In case you missed it:

Sea Limited is a commerce, fintech and entertainment giant across Southeast Asia, Brazil and Argentina.

“With e-commerce and digital finance penetration in our markets still low but increasing, strong growth lays the best foundation to maximize our long-term profitability.” – Founder/CEO Forrest Li

Cost of goods sold growth was mainly driven by variable cost to support outperforming demand. Furthermore, credit cost growth associated with its credit portfolio weighed on this margin. Despite that, as economies of scale continue to deepen, GPM expanded. Moving down the income statement, G&A growth was just 11% Y/Y, while R&D fell by 5% Y/Y. Both items facilitated a lot of the margin expansion you see below.

Conversely, provision for credit loss growth was 76%. That is related to the aforementioned credit portfolio expansion, but the 76% provision growth was in excess of 70% loan book growth. This could lead to a bit of anxiety for the U.S.-based investors grappling with credit trends in a less familiar region like Southeast Asia. At the same time, Forrest Li is a world-class and battle-tested founder. That means I don’t think the risk amid any kind of macro issues is SE’s balance sheet blowing up. It’s that growth would slow down… because they would do the right thing and slow it down. Right now, macro signals look good to them and rapid credit growth will likely continue. More on credit health later.

SE still expects e-commerce GMV growth to surpass 25% Y/Y this year. It also reiterated 30%+ entertainment bookings growth for 2025. They remain confident in Y/Y EBITDA margin expansion, which was great to hear amid intensifying Brazil competition as MELI lowers free shipping minimums and SE pushes its own customer service forward. Notably, these investments from SE will be a much less severe margin headwind than previous CapEx cycles.

SE trades for 37x forward EPS. EPS is expected to grow by 160% Y/Y this year, by 44% Y/Y next year and by 38% Y/Y the year after. Those growth estimates may fall a bit following this report, but I don’t expect anything too drastic.

E-commerce (Shopee) – Marketplace:

SE’s largest segment keeps thriving. And that thriving is coinciding with sales & marketing growth of just 11% Y/Y. This helped power rising margins across Southeast Asia and Brazil, while order growth remained great and relatively stable at 28.4% Y/Y. It’s very encouraging to see buyer activity remain this promising and revenue growth accelerate despite managing this cost item so tightly. There was a time when I questioned how much of SE’s fantastic e-commerce growth was directly and perpetually tied to marketing spend. How sticky were these customers? As it turns out… sticky. 

For Brazil specifically, just like for MELI, SE’s growth again comfortably outpaced overall market growth. Sea Limited, Amazon and Mercado Libre are emerging as the three-headed commerce monster in Brazil. While we can argue about which will do better than the other, I think the gaps will prove small and subtle – especially between SE & MELI. Brazil is arguably the most compelling market for e-commerce in terms of mixing established infrastructure, a relatively affluent population and an e-commerce penetration rate that is 10 years behind the USA. People can bicker… but I think all three will keep doing very, very well in this market. They’ll battle for market share, trade promotions and build more capacity to gain a leg-up… and probably all keep winning.

E-commerce – Ads & Partners:

Ad revenue as a percentage of Shopee GMV (ad take rate) rose by 80 basis points Y/Y and powered the rise in overall e-commerce take rate.

Ad revenue expanded by a robust 70% Y/Y as merchant customers rose by 25% Y/Y vs. 20% growth last quarter and spend per customer maintained 40% Y/Y growth.  In addition to scaling go-to-market and plugging merchants into more placements, AI is also helping here. Partnerships with providers like OpenAI are improving search, recommendations, discovery and ad targeting. As a result, ad conversion rates rose by 10% Y/Y, with plenty more improvement left to be enjoyed. Work to deepen the content ecosystem is also going well, as YouTube videos including a Shopee link rose 30% Q/Q. They just expanded this partnership to Brazil, and added a new Meta partnership unlocking easy Shopee checkout on Facebook. Not only does all of this work create more revenue opportunities directly, but indirectly too. More ad proliferation directly supports marketplace traffic and monetization for SE. They get paid for the ads and they get paid when there’s more volume on Shopee. It’s a highly margin accretive growth driver because it’s simply monetizing the traffic they’ve already earned.

