Every cent counts
- Shopee scaled back its presence in Latin America; Brazil as a core market remains unaffected. Poland is currently Shopee’s last test market standing.
- Shopee entered the four Latam test markets back in 2021; we estimate they contribute LSD of Shopee’s GMV. The move could save SE US$40m a year.
- The move is aligned with SE’s latest focus on prioritising profitability. Maintain Hold as sentiment likely to remain negative near-term on further cost-cutting.
Scaling back presence in Latin America (excl. Brazil)
? Reuters reported that Shopee shut down local operations in its Latin America (Latam)
test markets of Chile, Colombia, and Mexico, while leaving Argentina entirely, citing
heightened macro uncertainties. Layoffs are expected to impact dozens of employees.
? Shopee will continue to leverage its cross-border operations (we believe this currently
still accounts for the bulk of volumes there) to maintain presence in the first 3 markets.
? Brazil, which Shopee has reclassified as a core market back in Mar 2022, remains
unaffected by the latest moves. Poland is currently Shopee’s last test market standing.
Limited revenue impact; cash burn in new growth markets to ease
? As per its expansion playbook, Shopee typically enters a new market through an asset-light cross- border strategy. Only after initial traction is seen to be strong, will Shopee then progressively build up its local operations to onboard more local merchants to increase the mix of local sales, thereby lowering average delivery times and improving customer experience. For example, Shopee entered Brazil in late-2019, but its local operations there were only progressively scaled up in early-2021.
? Shopee entered the 4 Latam countries in 2021 and they are currently at nascent stages of growth. We estimate they account for LSD percentage of GMV as of 2Q22, and an even lower sales contribution with higher subsidies given out in new markets.
? By maintaining its presence in the 3 markets through cross -border operations, we believe SE is not ruling out potential re-establishment of local operations in those markets should the macro environment improve. The scaled back presence could potentially save US$40m a year, or 1.6% of Shopee’s FY22F adj. LBITDA, in our view.
Move aligns with strategic direction to prioritise profits
? Generally, we believe the move is-line with SE’s latest strategic direction to prioritise profitability and cashflow management. We expect SE to achieve adj. EBITDA breakeven by 2HFY23F, and non-GAAP profitability by FY24F.
? Despite c.35% share price correction since its 2Q results in Aug due to suspension of Shopee’s FY22F revenue guidance, we maintain Hold on SE as we expect sentiment on the stock staying weak in the near-term, given newsflows on further cost-cutting.
? We remain positive on SE’s longer-term outlook with its continued market share leadership in ASEAN e-commerce and easing competitive landscape. Our 12-month SOP-based TP is kept at US$92, still based on 8x FY23F P/E for the gaming segment, 2.9x FY23F P/S for e-commerce, and 0.1x FY23F P/TPV.
? At current levels, investors are pricing in an e-commerce valuation of 1.2x FY23F P/S, almost at 2 s.d. below historical average of 3P marketplace peers.
? Upside risks: Shopee achieving earlier-than-expected adj. EBITDA breakeven in Asia; downside risks: weaker consumer spend in the region amidst macro uncertainties.
