Sea Ltd and its e-commerce division, Shopee has been in the news lately and it wasn’t for something good.
It started months ago when Shopee let go some of its ShopeeFood and ShopeePay employees based in in South East Asia. Since then, the speed has ramped up and the company has been implementing a series of cost cutting measures such as reduced incentives in Shopee for both the user and couriers, reducing employee benefits and rightsizing certain business segments.
Shopee has also announced closure of its operations in countries such as India, France and significantly downsized its presence in four Latin American countries, namely Argentina, Chile, Colombia and Mexico. It will continue to operate in Brazil.
Sea suspended its 2022 revenue forecasts for Shopee as it adapts to increasing macro uncertainties and focus on efficiency and optimisation for long term sustainability and profitability
The company’s leadership including Forrest Li has also said that the leadership team has decided not to take any cash compensation until the company reaches self-sufficiency, with a target to achieve this in the next 12 to 18 months.
UPDATE: Grab has shared a timeline where the company estimates to breakeven on its adjusted EBITDA by 2H24, about 2 years from now. As Grab has a milder cash burn and does not envisage having to undertake mass layoffs and is still selectively hiring, it is still expecting to grow revenue by 45% to 55% in 2023 and expects to break even in its digital bank operations by 2026.
How significant is Shopee to SEA’s income?
Looking at the chart below presenting Sea Ltd’s June quarter’s income statement, we can see that Shopee accounts for nearly 60% of Sea’s revenue, however it makes up almost the entirety of the operating loss as Garena is profitable.
Why didn’t Sea focus on profitability earlier?
Growth was the key focus.
Expanding geographically and capturing market share in each country it operated was more important. Profit was considered secondary. Similar to companies such as Alibaba and Amazon, the belief was that with scale and market share, profit would naturally flow through subsequently.
Unlike other e-commerce or tech companies, Sea also had a cash cow in the form of Garena. However, due in part to the post-pandemic reopening and in part to a ban on its mobile game Free fire in India, Garena has seen declining profits. With Shopee scaling up and increasing the cash burn, this is an impact to the bottom line from both segments. The digital segment, SeaMoney is also loss making as it is in the initial phases of scaling up with a digital bank launching at the end of 2022.
Capital markets were strong, fund raising was easy. In September 2021, Sea raised $6 billion;
- $3.5 billion was raised by selling 11 million shares at $318
- $2.5 billion raised through a convertible bond offering due in 2026, paying a 0.25% coupon rate and having an exercise price of $477.
If the share price is above $477, bondholders will likely exercise the shares, if it is below, bondholders will have to be repaid in cash (Note: Sea is able to redeem these bonds from Sept 2024 for cash if the share price is above $620 for a certain period). As of 21 September 2022, Sea is trading below $60.
The interest rate environment has also changed. Cost of debt is much higher than before, if Sea chooses to rely on further debt to expand, the weight of further debt may soon be unwieldy.
What is Sea’s and Shopee’s target?
Sea’s target is self sufficiency. The company has $7.8 billion in cash and a $2.5 billion convertible bond which may have to be repaid in cash. Sea has a cash burn of $800m a quarter. If the company continues to scale at the current rate, the cash burn will widen. Hence, Sea has to scale or at least maintain its size while reducing its cash burn.
Shopee’s target is an adjusted EBITDA breakeven. According to Shopee, its adjusted EBITDA loss per order, before allocation of headquarters’ common expenses, in a more established market such as Southeast Asia or Taiwan is less than US$0.01. However, the figure stood at US$1.42 in Brazil. It is looking to breakeven in its established market with a longer term view of profitability.
Sea vs Grab – Who is growing their headcount more?
Sea and Shopee have dominated local headlines. On the other hand, Grab has not been in the news even when its competitors such as Foodpanda had laid off staff.
In fact, when we looked at Grab’s career portal, it shows 560 available positions! Sea actually has more available positions. We counted 1046 openings in Shopee and 173 opening in SeaMoney. There are also tens of jobs in the other divisions of Sea. It is worth nothing that there are zero openings in Garena.
This shows that Sea is rightsizing the company and hiring in places of growth while reducing costs and headcount in certain business segments.
Does Grab not have a cash burn issue? Is Grab doing better?
Grab also faces a cash burn. In 2Q22, it saw $252 million in operational cash outflow. But it has a stronger balance sheet with $8.1 billion in cash and investments with borrowings of $2 billion. With a smaller cash burn, it will last much longer than Sea’s current cash burn of $800 million.
Shopee reported adjusted EBITDA loss of $650 million on a gross merchandise value (GMV) of $19 billion while Grab reported $233 million loss on a GMV of $5 billion. This translates into a -3.4% margin for Shopee while Grab’s margin is -4.7%. From this perspective, it seems like Shopee is actually faring better than Grab.
So why is Sea squeezing hard on its cost base?
Perhaps it is comparing itself to other e-commerce peers.
Mature plays such as Amazon and Alibaba are profitable without a doubt. Even JD.Com and MercadoLibre are both profitable and generating operating cash flows. Perhaps the pressure is because of this peer comparison.
To be fair, one of Sea’s and Shopee’s closest competitor, Lazada, is likely not profitable as well. Alibaba has recently injected $912.5 million into Lazada on top of a cash injection of $378.25 million in May 2022, bringing the total investment made by Alibaba into Lazada to $1.3 billion just this year alone. This could be another reason Shopee needs to rightsize itself so that it can better compete with Lazada.
Closing statement
There seems to be pressure all around for Sea and Shopee. Sea is cutting costs because of overall burgeoning costs and a cash burn which may not last until the end of the current macroeconomic cycle environment. Sea’s CEO Forrest Li and his leadership team has also decided not to take any cash compensation until the entire company reaches self sufficiency.
As Shopee makes up 60% of Sea’s revenue, Shopee plays a huge part and has to cut cost so that it will not be a weight to Sea’s profitability. In addition, it also has to prepare itself for further competition from Lazada who has just received more than $900 million from Alibaba.
However, this does not mean that it’s the end as the company is still hiring in certain business segments with more than 1000 open positions on their career website. With a focus on cutting costs and seeking growth in the right places, Sea may very well be the next turnaround success story.
