SEA(SE.US): No dropouts, still "Little Tencent"

On the evening of March 4th Beijing time, before the US stock market opened, Southeast Asian "Little Tencent" Sea (SE.US) released its fourth quarter financial report for 2024. Overall, the improvement in profit for the e-commerce sector exceeded expectations, which was the biggest highlight. However, there are some underlying issues in the gaming and financial sectors, with the key points as follows: 1. In the key Shopee e-commerce sector, this quarter's GMV reached 28.6 billion, a nearly 24% year-on-year increase, significantly better than the market's expected 18% year-on-year growth. In terms of trends, the quarter-on-quarter growth rate only slowed by about 1 percentage point, indicating that despite entering a high base period, the resilience of e-commerce business growth is significantly stronger than expected. Breaking down the price and volume, this quarter's order volume grew by 20% year-on-year, slowing down by 4 percentage points quarter-on-quarter. While the growth in volume has slowed, the increase in average order value by 3% (due to factors such as live-streaming e-commerce and price subsidies) took over as the driver of GMV growth. On the revenue side, Shopee's revenue in this quarter increased by 41% year-on-year, significantly higher than the market's expected 35% growth, with a quarter-on-quarter slowdown of only 2 percentage points. The revenue exceeding expectations mainly came from the transmission of GMV growth exceeding expectations. Regarding monetization, the increase in monetization rate on the Shopee platform this quarter only increased by 0.1 percentage points quarter-on-quarter, the smallest increase since the 4Q23. However, the monetization rate of the high-profit marketplace increased by 0.4 percentage points quarter-on-quarter, mainly due to a decrease of 0.3 percentage points in the monetization rate of low-margin services such as delivery fees. Therefore, although the increase in monetization rate this quarter narrowed, the impact on profits will not be significant. 2. In the future star DFS financial sector, this quarter's key indicator - the unrecovered loan balance reached $5.1 billion, a 64% year-on-year increase, but it was actually lower than the expected $5.44 billion (+75% yoy). However, the sector's revenue surged by 55% year-on-year, with a 17 percentage point acceleration quarter-on-quarter, far exceeding the market's expected 36% growth. This trend was opposite to the growth trend of the loan balance. It can be speculated that this quarter the company's main focus in the financial business was on improving monetization rate rather than business scale. 3. In the key operating indicators of the Garena gaming sector, this quarter had approximately 620 million active users and 50 million paying users, with the former decreasing by about 11 million quarter-on-quarter. Both indicators were lower than the market's expected 3% and 2%, respectively. The loss of active users again is a negative signal. Fortunately, market expectations for revenue were not high, with an expected year-on-year growth rate of 18% and a quarter-on-quarter slowdown of 6 percentage points. Therefore, the actual 19% growth in revenue was still better than expected. In terms of price and volume, the number of paying users this quarter remained flat quarter-on-quarter, but the average payment amount per user deteriorated from being flat year-on-year last quarter to a year-on-year decline of -6% this quarter, which was the main reason for the slowdown in revenue growth. Overall, the company's gaming business ecosystem showed signs of deterioration and did not perform well. 4. In terms of profits, the most watched e-commerce sector achieved an operating profit of approximately $80 million this quarter, significantly better than the expected less than $20 million. The operating profit margin reached 2.2%, significantly better than the expected 0.5%, indicating that the progress of profit release in the e-commerce business was faster than expected. However, the DFS financial sector achieved an operating profit of $198 million this quarter, significantly lower than the expected $230 million. Additionally, the sector's profit margin was 27%, showing a certain decrease from the previous two quarters' levels of 28% to 29%. This was mainly due to the financial sector's marketing expenditure nearly doubling quarter-on-quarter. With the rapid growth of the business scale, the necessity of increased expenditure to maintain high double-digit growth seems to have also increased. As for the gaming sector, profits this quarter reached $270 million, better than the expected $250 million. The profit margin for this quarter's gaming sector was 52%, an increase of 0.9 percentage points year-on-year, but a slight decrease from the 52.7% in the previous quarter. Overall, the gaming sector's profit performance remained relatively stable. 5. In summary, this quarter Sea achieved a total revenue of $4.95 billion, a 37% year-on-year growth, with a 6 percentage point increase in growth rate quarter-on-quarter, indicating a strong growth. However, due to underlying operational issues in the financial and gaming sectors, the actual value was not as high as it seemed. At the gross profit level, the company's overall gross profit margin increased from 43% to 45%, mainly due to the 2 percentage point increase in the overall gross profit margin of the e-commerce and financial sectors. Combined with the above, the increase in both the e-commerce and financial business monetization rates should be the main reason for the gross profit margin improvement. On the expense side, the total expenditure on the four operating expenses was nearly $1.95 billion, a 19% year-on-year increase, indicating a certain rebound in expenditure intensity. The total expenditure on the four expenses as a proportion of revenue increased slightly from 39.3% in the previous quarter to 39.5%. Specifically, the main increase was in marketing expenses, which increased by approximately 0.9% to 21.2% as a proportion of revenue quarter-on-quarter. Looking at the sectors, the marketing expense rate for the Shopee e-commerce business actually decreased by 0.7 percentage points quarter-on-quarter. However, the gaming marketing expense rate increased