Sea Limited Building The Next Amazon

The stock went up 2100%. And then it fell 90% in 2023 to only then go back up 400% and now be down 55%. They captured multiple industries from e-commerce to mobile gaming with near perfect timing to only then fall flat on their faces when it turned out that these supposedly secular trends turned out to be rather short-lived. During COVID, their e-commerce business boomed and investors demanded that they grow quickly, which is exactly what they did. The Singaporean-based companies started opening up in markets as far-flung as Poland and Brazil, and they burned billions of dollars in promotions and subsidies to do so. When the stock market turned in 2023 and interest rates started to rise, investors turned on C Limited and hard. Their $360 stock price fell to $35 and founder Forest Lee had to aggressively pivot the company to become profitable. They started exiting all sorts of different markets that they just recently opened up including France, Poland, India, Argentina, Colombia, Chile, and Mexico. In addition to India, all of these markets that were unprofitable, they exited. They suspended executive cash comp and also capped business travel expenses. The entire organization got the mandate that they had to become profitable quickly which is exactly what they did. And to the surprise of many investors in 2023 they became profitable for the first time and they continued to push on their profitability for the next couple years while growing pretty quickly. Last year they grew 30%. And today they are the largest e-commerce company in Southeast Asia, facilitating over hundred billion dollars in transactions. And this is in addition to having a very successful fintech arm and gaming operation. And by the way, that Brazilian market that they entered that everyone thought would become an endless money pit as they fought against incumbents Marcato Libre and Amazon to an extent is actually now profit neutral. and they ship more orders in Brazil than Marcato Pago to the surprise of many investors. But after 2 years of improving profitability, investors were caught off guard when management guided profits to be potentially flat next year. The concern is that this is now reactionary to a new competitor that is popping up in Southeast Asia, Tik Tok. Now, we all know it as an entertainment company for short feed videos, but they have rolled out Tik Tok shops, which is a surprisingly popular way to shop now in Southeast Asia. And they are the second biggest player in those markets and growing very quickly as well. And in response to this new threat in the flat profitability, the stock has sold off 55%. And so the question investors are grappling with is whether or not CE will ever be able to truly become profitable and manage growth or was the little era of profitability they enjoyed sort of an illusion before they had to get back to spending a lot of money on promos and subsidies in order to facilitate more demand across their marketplace. We will cover this key question and much more in this video on C Limited. We will start with a breakdown of the business covering their three segments which is going to be their e-commerce segment called shopppee, the digital financial services segment which they name money with two e as well as their digital entertainment segment with genna which is the name of their gaming publisher and freef fire the name of their very popular mobile app. We will touch on all of that and then we will get into competition, break it down by e-commerce versus fintech and then finally we will touch on some risk and then valuation. This video is packed with a lot of information and took a lot of research in order to get it done. But right now, if you’re new to the channel, you’re probably wondering who am I and why should you listen to me? Well, my name is Drew Cohen and I used to work at Goldman Sachs in investment research. Later I worked at Capital Group on the buy side. I actually talked to Forest Lee when I was at Capital Group. Sat in on a few meetings with him as well as upper management. Right now though, I’m a registered investment adviser and I manage money for high netw worth individuals. Now, if you haven’t already seen it, we also put out in-depth videos on Marcato Libre as well as coupon, which I highly recommend you watch so you could get a better understanding of the e-commerce landscape after you finish this video, of course. And if you are enjoying these videos, go ahead and hit like and subscribe so we know to produce more content like this in the future. And later in the video, if you’re not enjoying it, you could always go ahead and hit unsubscribe. That is an option available to you. But we have a lot to cover. So let us get into the business. Overall, C Limited has $22.9 billion in revenues, a 9% operating margin. Uh, prior to 2022, every year they were losing money. And so in 2023, that was the first year they were profitable, just barely, and then their margins continued to expand to the 9% we see today, which equates to about $2 billion in EBIT. As I mentioned, they have these three segments. They have the e-commerce segment, the financial services segment, and basically the digital gaming segment, which we’re going to go segment by segment. But first, I want to just touch a little bit on some history to give you more context as to why they’re kind of in these businesses that may seem a little different, especially gaming. So, Forest Lee, who is the founder of C Limited, started this business as a game distributor before smartphones were very popular. And so, there was a lot of internet cafes across Southeast Asia. And in these internet cafes, you needed a way to download games. And so, Gerena was the name of a platform where you could download computer games. And there was also a social layer attached to it. So, you could find your friends, message your friends, and play with them online. So, that was kind of the start of the business. Then he got a partnership with Tencent to distribute a lot of their games throughout Southeast Asia. So, that was a very big deal for them. Tencent became a big investor in C Limited at the time as a part of that transaction. And so they helped them distribute games uh all across Southeast Asia. A problem that was quickly coming up though was how do you accept payments because as it turns out Southeast Asia is very underbanked. An average person doesn’t have a credit card and especially not back then in the early 2010s. And so they started something called Airpay which would later turn into C money. And this was basically an ability for people to go to physical counters, give cash, and then get a topup card or a digital coupon. some sort of way to actually then pay digitally online. And so that evolved into their financial services business, but that’s kind of the the beginnings of it. Now, in 2017, they purchased a Vietnamese gaming studio that just created this game, and I don’t know how Forestly picked this or or why he decided this game, but the name of the game was FreeFire, and it was before it was launched, and this turned out to become a huge huge blockbuster hit. This is a game that has made billions and billions of dollars uh in revenues already. And so it’s like a multi-person shooter game kind of think, you know, Call of Duty Mobile, something like that. And it it was very popular in Southeast Asia because it was designed to work on slower smartphones and also in an environment where network bandwidth wasn’t that much. And so it was a light game as it’s called because it didn’t take up a lot of kind of memory, a lot of bandwidth. And so it became very very popular. That was very big for them. that’s the only IP that they