Just when it looked like the largest of Southeast Asia’s internet firms was yet another poster child of cheap money, a bubbly startup that had grown too much too fast, Sea Ltd.’s top executives took an ax to costs.
They closed down some Latin American operations, cut jobs, sacrificed their own salaries and squeezed nearly $500 million out of the promotional expenses at their e-commerce unit.
The result? A surprise quarterly profit for the company, the first in its history as a publicly traded firm since 2017. Shopee, the popular e-commerce wing, made the turnaround possible. It went from a nearly $900 million cash loss a year earlier to an Ebitda of almost $200 million in the December quarter.
Investors are still less than gung-ho about the prospects of the global technology industry and Shopee has yet to demonstrate that it can hold its own against emerging online marketplaces like TikTok. But at least Sea’s billionaire founder Forrest Li has read the tea leaves right.
During the pandemic, the Singapore company’s U.S.-listed shares rose nearly tenfold. Yet as the region’s economies gradually reopened, the world’s hottest stock dropped 90%. First, Tencent Holdings, Sea’s big-name Chinese backer, sold $3 billion of its stake. Then India banned “Free Fire,” Sea’s most popular mobile-game title. That’s when attention turned to the losses at Shopee.
In three years, the unit has more than tripled the merchandise it handles in a quarter to $18 billion. It has also started to take in about 12% of those transactions as revenue, compared with 5% in late 2019. So far, so good. The problem was that to buttress its top line, Shopee spent $840 million on sales and marketing in the last quarter of 2021, leading to a cash loss of around the same magnitude. This had to go.
Tencent-supported Sea (the Chinese behemoth still owns 18.6%) and Alibaba Group Holding-backed Lazada are Southeast Asia’s e-commerce leaders. Their task, at least for this year, is to defend that moat against ambitious forays by social media firms like TikTok, which is giving sellers a platform to entertain Indonesian audiences before selling them stuff.
The Southeast Asian online retail market has grown rapidly, but that doesn’t mean it has fallen into a fixed pattern. While e-commerce’s share of sales surged to 20% in 2021, from 5% in 2016, “right now, transactions are concentrated in apparel and low-value electronics, and most of the activity is happening in consumer-to-consumer marketplaces such as Shopee and Lazada,” says McKinsey & Co. “The Southeast Asian e-commerce market is heavily reliant on Chinese imports.”
Shopee needs to prepare for a future in which demand might be much more diverse across product categories and suppliers could tap sources outside China. But that is tomorrow’s battle. With three U.S. banks collapsing in quick succession and a storied European institution — Credit Suisse Group AG — on liquidity support from the Swiss central bank, recession fears are looming. The immediate challenge for fast-growing firms is to show that they can survive an extended funding drought.
In that respect, the region’s biggest startups look fairly secure. Sea has enough liquidity to sustain the company’s average quarterly operating cash flow needs for 21 quarters, reckons Bloomberg Intelligence analyst Nathan Naidu. He estimates Grab Holdings, the Singapore-based ride-hailing and delivery firm, to be good for 17 quarters. Even Indonesia’s GoTo, formed through a merger of ride-hailing app Gojek and e-commerce firm Tokopedia, has managed to shore up its liquidity position by vigorously cutting costs. “GoTo’s cash pile might last 10-12 quarters,” Naidu wrote after the company announced a narrower Ebitda loss recently. His previous estimate was five quarters.
Why didn’t startups hit the brakes earlier? The simple answer: They didn’t need to. Take a firm like Sea, which has three business units: Shopee, the e-commerce powerhouse; Garena, the gaming unit behind tiles such as “Free Fire;” and SeaMoney, a digital financial services wing.
COVID-19 boosted demand, both for mobile games and impulse purchases by office goers stuck at home. Amid unprecedented fiscal and monetary easing, Sea had no problem pulling almost $6 billion in September 2021, the biggest ever equity offering by a Southeast Asian company. Investors were goading Sea to pursue growth, which is what it did. Until it learned better than to chase ever-higher gross merchandise value at the expense of underlying profitability.
Grab has taken home the same lesson. Jaya Grocer, the Malaysian supermarket chain it bought last year, is helping turn around the economics of its delivery business. A year ago, the division was spending 18% of gross merchandise value on commissions. Now that number is down to 12%.
An emphasis on profitability doesn’t mean saying goodbye to expansion. Sea and Grab have recently launched Singapore’s two new, fully fledged, virtual commercial banks, for which they won the licenses during the pandemic. Entwining commerce with deposit-funded consumer finance can propel the next round of growth, provided the companies can steady their own cashflows first. Faced with a dramatically altered funding environment, the young Southeast Asian startups have recently demonstrated both the ability and the resolve to behave like mature firms.