by 48% year-on-year, showing a relatively significant increase. The financial sector's marketing expenses nearly doubled from $66 million in the previous quarter to $120 million, indicating a significant increase in marketing expenses. Although the overall operating expense rate increased slightly by 0.2 percentage points quarter-on-quarter, the increase in monetization rate led to a full 2 percentage point increase in the gross profit margin. Therefore, this quarter Sea's overall operating profit margin still increased to 6.2% (vs. 4.7% in the previous quarter), with actual operating profit of approximately $310 million, about 18% higher than expected. The speed of profit release was still better than expected. Dolphin Research opinion: After nearly tripling in market value in about a year, investors will inevitably face the question of whether the company still has investment value after such a large increase. To answer this question, one must understand what performance expectations are implied by the current valuation in order to make a reasonable judgment between "high valuation" and "good performance." If using a simple and direct overall group PE valuation method, Sea's market value before trading corresponded to a P/E ratio of over 30 times the net profit of 2026. Dolphin Research does not comment on whether this is expensive or cheap, but it reflects the expectation that the company is inAfter the 26th fiscal year, it still maintains a profit growth rate of 20% to 30% or higher.From the perspective of segmented valuation, the market values Garena's gaming business at around 10x~12x PE based on net profit, corresponding to an estimated valuation of over $100 billion. There is not much attention or disagreement among sellers in this sector. The flexibility in valuation mainly comes from the e-commerce and financial sectors. Currently, the market values the e-commerce business at slightly below $50 billion, implying an expectation that the e-commerce sector will achieve an adj.EBITDA of over $15 billion in 2026 (corresponding to a profit margin slightly higher than 1% of that year's GMV) and an EV/EBITDA valuation multiple of around 30x. Dolphin Research believes that a profit margin slightly above 1% in terms of EBITDA/GMV is not high from a ceiling perspective, and compared to leading e-commerce companies in China and the US, a profit margin of 2%~3% is not unattainable. Of course, the expectation of a 30x valuation multiple also implies that Shopee's profit margin will continue to rapidly increase after 2026. Therefore, Dolphin Research believes that the market's valuation and expectations for Shopee are not excessively expensive or unattainable in an absolute sense. The question is how to move from the current break-even point to achieving a profit margin of over 1%. Continuous attention and verification of the progress in improving Shopee's quarterly profit margin are needed. The DFS financial business may be a potential source of incremental valuation that the market has not fully recognized. The current valuation of this sector is based on achieving an adj.EBITDA of approximately $10 billion in 2026 (corresponding to a CAGR of about 25%), valued at around 10x, corresponding to a market value of $100 billion, which is only equivalent to the valuation of the gaming sector. With growth expectations of over 20%, this valuation multiple is clearly fragmented. We believe that as market awareness of this sector accelerates and given the huge potential market size of Fintech, DFS could bring unexpected positive results. Based on the expected risks related to the stock price before the performance announcement, we can see that the biggest highlight of this quarter's performance lies in the better-than-expected improvement in Shopee's profit margin for the key e-commerce business. Since the adj.EBITDA/GMV for the e-commerce business has already reached 0.5% this quarter, the market's expectation for achieving a profit margin of 1% or higher by 2026 seems "easy" rather than overly optimistic. This may further induce the market to raise its expectations for the pace of profit improvement in the e-commerce business. However, beyond the better-than-expected performance in the e-commerce business, Dolphin Research also found that the performance of the gaming and financial businesses did not appear as well as indicated by the initial revenue indicators. The number of users and average payment amount in the gaming business both declined, showing a weakening ecosystem. Additionally, the growth in underlying loans in the financial sector was slightly lower than expected, while expenses increased more than expected, dragging down profit growth. This may also be a reason why the stock's sharp rise after the performance announcement significantly narrowed compared to the pre-market surge. The detailed interpretation of the financial report is as follows: I. Growth and Profit Increase, Shopee Deserves to be the flagship In the key Shopee e-commerce sector, this quarter's GMV reached $28.6 billion, a year-on-year increase of nearly 24%, significantly better than the market's expected year-on-year growth of 18%. In terms of trends, the quarter-on-quarter growth rate only slowed by about 1 percentage point compared to the previous quarter, despite entering a high base period, the growth of the e-commerce business has almost not slowed down, showing significantly stronger resilience than expected. Looking at price and volume separately, this quarter's order volume increased by 20% year-on-year, a decrease of 4 percentage points quarter-on-quarter. The growth rate of the number of orders has indeed significantly and consistently slowed down in the past three quarters, but like the previous quarter, as the growth of quantity slows down, the stabilization and rebound of the average order price has taken over (due to the impact of live streaming e-commerce and price subsidies), driving the growth of GMV. This quarter, the average order price increased by 3%, although the absolute value is not high, but compared to the average price decline of around -10% in the previous few quarters, the marginal contribution to the GMV growth from this quarter's accelerating growth of the average price is still quite substantial. In terms of revenue, this quarter