Is TikTok Shop a threat?
Sea Limited. Equity Research! Part 2/3
Welcome to Part 2 of the Sea Limited Deep Dive!
In Part 1, we explored how Sea came to be and how this fast-growing technology company from Singapore makes money! (Read Below)
Today, we are looking at Sea’s competition and exploring the risks the company must manage while operating a fintech and e-commerce business in Southeast Asia!
Additionally, we will discuss the management team and look at the moats of the company.
Let’s take a look!
1. Management
2. Moats
3. Competitors
4. Risks
5. Part 3
1. Management
As mentioned earlier, the company was founded in 2009 as a digital video game distributor, Garena Interactive. Today, more than a decade later, all three co-founders are still running the company, with Gang Ye serving as COO, David Chen as Shopee CPO, and Forrest Li as CEO.
Gang’s and Forrest’s stories are quite similar, as both were originally born in China, but moved to the US for university. Gang holds a degree in computer science from Carnegie Mellon University, while Forrest got his MBA at Stanford. Both would eventually move to Singapore, where they would meet David and create what would become Sea.
Forrest Li owns around 9% of the company, Gang Ye 5%, while David Chen 3%!
The salary of the management is set by an independent compensation committee. The members of the committee are appointed by the board of directors of Sea Limited, and are responsible for setting bonus goals and KPI’s for the CEO.
The total cash compensation of the entire management was $2.96M in 2024, a relatively modest amount compared to the salaries of similarly sized companies.
However, in 2022, the management was awarded 30M options to purchase shares for $120 a share, with options vesting quarterly over the next 5 years and expiring in 10 years, with Forrest Li receiving 5M of these options.
At the current share price of $164, the entire compensation package is worth $1.32B (($164-$120)*30M Options), with $220M of that going to the CEO.
Overall, the management’s interests are aligned with shareholders by owning a large chunk of the company and having long-term performance stock options!
2. Moats
Economic moats are operational and strategic characteristics of a business that protect it from competitors and help sustain long-term profitability.
We already established that Sea is a fast-growing company, but that growth could disappear as fast as it appeared if it’s left unprotected.
The management of the company fully understands it, so they have worked tirelessly to build a logistics, network effects, and scale moats, while using the inter-segment synergies to their advantage.
Logistics
In the 2000s, Amazon realized that warehousing and logistics infrastructure offered by the existing 3rd party suppliers was insufficient. So, to accelerate the transition from brick-and-mortar to e-commerce, Amazon started aggressively investing in building out its own logistics infrastructure.
Thanks to Amazon spending hundreds of billions of dollars on it, today, they have a logistics footprint that is uncomparable to any other e-commerce or logistics player in the US and Europe.
Shopee is aiming to do the same in Southeast Asia!
In addition to partnering with various local logistics companies, Sea has created a dedicated logistics subsidiary, Shopee Xpress.
Shopee Xpress handles first-mile pickup from sellers, storing, sorting, and last-mile delivery to buyers.
In-house logistics operations are crucial for Shopee to deliver a superior customer experience than competitors!
Thanks to their investments in Xpress, Shopee has been able to significantly cut down delivery times, especially in certain previously underserved islands. Today, customers in these regions can receive packages within a few days, compared to a few weeks just 3-5 years ago.
Let’s remember that there are thousands of islands in the region, with millions of potential shoppers.
For instance, Shopee has built a logistics hub on the island of Cebu in the Philippines, which functions as a distribution and delivery center for various nearby islands.
This hub enables Shopee to deliver orders faster, more reliably, and cheaper than competitors. Faster delivery supports increased customer satisfaction, driving repeat business and giving Shopee a competitive advantage.
Continued investments in logistics are likely to continue strengthening their logistics advantage!
Network Effects
Shopee is a marketplace platform where each additional merchant makes the platform more appealing to potential customers. People love a large selection of items to choose from, the more items there are on the platform, the bigger the probability that a customer will find the item they want.