really own even today. Uh, but it’s been a very popular game for them. And then in 2015, and I’m not sure exactly what the decision was here, but they decided they were going to get into e-commerce. And so, you know, he was looking across the the landscape in Southeast Asia, felt like they could do it better, felt like they could kind of learn what they used um with video games to kind of create an app that also was a little bit gamified, and then also tie it to their digital finance capabilities, right? So you’d be able to buy online. And so he decided to launch in 2015 Shopppee across seven countries simultaneously. Now they started uh by first going after female shoppers with a lot of clothing. And so the idea he had and it’s kind of funny because you know you talk to Jeff Bezos and he talks about wanting to start with books. You talk to JD.com founder Richard Lou and he talks about why he wanted to start with uh computers. Basically it’s a high ticket item. it’s a high trust transaction, but you’d be willing to wait for it and pay for shipping for it because shipping would be a small portion of the overall value. Whereas, you know, books are easy to ship. Uh you don’t need to worry about uh them being damaged in the process. But it’s also hard for a book retailer to carry that much selection. And so, it’s funny how every entrepreneur has their own story why they picked what they pick. But, uh Forest Lee picked um women’s uh fashion. And the idea there is that it’s easy to ship. It doesn’t get damaged when it’s going to be shipped because it’s just clothing. people are going to be willing to wait for it. Very often it’s an item they didn’t even know they wanted until they saw it and it’s light so it’s easier to ship. And so those are some of the reasons they decided to start in fashion. And then he also had this belief that um women are taste makers especially young women. So if the young women were shopping on this site eventually over time everyone would be. And so that’s why they decided to start there. This is in 2015. They launched seven markets and as they say the rest is history. And so we’re going to talk first more about the e-commerce segment and then we’ll get into other two segments. So if you’re looking at the annual report, you’ll notice that there’s actually four segments uh by revenue, not three. So the fourth one is going to be sale of goods. That is going to relate to firstparty sale of uh products on the shopppee e-commerce marketplace. And so if you recall from our Marcato Libre video or the coupon video, but I’ll just very quickly go over this again. There’s a difference between 1 P and 3P. So 1 P stands for first party. 3P stands for third-party. So if you get a merchant to onboard onto your platform and they’re selling their own inventory, that’s going to be third party. If you as the platform are buying the inventory directly from a supplier and then selling it on your behalf, you’re the so-called merchant of record. Then it is going to be you that are uh selling the goods and thus it’s first party. And so that’s kind of the distinction. um they started entirely as a third-party marketplace and so today they have 14.5 billion dollars in revenue. That’s going to be uh e-commerce service revenue. So there’s going to be a take rate on that. I’ll explain how they they monetize in a moment. And then they have $2 billion of goods sold. So that’s going to be the first party business. So as a thirdparty marketplace, you can grow really quickly and you could get a lot of merchants onto your platform and you get all of their inventory when they sign up, which is great. The tricky part about it though is getting a consistent experience because the merchants can offer whatever they want. They could sometimes have different refund policies. They can sometimes be harder or easier to work with. And so it’s the platform’s job, shopppee’s job to try to homogenize the experience as much as possible. So as a buyer on the platform, you’re not actually looking at, you know, the individual seller and like an individual sellers rating and all of that. You want to just trust the shopppee platform. And so that is what shopppee does is it aggregates all these thirdparty merchants together today. It helps them out with shipping too which I’ll mention in in a moment. Um on top of that it’ll help deal with refunds, any issues, there’s reviews, all of that. And so that’s the idea behind the marketplace business. Now I’m going to contrast it real quickly though with coupon which uh started in South Korea. They’re almost entirely firstparty. So, one of the benefits though being first party is you don’t have to deal with fake goods, counterfeit goods, or at least it’s a lot a lot less. Uh, you also since you’re the one who is selling the goods, uh, you don’t have to deal with issues of whether or not you have enough inventory selection as the platform, you can control all of that. And so, most of these e-commerce platforms found that even if they started with third party, they need to ultimately get some sort of first party there, which is what shopppee is doing now. So, shopppee does have first party. It’s focused mostly in FMCG, which is fastmoving consumer goods. And there’s a lot of kind of highfrequency purchases that uh average merchant may not want to really go on to Shopppee to sell. Think diapers, toothpaste, toothbrushes, all sorts of, you know, laundry detergent, whatever it is. But they want to have that on the platform because those are very good purchases to habituate a consumer to return to the platform because it’s an essential purchase. it’s going to be a high frequency item, something you’re ordering often all the time. And then it also helps kind of seed more selection, more options in these strategic areas. And so Shopppee has rolled out a little bit into one P as a result of that. Now, I’ll talk more about um kind of comparing uh the platforms and the behavior when we get to competition. Just giving you some more though highle facts here. They have 400 million buyers on the platform. So a very large number and just as important 20 million sellers. So a lot a lot of sellers on this platform, a lot of selection to choose from. Their gross merchandise value was $127 billion. So GMV, as it’s called, gross merchandise value is the value of all transactions on the platform. At least it should be. So there’s kind of an issue with this metric, and it’s somewhat specific to um you know, Asian-based commerce companies. Uh, I found this issue when I was looking at JD.com and Alibaba. This goes back to actually, I think it was 2017. Uh, JD.com before used to report two GMV numbers. And I was curious, why are they reporting two GMV numbers? As it turns out, there’s one very broad definition of GMV that includes all transactions, including refunds and canceled transactions. Then there’s another tighter definition of GMV that only includes actual transactions that were completed and not refunds and cancels. As it turns out, there is something called brushing, which is when a merchant will send items to someone who either didn’t order them, sometimes they’ll uh send items, try to get reviews, sometimes they’ll send orders uh to themselves. Uh and so there’s all sorts of different activity there. And it’s all done to try to boost uh their sales on the on the marketplace so they can boost their ranking and hopefully get reviews too in the process. So they all play games um with this in order to try to make their volume look higher than it really is. And as it turned out and I was able to basically circulate this from the footnotes in JD.com. And so to just kind of explain this a little better, there used to report these two GMV methods. One