Shopee Valuation - Why I Bought It

Disclaimer: I have bought SEA Group just prior to its Q1 2020 earning release. 

To start, I will reiterate what Hayden Capital said about Shopee's valuation:

"However, it’s still extremely early in the industry lifecycle, and valuations are almost meaningless given the ample “white-space” for competitors to gain a toehold + the lack of monetization on a customer level"

I will also share my story of buying from Shopee. I bought a cheap wooden table from Shopee for around $300+ and after chatting with the person, he is just a student in China. I don't trust the person but I trust Shopee to refund me if there are any issues. To me, Shopee allows that and is like an escrow. I do know Shopee has a special page for China sellers and encouraging China sellers very hard.

Mr. Forrest Li, SEA Group Chairman said:

SEA Group consists of various sectors

• Free Fire (Mobile Gaming)
• SeaMonkey (Digital Finance Services)
• Shopee (E-Commerce)

Free Fire (Mobile Gaming)

I wouldn't discuss Free Fire as I have no interest or any information, except that it is a competitive market and potentially profitable niche.

SeaMonkey (Digital Finance Services)

I will probably cover and update this post on SeaMonkey when I got more information. I used ShopeePay and there is no value to SEA Group yet. But I believed in the coming years, bank services (like installment, loans) will be disrupted and decentralized to companies with these virtual currency/wallet. The advantage of virtual currency/wallet will be like Square whereby the money doesn't escape the ecosystem (imagine earning shopping money at gaming or vice-versa and spending it). There is lots of benefit with a virtual wallet such as

• No middleman fees like credit cards, etc
• Provide as float/money for cash-flow (I wouldn't be surprised in 3-5 years time depending on regulations, Shopee offers shoppers with interest rate on the wallet. It would be cheaper than raising funds from the market or loaning from the bank)

Shopee (E-Commerce)

For Shopee, they are like Alibaba of South East Asia and their recent win was having Cristiano Ronaldo advertising for them in 2019. Shopee is largely loss-making (like Amazon at its early stage) and still "buying" revenue.

There are only 2 factors I would consider for Shopee: 

• Ability to scale. Still lots of "white space" and growth area. The one who can scale the best will be a big winner eventually (like Amazon, Walmart)
• Top 3 in various South East Asian Marketplaces (e.g Malaysia, Singapore, Indonesia, Vietnam, Thailand, Philippines)
• Brand name. Shopee is a very obvious name of shopping with the word Shop inside. The Ronaldo advertisement also reminded me of what Gary Vee would do for Super Bowl (I cannot find the clip but recalled him just saying that a celebrity chanting repeatedly of the brand). I cannot imagine the name Tokopedia working outside Indonesia. Lazada is slightly better but not as great as Shopee. 
• Shopee Brazil started in 2019. I am not aware of the development but Brazil is a big market. I won't be surprised they go to South Africa, etc with local support. FYI, Free Fire was already in Latin America so I think Shopee knows the market well enough.
• Duopoly with the closest competitor Lazada (backed by Alibaba). Shopee is backed by Tencent and the rest of the marketplace is a fashion and a local marketplace that would survive but unlikely to scale like these 2.
• Indirect competitors are Facebook / Instagram which launches their shop options.
• However, I still feel marketplaces like Amazon, Shopee still makes sense with the strong buyer intent in shopping, looking for discounts and deals rather than social intent.
• FB and Instagram still feel like (very) impulsive buyers who they or their loved ones got targeted by ads.
• FB's marketplace (i.e. Craiglist) does not attract sufficient buyers to create an eco-system.
• 3x Growth potential in e-commerce. Based on Mashable, the e-commerce market in South East Asia is a $100 billion market today and could grow to $300 billion by 2025.
• Advantage from the recent pandemic. If the pandemic continues, Shopee will have advantages as people in lockdown shop online more often.
• Ability to innovate
• The app experience is sticky. I think based on the way the app is built to stick. They came up with many mini-games (giving Shopee coins) and their celebrity endorsement, it is way more fun than Lazada. Perhaps it taps on their experience in mobile gaming.
• Shopee Live. FB Live is a big untappable market where people do auction-style videos. It creates lots of mini-community that the marketplace does not earn from. Shopee was quick to jump on the wagon with its China sellers again. However, it does not seem to grow much but it is proof of Shopee's ability to innovate faster than its competitors.
• Pro-Sellers. While Lazada is focusing on consolidating shipping to a few vendors in Singapore (e.g. Ninja Van) which frustrated many sellers, Shopee continues to be a free market

Conclusion

Until I failed to see Shopee's ability to scale or innovate, I will just hold or increase every month my position. For a start, I will try to spread my bets across other opportunities which I will share more at a later stage (maybe I should put a cap, e.g. 5 stocks).

As I start buying stocks instead of options (due to the difficulties), I hope to list down my thesis for buying them. I don't give a specific valuation number and I use mostly guts and common sense in investing as numbers can be faked.

Sources: 

http://www.haydencapital.com/wp-content/uploads/Hayden-Captal_ValueAsia_Presentation_SE_May-2019.pdf

https://moiglobal.com/wp-content/uploads/ideas19-sahm-adrangi-1.pdf