The same applies to merchants, as they want to sell to a large customer base. The more customers a marketplace has, the more merchants want to sell their products on that marketplace.
More merchants lead to more customers, which lead to more merchants, which lead to more customers!
This creates a powerful network effect that is difficult to break. Once merchants begin to earn income on Shopee, it is hard to convince them to switch to a competing platform. Similarly, customers who have used Shopee many times are less likely to switch to another platform.
The same principle is also applicable in financial services. Customers want a digital wallet that is widely accepted, whilst merchant partners don’t want to waste time implementing a system to accept a wallet that nobody uses.
Today, the Monee platform has over 50M active users and 26M active credit users, making the platform highly appealing to new merchant partners. With each new functionality, the platform becomes more appealing to customers and partners.
Network effects create a self-reinforcing cycle, strengthening the business and protecting it from competition!
Scale
As the largest e-commerce and fintech player in the region, Sea enjoys significant scale advantages.
In Shopee, the more packages they handle, the lower the processing cost per package!
Apart from the already discussed logistics advantage, Shopee enjoys major cost savings in technology, administration, and marketing.
It doesn’t take triple the software engineers, lawyers, accountants, and customer service employees to process triple the orders.
In Monee, the more customers they have, the lower the cost of capital they can get to fund loans, and the better their negotiating position with merchant partners!
Lower cost of capital allows Monee to issue more loans, charge a lower interest rate, or earn a higher net interest income. Whereas better terms with merchant partners enable Monee to offer services at lower prices and offer more bonuses.
In Garena, having 661.8M active players makes the platform attractive to new potential gaming partners!
Overall, scale creates a sustained and growing advantage that enables Sea to serve its customers, merchants, and fintech partners cheaper and faster, driving increased usage of Sea’s products.
Synergies Between Segments
All 3 segments of the company, Garena, Shopee, and Monee, complement each other, making the entire ecosystem more valuable and defensible!
Monee wallet is used to transact on Shopee and Garena. Other video game makers and e-commerce platforms use 3rd party payment processors such as Stripe or Adyen, which take a 2-4% cut of each transaction. This integration creates a structural cost advantage for Sea, allowing it to offer more discounts and rebates to its customers.
Meanwhile, Garena games are promoted inside Shopee, whilst Garena’s in-game currency can be purchased on Shopee.
Most importantly, Garena’s blockbuster game Free Fire was instrumental in Shopee’s launch in Brazil!
Free Fire was a huge hit in Brazil, so in 2019, when Shopee launched in the country, they heavily used the game to promote the platform. By offering various in-game and Shopee incentives to download and use this new e-commerce platform, Sea catapulted Shopee into Brazil’s most downloaded e-commerce app of 2021.
Last, but not least, Monee loans are used to fund both Shopee merchants and customers, to support supply and drive increased consumption on the e-commerce platform.
Competitors without similar integrated systems are struggling to compete with Sea!
This is because the blending of e-commerce, financial services, and digital entertainment creates cost advantages, supports network effects that drive more platform users, and creates new monetization opportunities.
3. Competitors
Shopee is the clear e-commerce frontrunner in the region, Lazada is the laggard, whilst TikTok Shop is the fast-growing upstart.
According to Momentum Works estimates, Lazada had a GMV of $18.8B in 2023, TikTok Shop was 3rd with $16.3B, and Tokopedia was 4th with a similar amount.
Let’s look at these and other Sea’s competitors.
Lazada
Lazada is the Southeast Asian e-commerce brand of the Chinese e-commerce and technology conglomerate Alibaba.
One would expect that with the backing of such a large and well-capitalized technology giant, Lazada would dominate the region, but that isn’t the case.
In 2020, Lazada’s $13.1B GMV was 54% of Shopee’s GMV, but by 2023, their GMV was only 33% of Shopee’s, a huge decline.
