Dismantling Sea: “Southeast Asia Little Tencent” how to make it?

Of the companies with a global market capitalisation of more than $1 billion, who has seen the biggest share price gain in the past 20 months? This time, the answer is not Zoom, Roku or Ping Duo Duo, but Sea Limited, the internet giant from Southeast Asia(Chinese-name Winter sea group). The company’s share price hit a low of $10.68 in January 2019 and closed at $138.21 by August 6. That means the company’s share price has risen by nearly 120 per cent in 19 months.

Author. Editing by Zhang Jilong.

Even in the six months since 2020, the company’s share price has risen as much as 245 per cent.

Sea Limited Monthly Share Price Chart.

Behind the surge in its share price is bright earnings figures.

Sea’s adjusted revenue for the full year 2019 was $2.9 billion, up 178.1% year-on-year, according to the results. Gross profit rose 5900 percent to $600 million from $1.1 billion in 2018.

Under the outbreak, Sea continued to grow at a high rate in the first quarter of 2020, with revenue of $910 million in the first quarter of 2020, up 57.9% yoY, and gross profit rising to $210 million, up 424.1% year-on-year.

The rise in share prices has boosted market capitalisation, with Sea’s latest market capitalisation reaching $65.4bn, making it Southeast Asia’s most marketed-to-head technology company.

Sea’s market capitalisation is close to that of China’s sixth-largest Internet-listed company, with a gap of just $200m.

Although the mobile Internet is still in its early years in Southeast Asia, Sea has a status that is no less important than Tencent and Alibaba’s position in China’s technology industry, and is therefore called Southeast Asia’s Little Tencent or Alibaba.

But in terms of business form, it is indeed a combination of Tencent and Alibaba. Sea’s main business is divided into three blocks, digital entertainment business Garena, e-commerce business Shopee, digital finance business SeaMoney.

Undeniably, this is a Chinese is very strange to the company, the domestic media for the company’s coverage and attention is not much.

It is not uncommon for Southeast Asia, with a population of more than 650 million and internet penetration of more than 60 per cent, to have a globalpresence internet company.

The question is, why did Sea do it?

The gaming business started out.

Interestingly, Sea is often referred to in media reports as a “game and e-commerce company”.

Among its three main businesses, the digital entertainment business, the gaming business, is not only the earliest development, but also the largest source of revenue, and is the only profitable sector.

The 2019 results show that Sea Games has revenues of $1.8 billion, or 60 percent of total revenue, and profits of up to $1 billion.

Sea was founded in May 2009 by Forrest Li, a Chinese-born in Tianjin, China, in Singapore. Before changing its name to Sea in 2017, Garena was the name of the company and, indeed, the name of its gaming brand.

But the company’s actual history can be traced back to 2005, jumei-Yupin founder Chen O-Pi is in Nanyang Technological University in Singapore, computer science, as a game enthusiast, he developed a school called “GGgame” eSports platform.

Around 2005, the Haofang platform, the united-party platform in the country emerged and was very popular. In The case of Haofang, the number of people online at its peak was even close to a million. But in Southeast Asia, there is no such product, although the company’s platform, which was acquired by Shanda at the time, was interested in entering the Southeast Asian market, but the product and localization have done a bad job.

“Since the products on the market are not mature, you might as well do it yourself.” With this idea, Chen Ou began to start a business.

In 2007, Chen Decided to study at Stanford University in the United States, in the process of applying, he met Guo, who later became the founder of the cross-border e-commerce company Lanting, and introduced Li Xiaodong, a senior manager in the Asia-Pacific region of a music television channel in the United States.

After learning that GGgame was developing rapidly, Li decided to join. It was not until Chen Left Singapore to study at Stanford that GGgame was completely handed over to Li Xiaodong, and Chen O withdrew.

In February 2018, Li Xiaodong changed the name GGgame to Garena, reportedly inspired by global arena.

However, at this time, the game market has undergone great changes, with the development of the Internet, competitive games began to online games, game makers began to pay more and more attention to their own matching and communication function development. ESports platforms are beginning to decline.

In 2009, Li Xiaodong liquidated the company and re-started it, but still used Garena’s name. This time, Garena began to target Tencent, making online gaming its core business.