year they all of a sudden started reporting only one. And I was kind of curious why they did that. And the explanation for it was the media at the time would see the smaller number, report that, and then for competitors who used a looser definition, which like Alibaba at the time, they would see a much bigger number. And so the reason why they wanted to get rid of this kind of better, more accurate number really, was because the media kept reporting that they were much smaller than they really were. So they got rid of the good definition of GMV. Basically, now they have this looser definition was all they reported. And so circulating though how that number changed for JD.com, you could then apply that and get a rough estimate. I did it at the time for Alibaba and you could figure maybe 40% of their GMV was this uneconomic GMV that was not actually a completed transaction. Actually a startling large amount of it. Um if you apply that same math to Shopppee, it will also be a very large number. Now uh since then though, things have changed in the e-commerce landscape. They’re much more aware of this merchant activity. they clamp down a lot more on it uh shopppee in specific too. So I don’t think it’s anywhere near that big but it it could be still a notable portion of GMV and so would be better if they reported a number that was not including canceled GMV or refunds. That aside though I’ll note that again in the valuation when we’re thinking of how to think of the value of this GMV. But either way $127 billion in GMV, maybe it’s 20% too high, 30, we don’t know for sure. They operate in seven countries in Southeast Asia and so Indonesia is going to be their largest and then they also operate in Taiwan, Vietnam, uh Malaysia, Thailand, the Philippines, and Singapore. And so those are kind of their seven core markets. Uh and then in addition to that, they’re also in Brazil. And so that’s the only kind of market from that big growth area that they actually kept. They said, “This is a market worth fighting for. We think we can build a good business here,” basically. And so they’re in those seven markets plus uh Brazil basically. They do have some crossber trade in other markets, but they’re not that big of a business. And crossber is kind of hard too uh for e-commerce because a lot of these countries they do have tariffs or import taxes. And then also it’s just not usually that economic shipping items that far out, especially because a lot of the goods sold on Shopppee are are pretty low value. And so a lot of the kind of skepticism for shopppee comes from the fact that a lot of the goods they sell, it’s a low order value. It’s called an AOV, average order value. That number is low. So if it’s low, it’s hard to get the unit economics to work because you have shipping uh attached to an item that’s pretty inexpensive. And so how much margin are you really getting out of that? Is that enough to get uh shipping covered? So that’s kind of been a reason why investors are skeptical. Plus the fact that uh the markets they operate in, they’re not very populously dense. You know, it’s pretty spread out geographically. Southeast Asia has thousands of islands, too. And so, you’re literally delivering some stuff by boat. And so, there’s a lot of skepticism on whether or not this could ever really be a profitable endeavor for them. And so, the the segment profits of Shopppee alone are, you know, 600 million. So, it is profitable at least on a consolidated basis. But this is a reason why the profitability of this marketplace is drawn much more kind of scrutiny than you know Amazon or or Kong. Kong by comparison it operates you know in a pretty populously dense geography. Everyone is pretty wealthy on average in Korea especially compared to the incomes of a lot of these Southeast Asian countries. And so, you know, the question investors were asking, especially, you know, the the bearish investors were, do you really want to be in the e-commerce business to people ordering very low average goods that have to be shipped very far away and they don’t have, you know, very high incomes? And they also are very um coupon or or promotion sensitive. And so, that was the reason why a lot of people did not and maybe still don’t like Shopee uh as an e-commerce platform. And there is a degree of truth to all of that. uh the incomes of you know all these countries that we’re talking about are lower than you know Korea or you know if you’re looking on average even than you know Brazil and so there is truth to all of that. Um on the other side of it though is kind of this argument that if you’re able to make the economics work on very small numbers which it looks like they’re able to do at least again on a consolidated basis. There might be a difference between tier one cities and you know farther flung out areas um from the the city centers. But if you can make the economics work now, then in the future you’re just going to have more and more volume to run through everything which will reduce your cost over time. Income should grow and you could habituate customers to be better quality customers over time, which actually is kind of what’s happened. Um you know, Shopee is definitely a very gamified app and what that means is there’s a lot of countdown timers. There’s like different games you could play for discounts and there’s a certain element where this creates a lot of compulsive purchasing. This is not actually a good thing. It’s it’s a mixed bag. On the one hand, you’re getting someone to buy something that they wouldn’t have bought otherwise, but on the other hand, it’s not something that they would go to the app to buy. And ultimately, what you want to do as an e-commerce company is you want to drive the behavior of someone that as soon as they think they want to buy something, they go to your app to purchase it. And so what’s kind of been transitioning a bit from shopppee I think especially if you go back you know from five years ago to today is a lot more um customers are habituated to think shopppee whenever they want to buy something. This sort of commerce is called high intentionality. And so we’ll contrast with discovery when we when we talk more about Tik Tok. But when you do have high intentionality that means I have this idea I need to buy more laundry detergent. I’m going to just go into the app. I’m going to type into the search bar. I’m going to hit buy. Maybe I look it through a couple sellers and that’s it. I I trust Shopee to do that. I don’t want to think about it. I don’t want to compare between multiple different apps. And so that is the behavior you want to get. Now, ideally, you can also have something like a VIP program which they’re rolling out which now you’re getting free shipping and since you’re paying for it, you’re acrewing more loyalty to the platform and you’re not even price comparing uh between other platforms right now. Now, in terms of price though, you know, Shopppee is very competitive if not the lowest. you know, Tik Tok shops, which we’ll talk about more later, is also known to be pretty cheap as well. So, they’re both pretty cheap, but shopppee is definitely not really losing on price right now. But you do want to get to the point where a customer is not that sensitive to, you know, a 5% price change, which is definitely the case of where Amazon is in the US. I can say personally, I never price check any Amazon purchases unless it seems like absolutely egregious. It’s almost always whatever’s on Amazon, you just hit buy. And that’s because in the United States, uh, the behavior of most shoppers on Amazon is they care the most about convenience, which it’s not just about the fast shipping. It’s also about the trust and the