Since peaking in 2021 at $21B, Lazada’s GMV has declined by 14% to $18B, whilst in the same time period, Shopee’s GMV increased by 30%.
Lack of effective localization is often named as one of the largest causes for Lazada’s underperformance in recent years!
Shopee focused on having deep and real on-the-ground expertise by hiring the best local managers. Whilst Alibaba just assigned various Chinese and China-based employees as country heads.
Lazada used the same marketing and operational strategies as in China, whilst Shopee delegated more responsibility to regional heads, empowering them to make faster decisions.
Lazada’s more centralised and “copy-paste” approach clearly hasn’t proven effective.
Another key factor behind the underperformance is their approach to logistics!
As mentioned in the moats section, Shopee invested heavily in building its own logistics networks. Meanwhile, Alibaba was more focused on building a logistics network in China, and used various local logistics partners that are slower, more expensive, and have a lower delivery radius.
Overall, I don’t view Lazada as a serious competitor to Shopee and find it likely that the gap between them will continue expanding in absolute and relative terms.
TikTok Shop
TikTok is the Chinese social media app that exploded during the pandemic and today is the world’s second-largest social media company, only behind Meta.
TikTok used its massive success in social media to do what Meta failed to do, build a large and successful e-commerce business!
Their 2B MAUs can view and purchase products promoted by TikTok creators right in the app.
Creators can easily promote their merchandise through shoppable videos and live shopping events!
A beauty channel can link the reviewed lipstick, a fashion influencer can sell accessories, a tech commentator can promote a smartwatch, and so on.
TikTok has turned some of the platform’s biggest creators into promotional salespeople.
This strategy has proven extremely successful, with TikTok Shop growing GMV by a mindboggling 270% in 2023!
In 2023, TikTok’s GMV reached $16.3B, around 30% of Shopee’s. However, after acquiring Tokopedia, the 4th largest e-commerce platform, TikTok Shop has overtaken Lazada to be in the second place.
TikTok’s strategy is different from Shopee, as it’s more of a front-end sales funnel, less of a complete e-commerce experience.
Shopee offers a full-stack e-commerce experience that includes warehousing, logistics, order management, refunds, sales analytics, seller trainings, customer and seller financing, and more.
TikTok Shop sellers use external platforms such as Shopify, WooCommerce, and 3rd party logistics companies to manage their business on TikTok, with TikTok essentially only handling discovery and payments.
To compete with TikTok’s effective live shopping and shopping video experiences, Shopee has introduced similar offerings in its app. Additionally, Shopee has entered into a strategic partnership with YouTube to integrate shopping into YouTube videos.
Nevertheless, TikTok Shop is a serious competitor that Shopee must consider!
3.3. Grab
Grab is Southeast Asia’s largest food delivery and mobility company, often dubbed “The Uber of Asia”. I wrote a full Deep Dive on the company a few months ago.
Grab competes with Sea in 3 key areas, food delivery, financial services, and ecosystem/superapp play.
Shopee Food is the 3rd largest food delivery platform in the region, processing $2.3B in orders in 2024. Grab is dominant, but Shopee is growing quickly.
Grab’s financial services arm competes with Monee, its presence is smaller, but it competes most intensively in Singapore.
But most importantly, both companies are competing to build a commerce super app ecosystem used by millions
Both have highly popular applications that are used quite frequently. Their main strategy is to use financial services to drive increased consumption on the platform and get a higher wallet share of customer expenses.
Today, Sea wins on scale and commerce depth, offering a larger selection of products and processing more transactions. However, Grab has a broader daily-use utility and transaction frequency, capturing more everyday customer touchpoints.
As both scale their operations, the overlap between their offerings will only increase, intensifying competition.
Others
As I mentioned before, Shopee has been quite successful in Brazil, and as of 2024, it is the 3rd largest e-commerce player, with $15B in GMV sales.