Garena began with a game-agent model, and the key to its rise was the 2010 league of Heroes in Southeast Asia. Over the years that followed, it began working with Tencent, Changyou, EA, PUBG Corp, NEXON and other game production companies to localize the game.

Some industry insiders believe that Garena will be favored by many gaming companies, an important reason is that in the GGgame period has accumulated a high visibility and user base, and through the development of Internet cafes game management system and most of Southeast Asia’s Internet cafes have extensive and close cooperation.

The agency gaming business has paid off handsomely for Garena, which has been profitable two years after its inception and has grown to become the largest gaming agent in Southeast Asia.

In 2014, World Startup Report noted that Garena was valued at $1 billion, making it the first Internet company in Singapore to value $1 billion.

With the rise of mobile games and the strengthening of its overall strength, Garena has also begun to play mobile games and self-research games. And set up a game research and development team in Shanghai.

In December 2017, Garena’s first self-developed “chicken-eating” Mobile game, Free Fire, was released with great success.

Garena’s first self-developed “chicken-eating” Mobile game, Free Fire, is pictured on the Free Fire website.

By the end of Q3 in 2019, the game had more than 450 million registered users, making it the highest-earning Mobile game in Latin America and Southeast Asia in the third quarter, generating cumulative revenue of more than $1 billion, according to Sea’s earnings.

In the Google Play Store, Free Fire was named Best Popular Vote Game 2019, ranking second only to PUBG, Fortnite and Call of Duty Mobile Game in the Big Escape game.

The 2019 Free Fire, pictured, is from Sea.

In the first quarter of 2020, Free Fire continued to be the third-most downloaded game on Google Play worldwide. The number of daily active users exceeded 80 million.

In November 2019, Free Fire hosted its first international e-competition in Rio, Brazil, with more than 2 million people watching it live.

One of the big reasons for Free Fire’s great success is its precise control of the market, which focuses on less competitive places in Southeast Asia and Latin America, where it happens to be pubG Mobile, Fortnite, Wilderness Action and other less-than-focused markets.

In order to adapt to market conditions, Free Fire has also carried out targeted research and development. For example, in the face of Southeast Asia, Latin America and other regions of users of mobile phone configuration is generally not high, “Free Fire” in terms of game capacity and picture quality has been optimized, compared to pubG Mobile a game of hundreds of people to fight, “Free Fire” a game only 50 people.

In addition, free Fire has deployed localization teams in each market to develop events based on local customs, such as the Water Festival in Thailand, the Carnival in Brazil, and so on.

These initiatives have paid off well, especially during the outbreak. In the first six months of 2020, Free Fire generated $300 million, surpassing NetEase’s Wilderness Action and Tencent’s Call of Duty Blizzard,” according to Sensor Tower, which generated $260 million and $220 million in first-half revenue, respectively.

Led by Free Fire, Sea expects gaming and entertainment revenue to continue to grow in 2020, from $1.8 billion in 2019 to $1.9 billion to $2 billion.

E-commerce business high growth, heavy investment.

The e-commerce business is Sea’s fastest growing, but also the most expensive business.

From 2016 to 2019, Sea e-commerce’s share of total revenue increased from 5.1% in 2016 to 37.8% in 2019, and is expected to match or even surpass the gaming business in the future.

As the main source of Sea e-commerce, Shope’s total turnover in 2019 reached $17.6 billion, up 71% year-on-year from 2018. The total number of orders was 1.2 billion.

Shope e was introduced to the market in 2015. It is said that at that time Li Xiaodong was inspired by his daughter, who told him that he missed Taobao in China.

“We decided to launch our own e-commerce business. Because we have the ability to tap into some of the big opportunities in the market, we decided to give it a try. At a summit of investment institutions in 2019, Mr Li said that was the reason for his decision.

In the mode, Shope e is similar to Taobao, the main C2C mode. It started out in Singapore and then expanded to Malaysia, Thailand, Taiwan, Indonesia, Vietnam and the Philippines.

From 2016 to 2019, Sea’s e-commerce revenue was $17.7 million, $47 million, $270 million, $820 million, and a CAGR of 359 percent.