Shopee's revenue increased by 41% year-on-year, significantly exceeding the market's expected growth of 35%, and only slowed by 2 percentage points quarter-on-quarter. It can be seen that the revenue exceeding expectations mainly came from the transmission of GMV growth exceeding expectations. From the perspective of monetization, according to the company's disclosure, Shopee conducted a new round of monetization rate increase in the Thai and Indonesian markets in early 2025, roughly raising the upper limit of the monetization rate by 1 percentage point. And major competitors Lazada and TikTok Shop have also similarly raised monetization rates in some markets. It can be seen that in the Southeast Asian region, raising monetization rates is still a common and consistent choice for the e-commerce industry. However, according to Dolphin Research's calculations, the increase in the monetization rate of Shopee's platform business this quarter was only 0.1 percentage points quarter-on-quarter, the smallest single-quarter increase since the trend of increasing monetization rates resumed in 4Q23. However, specifically, the monetization rate of the high-profit marketplace service still increased by 0.4 percentage points quarter-on-quarter, while the fee items with lower profit margins such as VAS (such as delivery fees) decreased by 0.3 percentage points, dragging down the overall increase in monetization rate. But since the high-profit marketplace monetization rate is still significantly increasing, the drag on the profit margin improvement of the e-commerce sector will be smaller. II. SeaMoney financial business continues to grow rapidly The future star SeaMoney financial sector, the core metric this quarter--uncollected loan balance reached $5.1 billion, a year-on-year increase of 64%, but it is still significantly lower than the expected $5.44 billion (+75% yoy). However, the sector's revenue increased by 55% year-on-year, accelerating by 17 percentage points quarter-on-quarter, far exceeding the market's expected growth of 36%. While the trend of loan balance growth is contrary to this, it can be speculated that the company's main focus in the financial business this quarter was on increasing monetization rates rather than business scale. In addition, this quarter, the proportion of bad debts overdue for more than 90 days that the company has not recovered remained stable at 1.2%, indicating relatively stable credit loan quality. III. Both the number of users and the average payment per user decreased, is the gaming sector about to cool down? In terms of key operating indicators in the gaming sector, this quarter had approximately 620 million active users and 50 million paying users, the former decreasing by about 11 million quarter-on-quarter. Both indicators were below market expectations by 3% and 2%, and the decrease in active users and the average payment per user indicates a weakened ecosystem. Additionally, the growth in bottom-line loans in the financial sector was slightly lower than expected, while expenses increased more than expected, dragging down profit growth. This may also be a reason why the stock's sharp rise after the performance announcement significantly narrowed compared to the pre-market surge.The temperature is starting to drop, which is obviously not a good sign.However, the market's expectations for revenue were not high, with a year-on-year growth rate of 18%, a decrease of 6 percentage points from the previous quarter. Therefore, the actual growth of 19% was better than expected. Similarly, in terms of revenue and volume, the number of paying users this quarter remained stable compared to the previous quarter, but the average payment per user decreased from the previous quarter and worsened from flat year-on-year to a decrease of 6% year-on-year, which is the main reason for the slowdown in revenue growth. Therefore, overall, there are signs of weakening in the company's gaming business ecosystem. Due to the impact of changes in deferred revenue balances, Garena's revenue on a GAAP basis grew by 1% year-on-year this quarter, a significant improvement from the -16% performance in the previous quarter, and better than the market's expected -1% year-on-year. However, when financial indicators affected by adjustments and underlying operating data show opposite trends, the latter is clearly more important. Therefore, the overall growth of the gaming business this quarter is still negative. In summary, in terms of growth, the most critical e-commerce business performance is significantly better than expected, but the underlying operating data of the gaming and financial sectors are not too good compared to expectations. Nevertheless, the absolute growth of the financial business is still good. In terms of profit indicators, the most critical e-commerce sector achieved operating profit of approximately $0.8 billion this quarter, significantly exceeding the expected less than $0.2 billion. The operating profit margin reached 2.2%, significantly better than the expected 0.5%, showing that the progress of profit release in the e-commerce business is faster than expected. The profit of the gaming sector this quarter was $2.7 billion, better than the seller's expected $2.5 billion. The profit margin of the gaming sector this quarter reached 52%, an increase of 0.9 percentage points year-on-year, but a slight decrease from the previous quarter's 52.7%, which was significantly better than the seller's conservative expectation of 48.3%. However, despite exceeding expectations, the profit margin of the gaming sector remained relatively stable. The DFS financial sector achieved operating profit of $198 million this quarter, significantly lower than the seller's expected $230 million, and the sector's profit margin of 27% was slightly lower than the 28%-29% levels of the previous two quarters. Combined with the analysis of expenditure in the later part of the document, the marketing expenditure of the financial sector this quarter almost doubled compared to the previous quarter. It seems that after a significant increase in scale, in order to maintain high double-digit growth, additional expenditure must be matched. Overall, the revenue growth outpaced the growth in expenses, and the progress of profit release exceeded expectations.