E-commerce – Logistics:

The durable growth despite less marketing is a byproduct of a superior customer experience. And that is enabled by great logistics. SE’s network greatly augments delivery speeds and costs, which allows it to pass more delight onto their customers in a profitable way and invest in more assortment to improve conversion. Just like for Mercado Libre, Coupang and others, owning a highly-productive fulfillment network is how SE can offer faster free shipping and other compelling perks. It creates an incremental layer of efficiency that enables rational decisions to stand out from the competitive pack. And that wasn’t easy.

Over the last 7 years, SE thinks it has developed an unmatched and localized logistics feel in its Southeast Asian markets. As its impressive founder notes, they know how to deliver lightning-fast service in high-density areas. They also know how to “deliver well in rural areas where we cross rivers, navigate rice fields and locate homes without formal addresses or postal codes.” I think that puts in perspective how impressive SE’s SPX Express fulfillment business is and how difficult it will be for others to match. 

This depth of expertise also enables a keen view of how to serve highly diverse regions within its markets. It’s how they profitably rolled out 2-hour shipping in Jakarta with 35% Y/Y order growth this quarter. It’s how they delivered a 20% cheaper shipping option for rural areas in Indonesia where consumers are less speed sensitive and more cost sensitive. In Taiwan, they noticed the popularity of self pickup options, and leaned in. They now have the largest automated locker store network in that compelling e-commerce market, which is now handling 70% of their overall fulfillment there. Customer service improves…. Sea Limited’s cost per order falls by 30%... great win-win.. The recurring themes from all of these notes are Sea Limited improving customer service, lowering its input costs, or (usually) both.

Going forward, Sea Limited is looking to accelerate efficiency gains earlier on in the fulfillment process. This includes enhancing demand forecasting algorithms for inbound inventory. The point of that work is to place goods in distribution centers closer to the end customer, lowering miles per fulfillment, enabling more order batching & cutting overall costs. Again… faster delivery… happier customers… fatter long-term margins. That’s why these investments are so incredibly compelling to make. Li offered a helpful example of how this will lower structural costs:

“In Indonesia, if we wait until an order comes in from a remote island before shipping the item out from Java, we must rely on more expensive forms of transport such as airplanes to get it there quickly. If we have already anticipated this demand, we can use cheaper forms of transport to pre-ship it to the area, letting us deliver it quickly and cost effectively once the order is placed.” – Founder/CEO Forrest Li

Separately, just like so many other global e-commerce titans, this one is further expanding its overall logistics infrastructure for 3rd-party merchant service. To support these added capacity needs, it will continue to deploy a leasing strategy vs. owning the land and facilities. That will greatly control CapEx needs and shrink the free cash flow headwind associated with the move. This should also help accelerate value-added services growth within e-commerce, as they’ll now have more room to cater to demand. It would be good to see that turn positive again on a Y/Y basis.

Finally, in Brazil, delivery times improved by 2 days Y/Y and ⅓ of São Paulo area deliveries were next-day. Their better speed of service is enabling growth in a wider array of categories and motivating merchants to list higher-valued goods. In turn, that helped Shopee Mall GMV (premium shopping destination) double Y/Y in Brazil.

Loyalty program:

Shopee VIP (new loyalty program) membership rose 75% Q/Q to 3.5M members as that initiative continues to do well. These members are spending 40%+ more than non-members across Thailand, Indonesia and Vietnam, while ordering 3x more frequently and spending 5x more than non-members. And for the business overall, this program helped power 12% Y/Y growth in buyer frequency.

Financial Services & Credit Health:

SE’s credit book rose by 70% Y/Y to reach $7.9B. Despite faster 77% credit loss provision growth, they said their "portfolio quality and unit economics have remained healthy.” This includes Brazil, where 3x Y/Y growth was met with “improving portfolio quality and user performance.” I talk about it all the time… it’s a luxury for creditors to have the granular level of shopping and repayment data on their customers that SE does. That enables a more holistic understanding of borrower quality and advances underwriting precision.

