18, Shopee… you look at its more established peers like eBay and Etsy, you use enterprise value to gross merchandise value multiple, it’s usually between 1-1.5. You put in conservatively 1.25. 

SeaMoney, you look at the total payment value for PayPal, for example. For this, we have to look at enterprise value over total payment value and the multiple is generally between 0.2-0.5. As an investor, usually I just conservatively put a 0.3… conservative estimates for all of them and then you sum all these parts up together. 

But of course the best way is still to use Excel and you start projecting based on the management estimates and based on independent reports like eMarketer, how big the e-commerce market is, how big the fintech market is for places like Indonesia, then you start looking. 

If you want to take a look at that, that’s where you can come over to SteadyCompounding.com and start subscribing to my web blog because… 

Reggie: 要plug, 要plug, 敢敢 plug (want to plug, just plug). 

Thomas: That’s where I will break it down for my members exactly how I’m projecting this revenue and when I discount all this cash flow back to present, what is the exact intrinsic value we are looking at to buy Sea Limited?

Reggie: Sweet! So yes, head to SteadyCompounding.com and sign up to be a premium member today. Yeah. Any last things you want to add before we sign off? I think that was a good conversation. 

Thomas: Yeah, I think Sea Limited is one of the most exciting companies I’ve come across these few years, but there are definitely risks to investing in this company. It’s not without risks. They are good at execution but competition is extremely tough. 

Gojek recently merged together with Tokopedia and Sea Limited has been relying on Gojek and Grab for the last mile delivery because in Indonesia, everything is so fragmented. There’s a lot of islands and stuff. So the last mile delivery, they have been relying on Gojek motorcycles to do this. As of now, we are not sure whether they will prioritize Tokpedia orders over Shopee, but it is something to monitor overtime. 

Shopee is also building up its own logistics which is Shopee Express and also, like we mentioned earlier in the show, we have to keep an eye on Garena because a lot of their competitive advantage… whether Shopee is able to hit the scale, the e-commerce penetration in key markets like Indonesia and Latin America, it’s very dependent on how much money Garena is able to produce. Because right now their biggest edge over its competitors is their ability to think long-term and if Free Fire were to come into problem, then it’s going to be quite an issue. 

The last risk I would like to highlight is regulatory concerns. It’s operating in multiple countries at one shot and a lot of these countries, they don’t exactly have the best reputation for ease of doing business. For example, Indonesia. Early this year, Shopee got queried by the Indonesian government as to why they are bringing China products into Indonesia. Because it is in the interest of the Indonesian government to stimulate business within Indonesia, so they want Shopee to sell from more merchants that are within Indonesia, meaning the factory and everything must be within Indonesia and if you start bringing in a lot of products, which are cheaper, better for the consumers, but because it doesn’t stimulate business, then I’m going to blackmark you. Shopee then came out to clarify that the amount of products coming from China is below 1%, that’s being sold on the platform. 

But investors need to be very aware of issues like this. There’s a lot of regulatory concerns Sea Limited have to navigate. Another example is India. Last year, they banned PUBG which in the end was a boost for Free Fire because Free Fire then took its number one spot in India as a battle royale game.

PUBG was banned not because they think gaming was bad etc but just because Tencent is the publisher behind PUBG and India wants to be very careful when it comes to companies from China. Yeah, so this is not happening to Sea Limited because it’s headquartered in Singapore, but still it is important for us to be aware that things like this could happen and if it happens to a big market like Indonesia or Brazil, then that is going to be a big hit for Sea Limited.

Reggie: Cool, cool. Yeah, and I think a lot of these risk factors, investors need to recognize this and discount it accordingly, fundamentally. I realized we talked so long, we never really comment on management other than the execution. I mean we did cover a lot of things there… 

Before we end, quick last words. What’s what are your thoughts on the management so far, the experience themselves? I think you definitely kept saying that they are executing very well, but I just want to hear your comments on management. 

Thomas: Yeah. The management thing is phenomenal. Most of… actually all of the founders are still in Sea Limited and they have a lot of skin in the game. Most of their net worth is actually tied to Sea Limited and when we look at the CEO, Forrest Li, he’s actually the one in charge of Garena. You look at how he actually gamified the whole experience. It’s amazing how he did it. 

Maybe just a bit of backstory as to why he came to Singapore… because he’s from China. His wife is from Singapore, so they studied from the same school overseas. The wife is a scholar with GIC or Temasek, one of the organizations and had to come back to serve bond. So kudos to GIC or Temasek for giving out the scholarship. That’s where you get Forrest Li to come in here and really start. 

The reason why he started Shopee was because he noticed his daughter was actually spending a lot of money on e-commerce. That was what gave him the idea to start Shopee. But the management at Shopee, rather at Sea Limited, is a very ambitious one and this is one thing I like to look out when I evaluate management. 

You can’t train someone to be ambitious, it must be something that’s innate in them and you look at the rate at which they are expanding, the amount of verticals that are going into the various countries. This management is definitely an ambitious one and there’ll be three people I constantly look out for when looking at interviews. One is Forrest Li, one is Yanjun Wang, which is the CCO of Sea Limited and there’s one last one called Junjie. He is the head of Shopee. 

They recently deployed him to China because they want to start bringing more products into Shopee for the rest of the regions outside of Indonesia, basically Brazil, Singapore etc. Because right now, Lazada is having an edge when it comes to bringing in products from Taobao because parent company… so they have that low pricing capabilities. 

Right now, you see them putting the key men behind Shopee in China in order to start bringing all these merchants directly onto the Shopee platform, no longer using drop shipping. When you see a lot of sellers in Shopee right now, the prices are still low but it actually can be lower if you remove the middleman in between. So he’s going there to poach these China distributors directly onto Shopee’s platform.

Reggie: Into Shopee Basics. 

Thomas: Yes. 

Reggie: Later, two more quarters, you’re here… “oh we are going to launch Shopee Basics.”

Thomas: Like Amazon, right? 

Reggie: Like Amazon Basics. Okay, good, good. I think we’ve definitely covered a lot of stuff today guys, and Sea Limited is a very big company that has a lot of parts. Not big in a sense that they are like very high revenue or not, but it’s decent size. One of the largest in this part of the world, but big in a sense that… we went through quite a lot. It’s three different business in an one and a half hour set. 

So yes. Thanks for joining us. For all of you that want to continue to have more interactions, join our Telegram group and also head over to SteadyCompounding. You subscribe and you can get all the detailed breakdown, the Excel sheet, the numbers and what Thomas is looking for.

Thank you. Thanks for coming on the show bro. 

Thomas: Thanks for having me. 

Reggie: Take care! 

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