ability to just buy something and forget about it and know it’s going to come. It’d be pretty annoying if half the time you bought something, it didn’t actually come, which was, by the way, eBay’s problem. In short, that’s another video, though. Um, but you want to get to the point where people are just trusting that the platform is going to work as you expect it to. So, Shopppee is trying to become more and more of this player. Part of that is 1P2. If they don’t have certain selection, they now have first-party goods that can cover that. They’re trying to get more essential everyday purchases on the platform because if you’re buying an essential item, it’s something you tend to buy pretty often. It’s a high trust transaction and you’re going to get a repeat purchase. That is exactly the behavior that they want. Now, they did roll out their own logistics arm uh called SPS Express. And so now this is doing over half of all of the packages in Southeast Asia right now and uh by some estimates almost 70% in Brazil as well. And so their logistics arm has grown a lot. This has allowed them to reduce the cost of delivery by a lot because if you’re paying a logistics operator, they have a margin on that. So by in-housing that you’re saving cost, you’re getting more volume in your system. It allows you to do upstream sorting. So you could sort more packages to different venues and then kind of consolidate them in a way that it’s cheaper to ship out. Now they have been also getting a lot better on shipping, especially within uh tier one cities, kind of the biggest cities across Southeast Asia. Most items are now shipped uh next day. And so that’s kind of where they are there. And now they’re trying to improve uh when you get away from the tier one cities, when you get into the more uh farther out of the the main city centers. And so there is a push to continue to improve those shipping speed times. and then also cost alongside that. And then if you do become a VIP shopppee member, you get your free shipping with that. And so right now they have 7 million members. Not a huge amount relative to, you know, their 400 million buyers, but the program is growing quickly. And also once people enter the program, they start spending on average 30 to 40% more. And so that’s a very positive sign that this kind of flywheel is starting to work. Uh the other thing they rolled out was shopping mall which is going to be where brands are able to sell their items directly to customers in a way where there’s kind of an authenticity guarantee. And so this is going to be important because you know a lot of fake brands fake stuff on these marketplaces. By having Shopppee Mall the brand knows it’s like a brand safe area for them. The customer knows they’re actually getting their item. Shopppee will guarantee it’s legitimate. And so that’s a way they’re trying to attract a lot of brands. It’s kind of similar to um what Alibaba had with T-MAL because they started with Taoba. That was their third party marketplace. A lot of sellers and the same sort of issue with how do you know if something’s real and all that. So they rolled out T- mall where all the real brands could list their stores and it would be, you know, authenticated. This is a real uh brand store. And so they have that as well. All of that is important to help increase those AOVs, the average order value. So you want people spending more money on average in each purchase. You do that with brands because brands tend to have a premium. You also want to increase frequency which it has been increasing. Last quarter they announced um frequency has been up 15%. And so that’s a number you want to see continue to increase. So they add more selection. Uh they get better faster shipping. People start coming to the platform more. They trust it more. All of that drives frequency up. And so those are all things that uh Shopppee is trying to build in terms of their flywheel. Now in terms of monetization, it’s kind of simple. There’s three ways they can make money. There’s going to be a commission on sales from thirdparty sellers. So that could be anywhere from 8 to 18%. It’s going to vary by category of what you’re selling as well as geography. On average it’s about 13%. Then they’re also going to charge for shipping. Right now they’re not really trying to make money off of shipping. Um they’re just trying to recover their cost, but in time they could have a margin in theory on that shipping. And then lastly is going to be advertising. And that for a lot of these e-commerce players is is the real money maker because when you have a customer that is coming to your app and they have high intentionality to purchase something, that tends to be a very good opportunity to have a merchant pay to get their uh listing pushed up to the front because it has a pretty good return on ad spend. And so uh that’s kind of the idea behind the advertising, the search ads. It’s worked very well for Amazon. That’s mostly the reason why they’re profitable in e-commerce is because of advertising. And uh Shopppee should be able to do the same thing. They’ve already started to do it. They’ve already uh had, you know, most their margin you could say is probably today from advertising. They kind of talked about that on the last call, how much that’s been increasing as a percent of GMV. And so Shopppee right now, it’s number one in all of these Southeast Asian countries. It’s more and more trying to do the Amazon thing of being the full logistics provider. They’re moving more into fulfillment. They have their own logistics arm. They’re trying to tie it to the membership program. They don’t quite have a a content avenue to it yet, you know, tying it to something like TV streaming. Uh they do have, you know, discounts and promos and and all of that for more purchases though. And so that’s going to be shopppee. Uh let us now turn to digital financial services or C money. They used to actually call it Coney. Money spelled M O N E Y. And they changed it to two E’s at the end. So it kind of rhymes with shopppee. And so this is going to be a business with $3.8 8 billion in revenue, 60% growth, about $970 million in EBIT, and that is growing 48% year-over-year. And so, EBIT is growing slower than revenue. Always important to flag. Uh that’s in part because they just signed up a lot a lot of new customers, almost 40 million new borrowers on the platform. So, there’s some customer acquisition cost associated with all of that. And so Coney is it’s an interesting business because it’s not quite the same as Marcato Pago if you’re trying to just apply that understanding here. And it’s also not the same as you know an Alip Pay or something. And that is because there are a lot of different digital financial services all throughout Southeast Asia where every country has their own kind of home hero and there’s a few regional players that are dominant. We’ll touch on all of that in the competition. But as a result of that, the way people use C money is sort of different. So it is true, you know, you do have the e-wallet there. You do have QR payments, all the kind of things you would expect, you know, for a financial services app, but their big money makers are going to be buy now pay later loans or what they call shopppee pay later, personal loans, and then also merchant loans. So they’ll lend to the merchants on their platform. Now, to a smaller degree, they do have some merchant acquiring, which is where they’re uh processing payments. They don’t talk that much about it. They also have some micro insurance policies, some other, you know, financial services tagged in there. But the big thing is going to be lending for them. And uh the way they kind of differentiate on