SEA Ltd: A Stable Duopoly in Indonesia focusing on profits?
- Shopee & Tokopedia might prefer a stable duopoly in Indonesia as evident from rising take-rates in 1Q24; there is not much share to gain from other players anyway
- Shopee & Tokopedia are also leaders in fast-growing live-commerce much ahead of others
- Shopee’s rising in-house logistics (50%+ of total deliveries) and lower logistics subsidies also support profitability.
- Maintain BUY with an unchanged TP of US$75
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Shopee raised seller commission rates in 1Q24; benefits to be felt over 2024. Earlier, we expected to witness an intense competition in the e-commerce sector in FY24F, especially in Indonesia due to the merger between Tokopedia and TikTok Shop. However, TikTok Shop Indonesia has been less aggressive post-merger and has increased seller commission rates. The market is witnessing more rational competitive behaviour by the incumbents, as evident from the rise in take rates between Dec 2023 – Jan 2024. Furthermore, TikTok Shop’s promotions in the same period have turned more rational, with the trial period set to end in Mar – Apr 2024.
TikTok has two immediate tasks at hand –ensure regulatory compliance and revamp Tokopedia. With TikTok Shop still doing in-app transactions, GoTo CEO Patrick Walujo has commented recently that GoTo will be 100% compliant with the Indonesian trade ministry regulation that bans in-app transactions on social media, by mid-April 2024. This comment was made after Indonesian SME minister raised objections about non-compliance by TikTok Shop. The Ministry of Trade will audit the integration process in few months to decide whether there are still any violations. Without in-app transactions and data-sharing between social media and e-commerce platform, TikTok Shop may struggle to convert impulse buying into an actual sale. TikTok can only have a role in product promotion, while the transaction process should be handled by the electronic system of Tokopedia. Hence, TikTok Shop needs to make better use of Tokopedia’s business to thwart this threat.
A stable duopoly between Shopee and Tokopedia in Indonesia?
Tokopedia has been losing market share in Indonesia due to loss of price-sensitive subscribers to TikTok Shop and Shopee. According to GoTo CEO Mr Walujuo, TikTok Shop more than doubled its market share to 11% in 2023 while Tokopedia’s share shrank to 23% from 28%. This implies the merged entity’s market share at 34%. This could be comparable to 35-40% market share of Shopee in Indonesia. TikTok Shop has committed to US$1.5bn investment in the merged entity over the long-term, so Shopee may not want to compete with Tokopedia using aggressive promotions and logistics subsidies. Shopee has indicated its intent to focus on profitabilty and Tokopedia may want to focus on profitabilty as well as there is not much market share to gain from third-party players for both of them. Lazada with <10% market share in Indonesia is not a big threat with most of its revenues coming from LazMall and the brands’ official online stores, which feature original products and tend to be more expensive.
Sales & marketing expenses declined sharply at Shopee as a % of sales in 4Q23. Shopee ramped up its investments in live-commerce in 3Q23, and hence there was an upfront expense incurred in sales and marketing in 3Q23. This was due to (i) various subsidies offered to sellers with the intention of enticing them to adopt the video format, and (ii) an endorsements fee paid to key opinion leaders (KOL). However, those expenses came down in 4Q23 as sellers were adopting video even without subsidies.
Logistic subsidies no longer rising sharply as indicated by a sequential rise in VAS revenue. SE’s e- marketplace revenue can be split into core marketplace and value-added services (VAS). The VAS segment mainly generates revenue through logistics services offered by Shopee, where it undertakes the fulfilment and delivery of the order (without or without external vendors). If Shopee offers logistics subsidies to its customers, it reduces VAS revenue. If VAS can grow faster than GMV growth, then it implies reduction in logistics subsidies. While VAS revenue growth of 11% q-o-q in 4Q23 was lower than GMV growth of 15% q-o-q, it is still a big shift from 3Q23, where VAS revenue declined by 5% q-o-q compared to a 11% q-o-q rise in GMV.
Rising in-house logistics helping reduce costs
In-house logistics is driving efficiency, potentially supporting a reduction in e-commerce losses. At present, Shopee’s in-house logistics efficiency is more than 50%, compared to the 30% seen 18 months ago, captured under cost of services as Shopee adopts an OPEX model where the storage facilities and delivery vehicles are leased. There is insufficient room to gain logistics efficiency unless an in-house logistics unit is set up. Shopee is able to drive this efficiency since it can direct more traffic into its own logistics network, resulting in cost efficiency. However, achieving 100% efficiency is unattainable. Nevertheless, we expect Shopee will attempt to achieve 60-70% efficiency in its logistics operations, which can support growth in its adj. EBITDA. Other key insights provided by the management in 4Q23 include the opening of five new sorting centres and 385 new first and last-mile hubs across the Asia market. Platform logistics cost per order in Asia decreased by 12% y-o-y in 4Q23, partly due to Shopee’s in-house logistics network cost per order decreasing by 20% y-o-y. Shopee has made good progress on delivery speed in Indonesia in December 2023, with more than half of the orders from buyers in Java delivered within two days.
Shopee has introduced various other logistics features. Shopee is expanding premium services such as next-day delivery and return-on-spot services in Indonesia and Vietnam. This initiative has resulted in higher trust and increased product/purchase frequency from buyers, particularly new users. The differentiated return service allows the user to ask for a return anytime during the shipping process, and Shopee can intercept the orders even during shipping, a feature not offered by any other logistics player in the market so far.
