Should SEA Group stop pouring capital in Shopee?

While Garena has constantly recorded high profits for years, Shopee has been submerged in tremendous losses

SEA Group’s latest financial report showed a large gap in earnings between its e-commerce and game businesses. While Garena has been constantly recording high profits for years, Shopee has been submerged in tremendous losses.

In 2019, Shopee’s gross merchandise value rose 71 per cent to $17.6 billion. Its adjusted revenue increased by 224 per cent to $942 million. However, its earnings before interest, tax, depreciation, and amortisation (EBITDA) index showed negative growth. The gross profit margin reflected that Shopee has been offering tremendous discounts to gain market share and accelerate turnover.

Meanwhile, the game business Garena has showed an impressive growth. Last year, Garena reported $1.8 billion in revenue and $1 billion in pre-tax profit, equivalent to the EBITDA of 40 per cent.

According to Tech In Asia, even if Shopee reports profit, its gross margin will be tiny compared to Garena's. In other words, Shopee is burning money earned by Garena. Specifically, the e-commerce platform splurged $765 million out on sales and marketing to get $942 million in revenue and lose $1 billion last year. Garena's sales and marketing expenses were $109 million but the turnover and the pre-tax profits were $1.8 billion and $1 billion, respectively.

Taking on losses to gain market share has been a common strategy in regional e-commerce markets in the past years. In 2016, the total losses of the Big Four (Lazada, Tiki, Sendo, and Shopee) in Vietnam hit VND1.7 trillion ($73.9 million). The losses doubled to VND3.4 trillion ($147.83 million) in 2017 and VND5.1 trillion ($221.74 million) in 2018.

Indeed, SEA is taking advantage of the e-commerce business to expand to other sectors like financial services. The Singaporean group has been attempting to get a license for e-bank business in the country. That is also the reason why SEA keeps pouring capital into Shopee despite it burning through capital in the blink of an eye.

Nevertheless, the strategy seems to be far from useful for SEA because the game business is producing high margins and has yet to reach the saturation point. Every cent of investment and expenditure in Garena can gain much larger benefits than in Shopee.

On the other hand, Tech In Asia assessed that maybe investors prefer Shopee over Garena. This is reflected by SEA’s initial public offering (IPO) in 2017, when Shopee was the main factor that helped SEA lure in more investors. Notwithstanding, everything has changed. After the failure of WeWork, investors are more interested in profitability. That means even if the companies produce high growth rates or show positive prospects but are far from making profit in the short term, they will not be appreciated by investors.