Shopee’s main competitors in Brazil are Mercado Libre and Amazon. In 2024, Shopee grew platform sales faster than its competitors, jumping 28%, whilst Mercado Libre grew 15%.
Their strategy is clearly working, with Shopee being a market share taker, growing 3 times as fast as Amazon, which grew platform sales by 8.6%.
If these growth trends continue, Shopee will overtake Amazon in 2025, an unbelievable achievement!
In video games, Garena competes with hundreds of large and small video game developers, and a new hit is always around the corner.
Meanwhile, in financial services, apart from the already mentioned Grab, Monee competes with dozens of local and regional fintechs.
4. Risks
Regional Risks
While Southeast Asia has enjoyed incredible stability in the last 2 decades, historically it has been a politically, environmentally, and economically volatile region.
On the political side, most regional countries are led by corrupt and incompetent governments. Corruption in the region is a pervasive problem, leading to a lack of trust in the government, weaker rule of law, and wasted state resources. Additionally, if China invades Taiwan, the whole region could explode in War and trade tensions not seen since WW2.
Whilst if we look at the environment, the region is heavily exposed to hurricanes, volcanic explosions, tsunamis, rising sea levels, and climate change. For instance, the 2004 Indian Ocean tsunami caused hundreds of thousands of deaths and destroyed billions of dollars worth of infrastructure in Thailand and Indonesia.
Meanwhile, while the region has some of the fastest-growing economies in the world, this growth has been highly dependent on a few global trends that could reverse. Export-oriented global trade system is getting weaker due to rising protectionism and tariffs. Furthermore, strong reliance on tourism, especially for the lower-income people, puts the economy at risk if tourism numbers drop.
Overall, political instability, large environmental disruptions, and weaker economic performance could stifle Sea’s operational performance, reducing revenue and increasing costs, leading to lower profits!
Regulatory Risk
The company is quite heavily exposed to regulatory risk in its Shopee and Monee divisions.
As an e-commerce and food delivery platform, Shopee is exposed to government regulations that limit its take rates!
Restaurant owners, delivery drivers, and medium and small businesses that sell on Shopee are politically important constituencies that a politician could want to try to get on their side by promising to lower the fees charged by platforms. For instance, there have been some discussions in the Philippines to cap certain Shopee fees.
Any caps on fees could significantly lower Shopee’s ability to increase its take rate, lowering revenue growth and reducing profitability.
Meanwhile, as a financial institution, Monee has to comply with strict banking and financial services regulations.
Any changes to these regulations could force Monee to discontinue some services, charge lower interest rates, have more in reserve capital, or implement stricter borrower protection practices.
Additionally, Monee might be forced to adhere to stricter anti-money laundering and know-your-customer laws.
Increased regulatory burden could affect Monee’s ability to monetize its 50M+ large customer base!
Gaming is a Hit-Driven Business
Video games are fundamentally a hit-driven industry with a significant share of industry revenue and profits generated by a small number of blockbuster games.
For instance, in 2023, Honor of Kings was the highest-earning mobile game of the year, generating $1.58B, around 1.7% of the sales of the entire industry. Meanwhile, the top 10 games together made around $8.5B, about 9.2% of the industry.
This dynamic of the industry makes Garena’s business extremely volatile, as we discussed in Part 1 of the Deep Dive.
Operating in such an environment means that Garena’s revenues could double in a year (2021) or collapse by 60% (2023), and we, as investors, have a very limited visibility into the future.
If Free Fire underperforms for whatever reason, it can have a large adverse impact on the financial performance of the whole company, especially considering that Garena is responsible for 72% of the operating income of Sea Limited!
The underperformance of Garena was the leading cause behind Sea’s revenue growth falling from 25.1% in 2022 to just 4.9% in 2023. This inherent volatility makes Sea a less predictable business.
5. Part 3
This Deep Dive will conclude next week with the release of Part 3.
In Part 3 we will take a look at Sea’s finances, explore their opportunities for growth, and finish with a valuation model!
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