One reason is that it is just in time for the rapid growth of e-commerce in Southeast Asia, and one reason is that it has inherited the parent company Sea’s very good tradition of local operations, says Liu Jianghong, general manager of Shopee’s cross-border business.

“For example, we judge that many markets in Southeast Asia will skip the desktop and go directly to the mobile side, so we re-optimizethed the app to accommodate this group of ‘naturally mobile’ consumers, with the entire process from selection and order ingress to payment to be completed in 30 seconds.” Liu Jianghong said that shopee is used to taking different countermeasures to the consumption of different regions.

In fact, before Shopee, there was a popular e-commerce firm in Southeast Asia, Lazada. Standing behind Lazada is Alibaba.

In 2016, Alibaba bought a 51 percent stake in Lazada for $1 billion, taking control, and in 2017, it added another $1 billion to about 83 percent.

“The only way to drop ali was Lazada, which covers all the major countries in Southeast Asia.” In a comb inge on the development of the two platforms, Merten Ventures CEO Li Jiang 玕 told All-Weather Technologies that Shopee, as a latecomer, started in Taiwan and started in Indonesia in 2016 and then surpassed Lazada on GMV for more than a year.

According to the latest data from the Southeast Asian e-commerce platform released by the analytics agency iPrice Group in the second quarter of 2020, the data show that Shope mobile is the first in the market to become the top shopping app champion in Southeast Asia, while web end has the highest e-commerce platform with 270 million monthly traffic, while indonesia, Vietnam, Malaysia, Singapore and Thailand are ranked first in five markets.

So what is the specific reason why Shopee is gradually overtaking Lazada?

In the eyes of some investors who are concerned about Southeast Asia, there are the results of Shopee’s own efforts and Lazada’s own reasons.

In terms of business development, compared to Lazada online in the middle of the moment, Shope e absorbed one of the essence of China’s Internet enterprise development – burning money marketing, “Shopee subsidies are very strong, advertising campaign is very strong.” Li Jiang 玕 think.

In order to increase its visibility, Shopee has long invested in star marketing: in the Indonesian market, the South Korean women’s team BlackPink was signed as a regional spokesperson for Indonesia in 2018; in the Philippine market, he also hired Manny Pacquiao, a national treasure rits in the Philippines, as a brand ambassador for the 11.11 tha prize; and in August 2019 Shopee announced that global soccer superstar Cristiano Ronaldo would be its global spokesperson.

Such a large investment makes the e-commerce business become a “golden beast”. Sea’s earnings show adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of $1 billion in 2019, while the e-commerce business’s adjusted EBITDA was negative $1 billion, just enough to eat up the gaming business’s profits. This, combined with the digital finance business, resulted in a loss of $179 million in sea’s overall business in 2019.

Also in the first quarter of 2020, the e-commerce business lost $260 million while the gaming business contributed $298.4 million in profits.

One Singapore-based investor who mainly looks at Southeast Asian opportunities thinks that Lazada, which focuses on B2C, is more like Tmall and The C2C model of Shopee is more like Taobao. “

In terms of localization operations, he cites an example of how Shopee and Lazada competed in the Indonesian market before the outbreak, when competition was fierce. In fact, Lazada Indonesia CEO Lee Chun stayed there for no more than a few weeks, but Shope’s CEO spent at least 70-80% of his time in Indonesia.

Another interesting problem is that many of Shope’s executives are from Lazada. For example, Shope’s CEO, Feng Wei, worked at Lazada before joining Sea, where he was in charge of cross-border business, and joined Sea because of a poor job at Lazada, but Sea did not start e-commerce at the time.

Feng Wei’s work experience in Lazada made him more acutely aware of the problems he might encounter in the development of e-commerce business, so Shopee could well avoid these problems and take a lot of detours.

In December 2018, Indonesia’s C2C e-commerce firm Tokopedia also received a new $1.1 billion financing from SoftBank’s Vision Fund and Alibaba.

But Tokopedia also didn’t stand in the way of Spoute’s development, with Iprice releasing data on the Southeast Asian e-commerce platform for the first quarter of 2020, which also surpassed Tokopedia in Indonesia.

Lazada and Shopee rank in Southeast Asian countries, pictured from iPrice.

“If you believe that Southeast Asia e-commerce is a multi-billion dollar opportunity, Shope eis is most likely to seize it.” Li Jiang 玕 think.

