Clearer path to profitability
Gaming – Garena
Garena user base is likely to bottom out in 2Q22F led by rising popularity of Fire-Fire Max. The Free Fire ban in India in Feb 2022 coupled with easing of movement restrictions resulted in Garena’s average user base declining by 50% in 1Q22.
Free Fire MAX was launched officially on 28 Sep 2021 and its user base has been growing steadily across high-end smartphones users. Our channel checks indicate that Free Fire which lost 10m net users each month on average from Jan- March 2022 mainly due to India ban is seeing only 2-3m net drop since end March 2022. Free Fire MAX, on the other hand, continues to acquire 4-5m net users each month. This suggests potential stabilization of Garena’s user base in 3Q22F. We expect to see Garena’s user base bottom out in 2Q22F with 1-2m q-o-q rise from 3Q22F onwards led by Free Fire Max.
E-commerce and food delivery – Shopee and ShopeeFood
The US$60bn Indonesian e-commerce market is experiencing improving take rate. For instance, market leader Tokopedia has revised its take rates y-o-y during 1Q22 ranging from 1.50%-2.00%, and has witnessed increasing orders, and thus overall revenue. While continuing to dominate the Southeast Asian region, Shopee is making great strides into the Latin American market, especially Brazil. Shopee’s adjusted EBITDA in Southeast Asia & Taiwan excluding headquarter (HQ) losses came at only US$0.04 per order compared to US$0.15 in 4Q21 and US$0.12 in 1Q21 due to reduction in discounts and subsidies. Shopee is on track to achieve positive adjusted EBITDA before allocation of HQ costs in Southeast Asia and Taiwan by FY22F. The cash flows generated from now will be utilized largely to cover the losses generated in newer markets especially in Brazil from FY23F onwards.
Delivery wars are getting less intense in Indonesia. When ShopeeFood entered the food delivery space, it adopted aggressive promotional tactics to acquire customers, according to Momentum Works. By January 2022, ShopeeFood was able to achieve a market share of 8%. Our industry checks indicate that market share of ShopeeFood has been stable over the last 3 months as ShopeeFood has become more rational lately.
We reduced our FY23F e-commerce EBITDA losses by 27%. Sea Ltd has guided for EBITDA breakeven for (i) its e-commerce business in Southeast Asia and Taiwan by 2022 excluding headquarter (HQ) losses and (ii) its combined e-commerce and fintech business by 2025.
The key reason for narrowing of our FY23F EBITDA losses is sharp improvement in e-commerce EBITDA margins. This is due to potentially lower incentives to be offered to both consumers and merchants by Shopee. South-East Asia and Taiwan business will start to generate positive EBITDA excluding headquarter losses in FY23F. Brazil losses are also expected to decline in FY23F, while Shopee may limit itself to just cross-border e-commerce business in other new markets.