Amazon (AMZN) proved that in-house logistics drives more orders and efficiencies. AMZN’s own Fulfilled by Amazon (FBA) feature is estimated to have costed 70% less per unit on average than other comparable major US carriers’ premium options. When it comes to standard shipping options, AMZN’s FBA offers 30% less per unit on average. According to a Jungle Scout survey carried out between Dec 2023 – Jan 2024, 86% of sellers use AMZN’s FBA. Currently, AMZN has over 175 fulfilment centres across the globe, with more than 100 across the US.
Live-commerce growing rapidly, with Shopee the market leader
Live-commerce to be a major driver of e-commerce revenue in the long term. Almost 15% of Shopee’s total orders from Asia in 4Q23 had their origins in live-commerce (~5% in 3Q23 and Indonesia ~10% in 3Q23). Shopee ramped up their investments in live-commerce, and hence there was an upfront expense incurred in sales and marketing in 3Q23 due to various subsidies offered to sellers and key opinion leaders (KOL). This has the potential to rise to 25-30% in the long term for categories which need more explanation to make decisions, such as fashion and cosmetics. Shopee’s AOV in live stream is relatively lower compared to marketplace orders as it was launched in 2023. We expect a convergence in AOV with mainstream commerce as the medium term.
In Malaysia, Shopee experienced significant growth in live-commerce. By 2023, Shopee boasted over 1m Malaysian users registered to stream on Shopee Live, along with over 450,000 new local sellers, influencers, and affiliates joining its ecosystem nationwide. Notably, in 2023, 80,000 sellers increased their earnings by 25% y-o-y, while affiliate and livestream orders surged by 420% y-o-y and 500% y-o-y respectively. Since its inception in 2019 until end-2023, Malaysian consumers engaged with local influencers a staggering 3.5bn times on Shopee Live. The adoption of Shopee Live by new local sellers resulted in a remarkable 10x increase in sales and a 16x surge in orders compared to 2022. Moreover, over 89,000 new affiliates were onboarded to drive traffic to local sellers on Shopee Live. Livestream orders accounted for up to 40% of total platform orders for sellers, who achieved sales exceeding RM500,000 in 2023.
Shopee Live is the dominant platform for live-commerce in Indonesia. According to Populix’s survey conducted in May 2023, Shopee was the most used live streaming feature (~69%), far ahead of TikTok Live (25%), Tokopedia Play (4%), and LazLive (2%), as per respondents. The same survey identified that product categories most frequently purchased are fashion and accessories (85%), beauty, care & health (54%), lifestyle (41%), household needs (33%), daily products/FMCG (32%), electronics (25%), and mother and child/baby needs (16%). In addition to this, a varied product selection also plays a special role in meeting different consumer preferences. In this survey, Shopee Live occupies a leading position where 74% of respondents chose it as a live streaming feature that offers the most complete and most varied product range, far above its competitors TikTok Live (20%), Tokopedia Play (10%), and LazLive (9%).
Shopee Live's success can be attributed to investments in high-quality studio production, key opinion leader livestream services, and increased livestream touchpoints across the user journey, accompanied by in-stream tools to optimize conversions. This platform has emerged as a vital channel for discovering locally made products. Additionally, more than 60,000 small and medium enterprise (SME) sellers benefit from Shopee's strategic collaborations with ministries and government agencies, including the Malaysian Communication and Multimedia Commission, the Rural Development Ministry, and the Domestic Trade and Cost of Living Ministry.
Shopee expects live-commerce to be a significant component of its platform. Shopee's investments in live streaming have specifically targeted key categories like fashion, health, and beauty, which benefit greatly from this user engagement format, often yielding higher margins. This strategy has strengthened Shopee's market dominance in these categories while maintaining a focus on investment efficiency and driving rapid improvement in unit economics. Management notes a significant q-o-q unit economics improvement in 4Q23, aligning with the company's belief that live-streaming e-commerce can be both a substantial and profitable component of the platform in the long term.
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FY Dec | 4Q2022 | 3Q2023 | 4Q2023 | % chg y-o-y | % chg q-o-q |
Revenue | 3,452 | 3,310 | 3,617 | 4.8 | 9.3 |
Cost of Goods Sold | (1,754) | (1,869) | (2,092) | 19.2 | 11.9 |
Gross Profit | 1,697 | 1,441 | 1,525 | (10.2) | 5.8 |
Other Oper. (Exp)/Inc | (1,354) | (1,569) | (1,581) | 16.7 | 0.8 |
Operating Profit | 343 | (128) | (56.5) | - | (55.8) |
Other Non Opg (Exp)/Inc | (8.6) | (32.0) | (49.2) | (474.8) | 53.7 |
Associates & JV Inc | 1.54 | (0.4) | (9.9) | - | - |
Net Interest (Exp)/Inc | 43.5 | 77.9 | 80.8 | 85.7 | 3.8 |
Exceptional Gain/(Loss) | 0.0 | 0.0 | 0.0 | - | - |
Pre-tax Profit | 379 | (82.3) | (34.7) | - | 57.8 |
Tax | 43.5 | (61.7) | (76.9) | - | -24.7 |
Minority Interest | 3.96 | (5.2) | 1.88 | (52.7) | - |
Net Profit | 427 | (149) | (110) | - | (26.5) |
Net profit bef Except. | 427 | (149) | (110) | - | (26.5) |
EBITDA | 458 | (20.6) | 45.0 | (90.2) | - |
Margins (%) |
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Gross Margins | 49.2 | 43.5 | 42.2 |
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Opg Profit Margins | 9.9 | (3.9) | (1.6) |
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Net Profit Margins | 12.4 | (4.5) | (3.0) |
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