Backed by Tencent and China.

Although Sea is a Singapore company, it has close ties to China.

In business, most of the games it represents are products of Chinese gaming companies, and domestic e-commerce practitioners are an important source of sellers;

On the team, Sea’s earliest founders and current core executives are also Chinese.

Sea founder Li Xiaodong graduated from Shanghai Jiaotong University’s Engineering Department, initially working as an HR for four years at Motorola and Corning, and went to Stanford University in 2006 to pursue an MBA.

Sea founder Li Xiaodong, pictured, from Sea.com.

Shope’s CEO, Feng Wei, is a native of Jiangsu Province, where he received a scholarship from the Ministry of Education of Singapore in 2000 to study computer science at the National University of Singapore and later to study management science and engineering at Stanford University. After graduating from college, he joined McKinsey and Lazada.

Not only that, but Sea is also actively using local Chinese talent, “I moved my family from Singapore to Shanghai, where I set up our game studio and started searching for a variety of customized resources in China. Li Xiaodong revealed.

Sea’s e-commerce business, Shopee, also has its China headquarters and research and development center in Shenzhen. According to a Shopee employee, Shopee’s Shenzhen research and development center was established in 2017 and has more than a thousand people by 2020, with an estimated 2,000 by the end of the year, surpassing the number of research and development staff at its Singapore headquarters.

To attract talent, Shopee has also offered a good deal, with some employees saying it can be paid as much as the nation’s first-tier internet companies, and even Byte Dance and Ping Duo Duo.

In addition to research and development, Shope e is also actively using China’s e-commerce resources, in Yiwu, Shenzhen, Xiamen and other places to hold a special chamber of business, store-in guidance, to encourage businesses through Shopee to go out to sea.

“Southeast Asia is actually more suited to be the first stop at sea. Southeast Asian consumers’ recognition of Chinese brands is actually much higher than that of european and American people. On Shopee, the number of Chinese sellers is growing exponentially every year. Liu Jianghong believes that the dividendof domestic e-commerce has come to an end, Europe and the United States have some less stable factors, and Southeast Asia is a fast-growing incremental market.

He cites clothing as an example, “The current supply chain of clothing in Southeast Asian countries is mainly content with exports.” Most of the local consumption comes from China. “

Sea’s development has also been close to an internet giant, Tencent.

Li Xiaodong has introduced that the founding of Garena was originally a standard Tencent. Like Tencent, social and gaming is its core business, and in 2010, Garena was launched, featuring meet-and-chat and gaming.

Also in the same year, Garena received investment from Tencent, which has since been involved in several rounds of financing for Sea, becoming a major shareholder in Sea. Tencent owns 39.8 per cent of Sea, surpassing Sea’s founder, Li Xiaodong, who owns 20.7 per cent, according to a prospectus disclosed by Sea in october 2017 when it went public.

Tencent’s support has also played a big role in the development of the game. In addition to providing capital support, Tencent has also poured its gaming resources into a stake. In 2010, Tencent invested in Riot Games, which gave Garena the rights to operate its popular game, League of Heroes, in Southeast Asia, and later gave Garena the Southeast Asian rights to several games.

In November 2018, Sea and Tencent will partner, garena, which will have a five-year priority for the release of Tencent’s mobile and PC games in Indonesia, Thailand, the Philippines, Malaysia, Singapore and Taiwan.

In media reports, Sea is seen as enjoying Tencent’s “son-in-hand” treatment.

On the other hand, however, the tie-up between Sea and Tencent may not be entirely a good thing, and may limit its scope for development. A person at Ernst and Young said.

In the Southeast Asian market, whether Sea will compete with Tencent is also a potential question. Sea is building its own “Ant Financial” SeaMoney, which includes not only payments but also digital banking. WeChat Pay is also currently trying to expand into Southeast Asia, and the two will not conflict.

More than these long-term problems, some investors are more worried about whether Sea’s share price is in a bubble.

“The fundamentals and share prices are now at an all-time high, ” said one investor worried that Sea would release its second-quarter results in late August, predicting that the quarterly results should look better and the problem was that “the share price has doubled compared to three months ago and seems to be unsupportable.” “