E-Commerce Benefitting From Better Monetisation And Leading Market Share
SEA’s share price has appreciated >15% since it turned profitable for the first time in 4Q22. Though GMV growth may slow down, Shopee’s continued dominance in its established markets and growth in new markets should allow it to continue increasing commission fees and expanding its logistics structure. Hence, we expect margins to improve moving forward. Also, we see limited threat from the new competitors in Southeast Asia for now. Maintain BUY and target price of US$94.34.
• Improved EBITDA and profitability. Shopee is gaining traction in its new South American markets, while higher monetisation in its core Southeast Asian markets supports revenue growth. From 2022, it has been optimising costs with cutbacks on brand marketing and shipping subsidies in its established markets. The success of this strategy is evident from its achievement in 4Q22, when it became the first e-commerce company in Southeast Asia to report positive net quarterly income. We also observe improvements in gross profit and adjusted EBITDA qoq in 1Q23 which is seasonally the lowest quarter per the table above, which reinforces sustainability in the business model.
• Still leading in market share. Shopee, a prominent and leading e-commerce platform in Southeast Asia, achieved an impressive GMV of US$47.9b in 2022, securing its position as a frontrunner in the market, while Lazada followed with a GMV of US$20.1b. On 19 Jul 23, Alibaba further injected US$845m (S$1.1b) into Lazada. This brings the total injections to US$2.8b (S$3.8b) since May 22, giving Lazada dry powder for higher spends such as marketing which may put Shopee’s growth plans at risk. Despite external factors, we firmly believe that Shopee will maintain its market leadership, underpinned by its sizable merchant and customer base.
• Moreover, Shopee’s localisation setup in each country it enters has proven to be highly effective, providing excellent support and tailored solutions to cater to diverse localisation requirements. For instance, Shopee Singapore had 13.6m visits in Feb 23, as compared with Lazada Singapore’s 5.8m visits. Despite starting its Singapore operations three years after Lazada, Shopee Singapore’s higher online traffic to date demonstrates its effective strategies. Per McKinsey & Co, the Southeast Asian e-commerce market is projected to triple at a CAGR of 22% from 2023 to 2026 to reach US$230b in GMV.
• Increased focus on logistics capability for cost efficiency in Southeast Asia. During SEA Limited’s (SEA) 1Q23 results briefing, management highlighted its focus on expanding its logistics network and integrating its in-house logistics arm, Shopee Express. While working with third-party logistics (3PL), Shopee has also been introducing automation into its workflow to improve efficiencies. In a 2022 McKinsey survey, 50% of respondents stated that delays in deliveries were the greatest drawback of e-commerce purchases in Southeast Asia.
• According to management, these initiatives should reduce average delivery times by more than half a day across its markets. With return rates for e-commerce sales ranging from 15- 20%, building on its logistics arm will ensure a better and faster return experience to attract and retain customers. We also note that Shopee has been improving monetisation of this arm, such as increasing seller shipping fees in Singapore from 1 Jun 23. This allows Shopee to capture opportunities in the Southeast Asia logistics value chain. As e-commerce becomes increasingly prevalent, we reckon that such value-added services will drive margin expansion for the e-commerce segment.
• Keen competition poses limited threat in Southeast Asia. Shopee has a dominant market position in SEA-6, grossing US$47.9b in GMV and holding 30-50% of regional traffic share in 2022. This can be attributed to its effective cost-cutting (eg employee lay-offs: around 500 cuts in Shopee Indonesia in Mar 23) and increased commission rates (across all operating markets). However, besides the presence of major player Lazada as discussed above, two companies from China are challenging the dynamics of the e-commerce industry. These entrants pose limited threat to Shopee’s position for now:
a) TikTok Shop is the e-commerce marketplace of short-form media platform TikTok. The app expanded to six Southeast Asian countries in 2022, swiftly growing its GMV to US$4.4b per Momentum Works. With Indonesia as TikTok’s second largest market (about 113m users), it accounted for 57% of its 2022 GMV (US$2.5b). Though TikTok Shop can leverage on the large TikTok user base, its GMV is a mere 13% of Shopee’s GMV in Indonesia. Additionally, we note that TikTok Shop has raised its commission rates to be in line with other e-commerce players in Jun 23, which will likely slow TikTok Shop’s growth. Hence, we believe the impact that TikTok Shop has on Shopee’s market share is limited.
b) Pinduoduo, China’s e-commerce giant, first launched Temu in the US in Sep 22, and has rapidly expanded to 22 other countries like Australia and France with the help of its low prices and aggressive marketing gaining market awareness. Its most recent launch was in Japan on 1 Jul 23, marking its first move into Asia. Its “Southeast Asia, Japan and Korea cross-border e-commerce platform seller study” has been sent to sellers, sparking rumours of its entrance into the Southeast Asian market.