lending is twofold. So as you’d expect, it’s using shopppee as a customer acquisition engine. So let’s say you are checking out for an item. Okay, you could use shopppee bnpl, shopppee pay later basically. And that will allow you to finance the transaction as you would expect. And similar to South America, a lot of Southeast Asia, very underbanked. A lot of people do not have credit cards, for example, um, and you know, digital bank accounts, all that. These are kind of a newer thing for a lot of them. So, access to credit is definitely something that can help close a transaction, and it’s helpful for the customer. And so, when a customer is checking out, they could get a buy now pay later loan. Uh, they also now ruled out personal loans, too, though. And so once they build a profile on an individual’s transactions, gain some comfort with that, they can offer them a personal loan, which has also, you know, been pretty popular. And then lastly, it’s also offering loans to merchants. So that could help them finance inventory, their business, whatnot. They also recently though just got bank licenses in a lot of the countries they operate in, including Singapore, Malaysia, Indonesia, um, Philippines, and then Thailand is pending, and then they also have Brazil. And so they are able to be kind of like a traditional bank which I don’t love to to be honest with that. Um but that does allow them to uh have much broader sort of activity uh financial activity as well as accept deposits and use those as a potential um uh funding source for the lending activity they have. Now the lending book has been growing a lot. It’s been growing about 80% year-over-year. Now, that for a lot of people is going to be a bit of a red flag, especially if we think that you are extending loans to subprime consumer borrowers who have no credit history. All of that kind of rings like a red flag. On the other end though, interest rates are very high. And so it’s kind of similar as we talked about with Marcato Pago where you have very high interest rates and pretty high loss rates as well, but high enough interest rates that they offset the losses and still allow the lenders to make a pretty good margin. Since a lot of banks traditionally have not extended credit to these consumers and it’s still, you know, a growing market, the lending spreads are very, very high. And so the idea is that that can more than compensate you for an unexpected loss in case things turn out much worse than expected. Now their disclosures are not as good as Marcato Libres, which is a little annoying. They don’t disclose uh the same thing as like a net interest margin or net interest margin after losses, which would basically be what your interest income is less your interest expenses uh divided by, you know, your loans outstanding. That’ll be your net interest margin. And then if you take away losses from that as a percent, you know, a 5% loss rate, a 20% loss rate, that’ll get you to what um Melly called net interest margin after losses, what’s also known in banking as a riskadjusted spread. So that number though they don’t give you, which is very annoying to be honest. You could kind of back into it and I estimate it to be, you know, somewhere around 25%. Which is right around where Marcato Libre is. Uh but it’d be nicer if they just gave that to us. And so once again though very high interest rates, very high APRs on a lot of these things. And so it is an area where you know a lot of losses are expected but because of that the interest rates are very high. And the other thing really really worth emphasizing is the duration of these loans. So a lot of these loans are 3 to 6 months. Now having a short duration loan is important because that means if they don’t pay you back you know very quickly, right? And so you could adjust your risk models. And so it’s very different if you’re lending, you know, a mortgage to someone and it’s a 30-year mortgage and you won’t know for a long time if they’re going to, you know, be able to pay or not when they go through a tough time. Instead, you need the full money back in, you know, 3 to 6 months. Uh, almost all of their lending is a year or or less. And so that does kind of derisk it to a certain extent, although I’m a little queasy about saying the word de-risking here, just because again, you do get your money back much quicker. If there’s an issue with the risk modeling or something, you’ll know very quickly if you know some cohort of people are not paying back, you can adjust that quicker. So, it does add a certain degree of safety to the lending. If you ever saw them reach out and they’re doing three-year personal loans, five-year personal loans, something crazy like that, that would be a very, very big red flag. But, at least from what I can tell, they’re not really doing that today. And you could go to the balance sheet, you could see where the uh loans are held. If they’re in the current liabilities, you know that they’re going to be paid back within a year. If they’re in long-term liabilities, it’s going to be over a year, right? Or non-current liabilities. And so they do have like a billion or so there. Um, and so I’m not exactly sure how much of that relates to actual lending activity. If it’s loans a little bit over a year, but their $9.2 billion lending book in total, I I imagine almost all of it is going to be these shorter term loans. And so, you know, again, they’re using Shopppee a lot to try to acquire customers, but once they get a customer and it becomes a money customer, quote unquote, they can then offer them other promos, other personal loans and stuff. And so, they could do more financial activity for them. And, you know, provided the interest rates are high enough to cover, you know, the losses, it should be a pretty good business. Um, I actually wonder how long these lending businesses can have such high margins and spreads because right now people are very worried about lending to this segment because again if I’m saying you’re lending to a consumer that’s a subprime borrower with no credit history that a traditional bank like cannot run away fast enough and so as a result of that though the economics of this business have been very high. It’s the same thing for Marcato Pago in South America and it could be a long time. But I kind of imagine at some point though you see these lending spreads drop which is going to be kind of a key risk for them but it also shouldn’t happen for a long time. Probably not going to happen until we also see a bigger credit event and so more people are kind of comfortable with the lending rates they’re charging because if they are making you know these 25% around that um net interest margins after losses that’s going to be their expected losses. What could happen is in a very bad global recession, something like that, losses spike, they’re even worse. But then you do still have a good amount of spread to kind of cover your losses. And so, even though I’m not crazy about this business, it kind of seems like the economics they’re able to pull from it right now are high enough to kind of compensate for that. But we’ll talk a little bit more about that in the risk section. Now, I want to briefly talk about their their last segment, which is going to be uh digital entertainment or gora. Now, this is going to be basically two businesses. You have a publisher and then you have the game developer. Now, they really only have, you know, one big game that they’ve developed, which is going to be Freefire. That is is going to be their absolute biggest franchise in their money maker in the segment. They don’t break out how much of this business is just from FreeFire, but we do know, you know, as a segment whole, uh, it’s