The firm’s respectable level of provision resilience is despite adding more than 5M new borrowers, following 4M new borrowers added last quarter. They continue to start slow with spending limits on these newer customers to ensure repayment trends are healthy. 

Overall, active credit customers rose 45% Y/Y to 34M total and Thailand’s book crossed a big $2B milestone. They’re confident in risk pricing capabilities and will likely keep growing this product rapidly.

To me, the NPL resilience is highly encouraging. The outpacing provision growth is a little concerning, but they are rapidly growing new borrowers so it’s not that shocking and is not severe either. My concern over this metric will build if this becomes a durable theme, which hasn’t happened. In that scenario, I’d expect this responsible team to pull back on growth.

In terms of financial services growth today, On-Shopee loans enjoyed strong, profitable demand enabled by buy now pay later (BNPL) expansion. Their “SPayLater” GMV penetration, or percentage of marketplace GMV paid for with this option, is in the single digits for new markets and over 30% for mature markets. That shows exactly how much more progress they have left to enjoy. Off-Shopee (or off-platform) credit growth is another exciting opportunity. This rose by 300% Y/Y as SE adds a lot more 3rd-party merchant adoption. Customers want the Shopee payment option and want flexibility to pay later. Adding this inherently boosts merchant conversion and creates a compelling win-win that should power a lot more growth. The fintech opportunity extends well beyond Sea Limited’s own ecosystem and is still just 10% of its total credit book. Long runway.

Off-platform is how they also hope to greatly bolster their offline presence, taking advantage of another giant and untapped commerce opportunity. Whatever they can do to juice frequency will be good for this business, and off-platform should help a lot in that regard.

Its digital wallet, the Shopee Pay App, is now being used by 20% of monthly actives. With it, credit approvals are faster and discounts are more easily accessible. SE hopes to cross-sell these customers a lot more financial service products down the road, including insurance, bank accounts, more credit products and more.

On the unsecured loan side of things, a higher degree of confidence in underwriting is leading to higher credit limits and longer duration in Indonesia. This is helping create faster prime borrower growth. They’re making similar updates in Thailand and Malaysia with similar results.

Entertainment:

Bookings growth sharply accelerated vs. last quarter despite tougher Y/Y comps. That was thanks to continued strong performance from its evergreen Free Fire franchise. Squid Game and “Naruto Shippuden” promotions in the region helped drive 7% active user growth and were met with strong customer satisfaction. This also fostered robust paying user ratio gains, with that metric spiking to 9.8% vs. 8.0% Y/Y and bookings per user soaring from $0.89 to $1.25. This momentum is why they remain confident in 30%+ Y/Y bookings growth for the segment.

SE takes a good approach to content creation within the gaming segment. It only uses and develops IP like Squid Game when it has superfans in charge of that development. This helps preserve what customers like so much about a given brand, while avoiding making unwanted changes. 

Other LatAm Markets:

They’re excited about the Argentina entrance and shut down some Chile and Colombia cross-border operations to focus on this market and Brazil.

This was a very good quarter on the demand side. Customer and engagement growth was strong, entertainment bookings growth set a 4-year record and financial services kept briskly expanding as well. Momentum is strong in every single market. Some are likely worried about the modest margin pressure stemming from Brazil e-commerce investments and credit portfolio growth. To me, Brazil is more than worth aggressively pursuing, despite a highly competitive landscape. It is a wildly compelling market for e-commerce and SE should be investing aggressively to capture a larger piece. Next, credit trends still look good on the NPL side, even though the heightened provision growth this quarter (above portfolio growth) should be closely watched going forward. Again, to me this is a revenue growth risk rather than a balance sheet blow-up risk... SE has a prudent and great team. This is one of my favorite companies that’s not a current holding and a name I could easily own. The issue is about my hefty existing exposure to the same themes and geographies that will drive this company’s success. I don’t want to get too concentrated. Still, if the multiple contracts much more, I might have to re-think. Max readers, stay tuned on that one.