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Intrigue over Sea and Li, the group’s China-born Singaporean founder, has heightened alongside a dramatic surge in Sea stocks, which have increased fivefold over the past 10 months. In recent days shares were trading near US$265 – a stratospheric rise from when they went for US$15 at the time of the firm’s 2017 IPO.

While some have criticised Li and his company for growing “too hastily”, others say Sea’s growth has been natural and informed, rather than forced.

A GAMING BEGINNING

Much of the optimism surrounding Sea stems from bullishness about its gaming arm, Garena. Despite its outsize present-day influence, the story of its meteoric rise is little known outside gaming and investor circles.

A gamer at heart, Li – educated at Shanghai’s Jiao Tong University before his Stanford MBA – has gone on the record saying that Garena’s success was down to recognising “unmet needs” in the gaming scene at the turn of the 2010s.

Li in an interview that year said the inspiration behind the company was to connect world gamers, pointing to how interactive games had evolved into an important entertainment format for the younger generations especially, soon surpassing radio, television, and even films.

“We believe interactive games are something that all human beings understand and enjoy, across countries, races, languages and religions,” he said.

Yet Li has said Garena did not have an easy start.

“We pretty much just used our own money, and some money from our family and friends. That is how we got started.”

At that point, Li decided to set up a gaming studio in Shanghai, and shift from PC-centric games to ones catering specifically to mobile phone users. A couple of years later, Garena released its hit-game Free Fire, which analysts see as a catalyst of its success.

Free Fire emerged as the most downloaded video game in the region in 2019, partly because it could run on almost every device, even on the low-end phones prevalent in developing Southeast Asian nations. Garena said the game hit a record of 80 million daily active users last year, and was played in 130 countries.

Li would in 2017 rename Garena as Sea, in part to reflect the company’s regional ambitions, but kept Garena as the name for its games and digital entertainment arm.

A BEHEMOTH IN THE MAKING

“That’s one of the advantages of being late [to the industry], because you can see what’s out there, what the trends are and see what you can do differently or better,” he said.

Zhou said another key strategy Shopee had was to conquer local markets by localising and customising the app to specific regions. In Indonesia, for example, it launched a dedicated section of Islamic products and services to cater to the majority Muslim market.

He added: “We talk about Southeast Asia as a region, but every country is very different – from the language they speak and the currencies they use, and even in terms of purchasing power.”

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Even so, the e-commerce arm of Sea is yet to make a profit.

According to last year’s third-quarter figures published in November, even though e-commerce revenue was up 173.3 per cent to about US$618 million, the adjusted earnings before interest, tax, depreciation and amortisation (or Ebitda) loss was US$301.6 million. This compares to a loss of US$253.7 million the previous year.

In contrast, revenue from its digital entertainment division, responsible for mobile games, rose by 72.9 per cent to US$569 million, as quarterly active users reached 572.4 million, a 78 per cent year-on-year increase.

But analysts saw Shopee as Sea’s “long-term game”, said Jason Davis, an associate professor of entrepreneurship at Insead.

This was especially so as there were no dominant players in the Southeast Asian e-commerce market, he said, meaning that global investors would continue to pour money into businesses there.

“It’s worth it to bleed a little now if you can become a dominant player later with a stable user base and eventually make money off it,” added Davis. “It’s not surprising to me and they still might be the most promising e-commerce [outfit] even though they are not showing growth margin profits.”

Other factors, such as low margins in the e-commerce industry and strong competition in the region, were also behind the lower revenue, said Tan Yinglan, founding managing partner of venture capital firm Insignia Ventures Partners. This meant that entering – and staying in – the e-commerce game was not necessarily about immediate profits, he said.

“In such a business, short-term profit matters much less than your capability to grow your user base and revenue channels sustainably,” said Wang. “For Sea, as long as the company is building up its tech infrastructure, organisational capability and key partnerships to grow its ecosystem, it is totally fine for the e-commerce arm not to make money at the moment.”

Besides its digital entertainment and e-commerce arms, Sea has in recent years launched its third business pillar, SeaMoney, as it tries to gain a foothold in the digital payments arena.

