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Expanding TAM through new market entry

  • SE’s e-commerce arm Shopee has been broadening market presence with entry into Europe (Poland, Spain, France) and India over the past 3 months.
  • We believe Shopee can replicate its successful playbook to build a foothold in new markets. Our FY21-23F revenue forecast is raised by 1.5%-6.7%.
  • Reiterate Add with higher TP of US$425, on SE’s solid execution across core businesses, as well as continuously expanding TAM through new ventures.
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Shopee going global?

Aside from enjoying rapid digitalisation of the ASEAN economy (where e-commerce industry could see 26% CAGR between 2020-25F to hit US$234bn, according to Google, Temasek and Bain’s e-Conomy report), Shopee has been actively expanding into new markets to enlarge total addressable market (TAM). Post establishing a strong market presence in ASEAN and Taiwan, Shopee first expanded into LatAm in late-2019 (where it has grown to rank second by average monthly active users in Brazil in 2Q21), and in recent months into Europe (Poland, Spain and France) as well as India. We see potential upside from this, as we believe Shopee can replicate its successful model to build a foothold in new markets. We raise our FY21-23F revenue forecasts by 1.5%-6.7% to account for faster Shopee growth, but also delay breakeven expectations for Shopee to FY24F.

Shopee’s expansion playbook

In a new market entry, we expect Shopee to initially focus on cross-border e-commerce to achieve critical mass, before eventually establishing a local marketplace with local merchants. Offering larger variety of products at lower prices should allow Shopee to stand out, as its existing merchant base is mainly Asia-based. Key strategies could also include: 1) starting with long-tail categories (fashion, home & living) and lower ticket size items, 2) aggressive marketing and subsidies (free shipping for buyers; commission free transactions for sellers), 3) cross selling through Free Fire, and 4) using in-app engagement tools to promote stickiness and boost its active userbase.

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3Q21F preview

SE is set to announce its 3Q results on 16 Nov; we estimate 3Q21F adjusted revenue at US$2.6bn (+8% qoq, +66% yoy). We expect increased mobility restrictions across ASEAN to spur another round of strong revenue growth for Shopee to US$1.3bn (+112% yoy) riding on GMV growth of +80% yoy and take rate expansion. Meanwhile, continued growth in Free Fire gamer base should support Garena to record game grossing of US$1.2bn (+27% yoy). Key things to watch: Strategic roadmap for Shopee’s market expansion and new ventures, Free Fire Max’s reception and new game pipeline.

Reiterate Add, TP raised to US$425

Reiterate Add with a higher SOP-based TP of US$425, as we roll over our valuation base year to FY23F. We continue to like SE for its solid execution across core businesses, as well as rapidly expanding total addressable market (TAM) through 1) new e-commerce market launches, and 2) growing verticals within the Shopee ecosystem.