going to be $2.4 billion in revenue, $1.4 billion in EBIT. So, this segment is still more profitable than money or shopppee almost combined. Not quite, but almost. And so, this is kind of their cash flow machine that they’ve been uh using to fund shopppee, using to fund uh money. And on the one hand, you could say, you know, how stable is really like a a single video game, Freef Fire, it’s a mobile app, you know, aren’t people going to get tired of it and switch to a different game? Gaming’s kind of competitive. I kind of would have thought the same thing, but if you think about games that people like and how often they’re playing them, like, you know, I played Call of Duty when I was in middle school. That thing is still around right now. And how many people continue to play it every every year? And so, a really good gaming franchise really can last for a long period of time. And in some sense, it’s actually a little safer than um, you know, a gaming company having to rely on putting out a new hit every year. Because when you do have a game like Freefire where it’s not reliant on, you know, a new hit and then someone buying it, you know, kind of if you’re thinking about like a different video game sort of model, think about, I don’t know, Nintendo Smash Bros or Mario Bros., any of the Nintendo games really. Every time they have to put out a new compelling game in order to get someone to buy it. It’s a totally different model when you’re when you’re talking about a premium game because all the players have it downloaded on their phones and it’s freetoplay and improvements are continuous and incremental and so they’re always adding new things to keep players engaged. It’s not like there’s one big launch or something like that. No, they just try to add new things. If it doesn’t work, that’s okay. You could come up with something else that could help attract players. and they do all sorts of different collaborations with everything from, you know, BTS, like a Korean pop music group to all sorts of different things they’ll do, you know, and then people just buy virtual items or or battle season passes uh within the app. And so, you know, it’s been around for, you know, over a decade now, right? And people have been playing it. It’s continued to be pretty popular. It is, you know, somewhat volatile, especially during COVID. Uh if you look at 2021, they did $4.3 billion in revenue that year. And then a couple years later in 2023, they did 1.9 billion. And so that was down almost 50%. And it’s really helpful when you’re looking at a business to look at kind of the time series and see the volatility and, you know, revenues, earnings, all that. It helps you catch a lot of things. Here comes a plug. I use uh Fiscal AI, who I was using before they sponsored these videos, but it is just a really helpful financial dashboard that just allows you to see a time series of all of these different uh figures. And so it’s helpful because I’m just looking at every single number across all these years, all these different segments, and you’re able to see very quickly if something stands out. So that’s why I like it. It’s just a really clean user interface. Sure, you could go to the SEC Adro documents and hand type everything into Excel. It’ll serve the same purpose, but this is a lot quicker. And so I use Fiscal AI a lot when I am preparing for these videos and all that, checking a lot of numbers. And if you want to support the show and are interested in checking it out uh through the link below, you’ll get a free trial as well as a discount on it. But I was using it when I noticed uh how much Gano’s revenues uh did jump up in 2021, fell back down. They had three years of basically losses, negative revenue. And then in this last year, it actually flipped positive and now they’re growing 26% year-over-year in that business. So I wouldn’t extrapolate out that growth necessarily, but at least it looks like they’ve stabilized that business. Now, there’s a couple other things happening in this business, though, and that relates to the publisher side. So, as a publisher, cuz it’s kind of an interesting business, what they basically do is they help a game developer uh sometimes localize the content. So, that could be translating it, making sure there’s like no inappropriate cultural references or it kind of just fits better to the culture. Um, in addition to that, it’s a lot of promotion. It’s going to be running the esports leagues. It’s going to be doing uh all sorts of events to draw attention to it. Also, very importantly, it’s going to be monetization, running the actual payment infrastructure, because as you can imagine, all these different countries, people paying different currencies, different payment methods, and so you need someone to help uh facilitate all of that. And so, they do all of that. They’re partners uh with Tencent and Tencent uses them for all of that. I’m going to talk about a key risk though in a little bit of Tencent in-housing some of that. Um, another one of their big partners here now is going to be EA Games and they got a big game uh win from them with FC Mobile, a football game, really popular in Southeast Asia. So, they do still have the publisher business. That’s going to be a much lower margin business. They don’t disclose any of this for sure, but I don’t know 20 to 30% margins versus, you know, 70ish maybe on FreeFire, something much higher. So, the majority of profits still though in this segment are from FreeFire. Now, take a breath. Let’s zoom out. We have these three segments. We have the gaming segment, $1.2 billion in EBIT. We have the money segment, just under a billion dollars. And we have Shopppee, just under $600 million. So, those are their three main segments that uh they have. Now, it’s kind of clear how Shopppee and money work together as a flywheel. You know, the Shopee pay later loans helps uh facilitate more demand on the shopppee platform. Shopppee transaction data as well as customer leads helps uh them acquire more users cheaper on money. there’s less of a real direct link with Greta. Yes, you know, money can still help them uh facilitate those transactions, but it’s a little bit more tenuous. However, uh they do occasionally actually run promos on FreeFire for people to win free items, virtual items, if they do certain things on Shopppee. I don’t know how popular this is today, but this was more popular a couple years ago, and I thought this was so creative I had to mention it where when they were launching in Brazil, they had a huge freef fire population. And so what they did was they gave people free virtual items, which of course cost them nothing so long as they would like spin a wheel, win some money, and spend it on Shopppee. And so there’s all of this uh kind of cross promotion that was happening between FreeFire and Shopee at the time, which really helped them kind of seed that marketplace maybe quicker than they would have otherwise. And so it just kind of shows that even though these don’t have the clearest link, there still were ways they could be creative and kind of spawn uh more activity to the overall ecosystem. So, let us talk about competition. Honestly, it’s not that long of a segment though because in e-commerce at least, there’s not many competitors left in Southeast Asia. Uh, Lazada is one of the bigger ones that is owned by Alibaba. They were dominant a decade ago in Southeast Asia, and this was the original competitor that shopppee overtook. They kind of never focused properly on this business. They never localized it to all of the different markets and it just never really was able to keep up with shopppee and some of the other competitors later on. And so it’s always been