Still unprofitable, it is viewed by experts as a relatively new exploration by the company but its recent win of the digital bank licence in Singapore could boost its prospects on this front, along with its plans for the recently acquired BKE.

The 2017 IPO is seen as one of the highlights of Sea’s stellar decade.

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Li Jianggan, founder and CEO of Singapore-headquartered venture outfit Momentum Works, said it “made a lot of sense” for Sea to list on the New York Stock Exchange rather than on Singapore’s bourse.

“The market there is much more liquid, with investors that were much more willing to back tech companies that focused on growth instead of profitability,” he said. In comparison, Singapore pales in comparison in terms of liquidity, transaction volume and investor base.

TOO FAST, TOO SOON?

Wang, the assistant professor, said expanding too fast was a “legitimate concern” for Sea but added that two factors needed to be considered. One was if the expansion was a natural extension of the firm’s core activities, and the other was whether it had learned the ropes in different markets before sinking investments there.

“We have to keep in mind that essentially Sea is a platform company specialised in operating in emerging markets,” he said. “Because it is a digital marketplace, it is well positioned to utilise the large amount of data collected on its users to expand to many online economic activities.”

Wang felt it was “natural” for Sea to venture from its e-commerce and gaming branches into digital payments. However, he added that the success of Sea in the financial sector remained to be seen as the industry had unique features that required distinct expertise.

Wang also said that by growing its expansion in Latin America, for example, Sea could establish itself as a global rather than a regional player. This could have enormous implications for the firm’s valuation in the financial market, though Wang added it would be difficult to replicate Sea’s success in such different markets.

Similarly, Tan of Insignia Ventures Partners said Sea’s “fast and exploratory” growth was part of its DNA, and was one of the reasons why it has achieved success. Sea’s growth pattern was not particularly novel for a tech company, he said, pointing to similar trajectories for firms in China and Silicon Valley.

“Sea saw the digitalisation bus for emerging markets coming from a mile away just when it had gained massive capitalisation from its gaming business, and decided it would not miss this ride,” he said.

Davis, the Insead professor, said Sea had accumulated experience in different sectors along the way, and its venture into the e-commerce and digital payments sectors was a “sustainable path”. This was because it was not easy for gaming companies to keep coming up with popular games all the time.

He said: “Sea probably realised gaming is a bit of a risky bet because it is highly dependent on having worldwide hits and continuing to churn out these hits, something that even much longer-storied companies like EA rarely do. We can think of diversification as a bit of a risk mitigator.”

Li of Momentum Works agreed, adding that Sea’s expansion was a case of the right opportunity at the right time for a company that had the right resources and organisational capabilities.

He said Shopee’s expansion into Brazil was a natural step as Garena’s games were already popular there, and would give the company experience in marketing, growth, operations, and payments. Sea’s growth was also “quite measured”, he added, as it was not mindlessly going into sectors such as ride-hailing or content-streaming.

AGAINST THE GIANTS

Tan said heated competition was expected, especially among peers of Sea’s size in a region that was becoming a hotspot for tech investors and internet companies.

But he felt that compared to its peers, Sea had developed a level of localisation that a foreign competitor would find difficult to attain. “At the same time, Sea has also grown its breadth or market reach in a way that more local champions would find difficult to compete with,” said Tan.

Another advantage for Sea was its gaming business, said Tan. Gaming, social media, and entertainment were increasingly seen as entry points into e-commerce and financial services and there were untapped possibilities for cross-pollination, Tan said.

Li said Sea had a good window of time to solidify its lead in the e-commerce market as Alibaba, for example, had internal cultural and organisational issues which prevented it from operating effectively outside China.

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The biggest competitor to Sea in Southeast Asia, he said, was ride-hailing company Grab. Grab had ventured into the payments and digital financial sector and had the operational discipline, funding and resources needed to succeed, he said.

Insead professor Davis saw Sea as a “small but very focused, nimble digital company”, and this meant that it could adapt to changes more quickly than bigger tech companies.

“It’s hard to keep up this pace but I think there is evidence that they have been able to do it and in three different markets that show you that they have growth capabilities,” he said. “We might be surprised that they can just continue to grow for a long period of time. I honestly think they are ready for competition.”