• Gaining traction in Brazil. In Jan 23, Shopee closed operations in Poland, following four Latin American markets (Chile, Colombia, Mexico and Argentina), France, Spain and India. This raised doubts in its ability to succeed in Brazil, one of the newer markets it entered in late-19. However, we note that Shopee has achieved significant milestones in Brazil. In Apr 22, Shopee Brazil reached 2m local sellers on its marketplace, beating competitors like Magazine Luiza and Americanas that had 160,000 and 122,000 local sellers at the time. Since then, the number has grown by 50% to 3m in Mar 23. According to Statista, revenue from Brazil’s e-commerce market is expected to grow to US$71.7b by 2027 (five-year CAGR of 14.1%). Its three leading players – Magazine Luiza, Casas Bahia and Americanas – brought in a total of US$9.3b in sales, making up 36.6% of the top 100 online stores’ 2022 revenue in Brazil per ecommerceDB. As for Shopee, its net sales per ecommerceDB’s estimates amounted to US$428m, accounting for 1.7% of the same pool. As the leading ecommerce app in Latin America by monthly active users, we opine that Shopee has huge potential in Brazil as it scales up operations and grows its presence via:
a) New commission structure and increased take rates. Shopee Brazil announced a 2% increase in its take rate from 1 Sep 22, charging sellers a 14-20% commission (12-18% previously). Furthermore, from 1 Jun 23, commission has also increased by BRL$2 per item (valued above BRL$4) sold, and by half the product value for items valued below BRL$4. These moves will improve Shopee’s unit economics in Brazil, which last reported contribution margin loss per order of US$0.34 in 1Q23.
b) Wider logistics network. Shopee Brazil’s recent expansion of its logistics structure – from six to eight distribution centres across the nation – allays concerns over its ability to succeed in the newly-entered market. The expansion reportedly increases the number of cities it serves by 40% and reduces average delivery time in Brazil’s Northeast. As of date, delivery times for local and international orders are up to 25 days and 50 days respectively. Based on UBS’ consumer survey in Brazil, Shopee is seen as lagging on delivery speeds compared with competitors. Hence, this initiative should place Shopee in a more favourable position.
• Commission fees of Southeast Asia e-commerce players have increased and indicate that competition by undercutting rates is not prevalent. Based on the latest commission fees gathered across the major e-commerce platforms, we note that all the players have increased their rates, with even newcomers like TikTok Shop not undercutting rates too excessively vs the incumbents. This indicates that undercutting commission rates is likely not the key strategy being employed by the key players in the industry.
STOCK IMPACT
• Resilient amid competition. We expect stable margins for its e-commerce arm, Shopee, with higher transaction-based fees from its operating markets and increased contributions from value-added services (especially related to logistics). We reckon that the logistics services cost leadership strategy – increasing capacity and integrating the in-house logistics arm and automation to their delivery centres – would enhance the segment’s margin. Management has also guided that Shopee Brazil is expected to achieve breakeven soon with its strong growth and marked presence. We have estimated 15% yoy 2023 revenue growth for the segment.
EARNINGS REVISION/RISK
• Maintain earnings. We maintain our earnings forecast for SEA at US$935m, US$1.27b and US$2.06b for 2023-25 respectively, where 2023 may be its first ever annual net profit.
VALUATION/RECOMMENDATION
• Maintain BUY with a target price US$94.34 on the back of its potential first annual net profit in 2023 with first positive operating income from its e-commerce and DFS segments. Given the current macro headwinds like rising global inflation dampening appetites for ecommerce, we expect the share price to trade sideways, buoyed by positive earnings momentum moving forward.