there. It’s still there, but it’s a lagard uh been really bleeding market share honestly, especially too as Alibaba had to focus much more on uh their domestic turf in China as they started bleeding market share uh to Pinuad. And so uh that’s Lazada, not that worrisome. There was another big player in Indonesia called Toipedia. They actually ended up merging with Gojek, which is uh one of the ride hail players there. And so they created Goto. They actually sold 75% though of Toipedia to Tik Tok shops. And so now it’s really kind of just going to be Tik Tok shops and shopppee. And that’s where we’re going to focus our discussion around for e-commerce. So, I already hit on some of this earlier when we were talking, but you can imagine if you’re on TikTok, you’re scrolling through, you see a video, it’s an item, maybe you hit purchase, it’s directly an app. This is what discovery commerce is. You had no intention of buying that thing when you open Tik Tok, but you saw it and it was interesting, so you bought it. And yes, it’s true. There’s a little bit of a different behavior in Southeast Asia where people will do a lot more live stream shopping and they’ll kind of watch these uh streams uh for in part entertainment but then to also shop. And so the two are kind of mixed where they may go to the app with the intention of buying something without really knowing what it is. They just want to go and watch these live streams. It’s still the general though category of discovery. You don’t know what you really wanted to buy before you saw it. And that to me is a very different sort of e-commerce behavior with very different expectations. That’s important to note though because if you buy something from Tik Tok, you don’t have expectations that it gets there the next day. You’re okay waiting a week. You also probably are only willing to pay a small amount of money. You’re not going to impulsively buy a TV on TikTok. What you might do is you’ll impulsively buy, you know, a $10 t-shirt or something like that and you’ll see it when it comes. And if it doesn’t, then whatever. It’s not uh the end of the world. If it kind of sucks, you’ll return it. And so that is a very different sort of commerce behavior than what we were talking about earlier with intentionbased commerce where you’re going to a mobile app to buy something specific that you knew you wanted beforehand. Even if it wasn’t the exact brand, you knew you wanted a haird dryer. And so you searched it and a bunch of different brands came up. You looked at the reviews. You bought something right there. And since you wanted that haird dryer, you do care how quickly it comes. You don’t want to wait a week. I wanted it. And so the the shipping times do matter more in that sort of transaction. And it’s very hard to uh facilitate kind of a high intentionality transaction if you know the trust isn’t there, the shipping times aren’t there. Um and you know, maybe you’ve never even really worked on that platform on a high value good. So all of that is kind of something to consider when you’re comparing the two. And so how Tik Tok is trying to monetize, you know, their app is through shopping. And it makes sense because uh if you think about Instagram, you know, you’re scrolling through Instagram, there’s an ad for something you like, and you go ahead and buy it. Now, Instagram doesn’t actually have the stores housed on the actual app. They abandoned that effort because they felt they didn’t need it. But Tik Tok does have the sellers actually on their app. And so that’s one distinction, but it doesn’t really change the idea. It’s still this sense of I didn’t know what I wanted. I found something. I went ahead and bought it thereafter. Now, the tricky thing for Tik Tok is could they ever get to the point that someone opens up the Tik Tok app just to search for an item to purchase? I’m not so sure. I think that’s a very tough behavior to ever get, especially when the first thing that happens when you open up the app is you get a video that’s super addicting and you just get caught into it. You know, the the way the app’s designed is also going to feed into the behavior that it sort of compels. And so, that needs to be taken into account. Now, could, let’s say, you know, someone be interested in beauty items and search Tik Tok for them? Yeah, definitely. But are they going to go to Tik Tok for toothpaste and laundry detergent and paper towels and all of these other everyday essential goods? I’m more skeptical on that. Um, but that is going to be kind of a big bull sort of argument there. I think that it’s a different sort of commerce. I think, frankly, it’s a little bit more competitive to Instagram uh than it is to shopppee. But there is the case too that Shopppee always did rely on being a little bit more entertaining of an app. They did want to keep people in the app shopping, browsing, looking for different things that they may not have wanted. And some of this behavior could be going to Tik Tok. Some of that budget could be going away. And so, yeah, that’s definitely, you know, a potential headwind. But at the same time, Shopppee’s kind of moved up, as we’ve been talking about, into this different kind of better quality commerce behavior where you’re going to the app when you know what you want, when you want the quick shipping, when you want to to trust the transaction, and when you want to look at a bunch of different options and just pick one with reviews. And so, it’s a different commerce habit. I don’t see, you know, one winning everything. Having said that, Tik Tok is growing very quickly. They have an estimated, you know, maybe $50 billion uh in GMV if we back out uh the United States. And that’s against, you know, C Limited’s 125 billion, but they’re growing, you know, faster than C. And so there’s some concerns whether or not they’ll catch up, they’ll overtake them. I don’t know how much it really matters. What matters is whether or not C Limited can continue to grow, right? And is Tik Tok in a way on their growth? They probably have already a little bit. I can imagine people spending more money on shopppee in a world where Tik Tok shops didn’t exist. That seems very plausible, but that doesn’t mean that they can’t both still grow a lot. And ultimately, it’s going to come down to the valuation and how much uh implied growth you need to assume in order to get a return, which we’ll talk about in the valuation. And so, you know, this is a competitor a lot of people are concerned about. Shopppee has kind of addressed this with a little bit more live uh streaming, live shopping, all that, but it’s just not going to be as good as Tik Tok because that’s what Tik Tok does. But I also don’t expect Tik Tok to be the best at, you know, searchdriven intentional commerce and shipping, which is more and more where shopppee is moving into. They’re spending more money on building out their logistics arm because they see that is much more defensible. They’re rolling into fulfillment more. Now, you know, Tik Tok is investing a little bit in this as well, uh, in their own logistics sort of capabilities, but it’s a long way to go now before you catch up to Shopppee. And now you also have to displace an incumbent for a lot of these uh essential goods that the shopppee customers were already buying from. And so uh from these reasons I really kind of just view them as as different businesses even if one business kind of is overlapping the other. By and large they’re just serve different functions for the consumer. It’s different consumer preferences that are being fulfilled. Now Shopee does partner too with Meta and Google and so that can help them in, you know, capturing more of this discoverydriven commerce. So now