Can Sea’s fintech ambition excite investors the way Free Fire did?

NEW YORK-LISTED Sea rallied 14 per cent last Tuesday (May 17), after announcing revenue numbers that beat expectations. For the first quarter ended March, Sea’s revenue surged 64.4 per cent to US$2.9 billion.

Investors appeared to shrug off the widening of its net loss to US$445.1 million (excluding share-based compensation) from the US$320 million loss a year ago.

The recent market response brings to mind investor reaction to Sea's financial results releases last year, when investors had also rewarded higher revenues and higher losses with higher valuations.

In August last year, Sea's revenue more than doubled even as its net loss widened by about 10 per cent. Investors chose, however, to focus on the strong momentum for e-commerce and the company's raised guidance for the segment.

To that e-commerce potential, Sea is now adding more of a fintech dimension. The company's rapidly growing vertical, SeaMoney, could harness Sea's e-commerce data to personalise its offerings and differentiate itself from its competitors.

But will this fintech opportunity be enough to help Sea recover from its very significant fall in valuations?

Sea shares have declined 79.2 per cent from their peak of US$372.70 in October 2021, to close at US$77.25 on Monday, possibly because the market is beginning to prize profitability among technology groups.

If it hopes to regain investor confidence, Sea will need to demonstrate how its fintech addition can amplify and be amplified by the group's e-commerce position.

Diminishing returns

Sea’s need for a new catalyst comes as its self-developed mobile game Free Fire, once touted as its golden goose, has been banned in India and is facing a slowdown. Sea’s digital entertainment business, Garena, has been hit with a decline in profitability and traction.

The segment’s Q1 adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) fell 39.9 per cent year on year (yoy) to US$431.4 million, while quarterly active users dipped 5.1 per cent from the same period a year ago to 615.9 million.

During an earnings call on May 17, Sea’s management said that the company has other games in its development pipeline. Some of these are being tested anonymously to avoid the “halo effect” of the Garena brand and capture better data. About half the development team is focused on new games.

But any new games released this year or next will also have to battle the unwinding of work-from-home conditions, which means that the pool of players, and the time they are able to spend, has shrunk.

Against this backdrop, Sea’s e-commerce business is still struggling with profitability. Shopee widened its Q1 adjusted Ebitda loss to US$742.8 million, from US$412.9 million.

Sea says that Shopee is expected to hit a positive adjusted Ebitda in South-east Asia and Taiwan by the end of next year.

The company has also revised its e-commerce revenue forecast downwards: to between US$8.5 billion and US$9.1 billion for FY2022, from a range between US$8.9 billion and US$9.1 billion.

This revision could signal a growing willingness by management to focus on profitability instead of market share, which would bode well for the company's bottom line. But the size of the losses suggest it will take a while for any changes to add to profits.

Fintech promise

Sea's fintech footprint has grown considerably. Quarterly active users for SeaMoney products — which include e-wallet ShopeePay and buy-now-pay-later service SPayLater – rose 78.2 per cent yoy to 49 million. In Indonesia, over 30 per cent of the quarterly active users have used multiple SeaMoney products within the period.

Sea is also going all in on digital banking. To date, it has secured digital bank licences in Singapore and Malaysia, as well as a bank licence in the Philippines. In Indonesia, it bought Bank BKE last year, which has since been refashioned into its digital bank SeaBank. The company is now tipped to be moving into the insurance sector via another acquisition.

Sea also wants to bring its fintech playbook to Latin America. Earlier this month, Shopee gained approval from Brazil’s central bank to operate as a payment institution.

For Q1, Sea’s digital financial services segment quadrupled its revenue to US$236 million. Adjusted Ebitda loss narrowed slightly to US$124.9 million. The bottom line was weighed down by US$184.9 million in sales and marketing expenses, up 21.7 per cent to promote e-wallet adoption.

Some are optimistic about the potential of fintech as a new growth engine. In a May 18 report, CGS-CIMB suggested SeaMoney could be cashflow-positive in the near to medium term - in line with Sea’s previous guidance for this to be achieved by next year. The research outfit also sees a “huge opportunity from the unbanked population to be captured” with digital banking.

Unlike fellow fintech hopeful Grab, Sea possesses rich e-commerce data that could give it an edge in alternative credit scoring, and enable more personalisation and cross-selling across merchant and consumer lending products.

In the United States, e-commerce giant Amazon.com has also harnessed its e-commerce expertise to guide its investments into payments infrastructure and merchant lending.

But all the spaces in which Sea wants to expand are competitive and require significant marketing and customer acquisition spend. There is no certainty that South-east Asian consumers will trust digital banks enough to make sizable deposits, and monetary incentives may be needed to change behaviour.

Of all Sea's business ventures, fintech has the most potential for lucrative scale but is also the most challenging market to conquer.