someone on Facebook, Instagram, YouTube can catch an ad for Shopee and that could be a way that they convert them. So I would also, you know, expect that to to go fairly well too because, you know, Meta is known to be pretty good at showing people ads uh that people want to see. And so it’s kind of uh, you know, a mixed bag. And there’s also the fact, too, that uh if you’re doing creative on TikTok, it’s kind of hard to do a short video that’s compelling. It’s a totally different thing. or you’re paying someone else to do it on your behalf, in which case you’re giving them a commission. There’s an affiliate fee involved in that. And so, you know, the economics of that, you know, they get a little bit pressured as well. And ultimately, it is going to come down to the return on ad spend. And from what I’ve been able to tell, you know, they’re both still pretty good because these are still pretty early businesses that still have a long runway to grow. And, you know, Shopppee is going to get a lot better with the targeted search ads and so is Tik Tok. And so, both businesses, I think, can improve. And you know, would a world where Tik Tok shops didn’t exist be better for Shopppee? Of course. Does it mean that uh all of a sudden all of Shopppeey’s commerce is at risk? I don’t think so. Um so that’s kind of where I’ll leave that for now. Let’s talk about the fintech competition real quickly. Now, this is a very different competitive landscape. There’s a ton of competitors. Uh Grab is going to be kind of the big regional competitor. They started as ride hail food delivery and they do a lot of quick service commerce and they’re also in financial services. So they cover a lot of different uh area in Southeast Asia. Then within each individual country you have kind of these local leaders and so uh go to which I mentioned before that was going to be Gojack with the Tokipedia merger. Uh that one is going to be pretty big in Indonesia but the biggest in Indonesia is going to be Dana. I I think that’s the way that’s pronounced. So that’s going to be the leading mobile wallet. Then in the Philippines you have Gcash. In Thailand you have True Money. In Vietnam you have Momo and Zallo. In Malaysia you have Touchand Go. And in Brazil of course you have Marcato Pago and New Bank. And so a lot of different competitors in all these markets. Coney is a number three or number four player in all these markets if you’re looking at like mobile wallet usage or something like that. So, the way that I would think about this is that they’re not necessarily trying to become a dominant player. Sure, they would love to. It just doesn’t seem very likely. Instead, what they’re doing is they’re trying to leverage shopppee to as best they can better monetize the ecosystem. So, some portion of these users can come over and take out a loan and it’s a, you know, a good spread on that loan. We’re able to monetize them better. That’s a win for us. Maybe we can down the line cross-ell them an insurance policy or something. And so, that’s kind of how I would think about this. They’re not going for absolute leadership. It’s more about just trying to capture some portion of the market cost-effectively. And that’s important because the customer acquisition cost on a lot of these financial services was very very high. This used to be a very competitive area. A lot of promotion subsidies. They used to give rewards on uh e-wallet payments. But the problem with that was that e-wallet payments didn’t have any margin to support the rewards. The the merchant discount rate was like 1% and that was not really enough to fund the rewards that they were giving. Whereas in contrast, you know, a credit card charges 2 to 3% merchant discount uh rate. And so that’s what helps fund a lot of of the rewards, at least the interchange portion of it. Getting into that more is is a whole separate video. We touch on it, I think, a little bit in the PayPal video. But the idea I’m trying to get out here is there was all these neo banks, new fintexs. They’re really trying to do a big market share land grab. A lot of it was very uneconomic. And so that’s how they kind of got to the positions they’re in. And a lot of that activity has since died down. And Coney has kind of been a late entrant in this. And so they’re more about just trying to monetize this ecosystem cost-effectively. That’s how I would think about that. And so, you know, we could get some shoppy customers to do a BNPL loan. That’s great. Um, we’ll take a nice spread on that. Part of the BNPL loan, by the way, is actually merchant funded. I probably should have shoved that in there somewhere earlier. But the way it works is that when you are taking out let’s say you know a $100 uh purchase the merchant might only receive $96 of that $100 and then C money can take that $4. And so that is in part you know their commission and how they make money off of the loan if it’s like a zero interest rate loan which sometimes those exist and it could be a different rates and commission structure but that’s the idea behind it. And I bring that up now too though to just point out there’s a different way they can monetize these which is going to be important to emphasize when we get to the risk which we will do right now. And so one of the biggest risk is going to be credit risk. Whenever you have a loan book growing 80% to new borrowers that are unsecured. There’s a risk of default. There’s a risk your models aren’t right. There’s a risk your loan loss provision isn’t high enough to account for the actual losses. and they haven’t had a big credit event because they’ve only recently kind of gotten much bigger in credit. But Southeast Asia as a whole has not had a big kind of adverse credit event. Co was kind of a weird one depending on where you were lending because if you were lending to, you know, e-commerce merchants, which, you know, they had that business to at that time, you know, they were doing pretty well. if you’re lending to someone through, you know, an e-commerce platform, they also were more likely to pay back because they didn’t want their access shut off to the e-commerce platform, which is, by the way, one leverage point Shopppee does have on uh customers is that if they don’t pay, then they could shut off their access uh to further purchases on Shopppee. So, that is kind of a good reason to continue to pay. If you’re going to default on something, maybe it’s not that one. Uh but that’s a risk. Credit risk is a big one. Don’t want to um gloss over that. uh especially when they now have, you know, a $9.2 billion book. Now, you could say, you know, how much can losses really be that high realistically, especially just given how quickly the the loan um portfolio turns over. Again, you know, a lot of these are short-term loans. And so, yeah, that’s kind of the the push back there. But I’m still flagging that as a risk. The next risk is as these lending markets mature, the spreads fall. So, no longer are you getting maybe a 25% net interest margin. Maybe that compresses a lot more to a net interest margin that you see, you know, in a more uh developed country. Again, this probably won’t happen for some period of time because these are still very, you know, underbanked markets, a lot of room for growth, and probably won’t happen until after some big credit events and people get really comfortable with the risk underwriting here. But I think long-term that’s a risk, especially if you’re looking at the 10-year math that we’re going to do in a little bit. The next risk is customer acquisition cost increase on the lending side. This could be because competitors get more promotional and so you either have to match the promotions or you lose business. Hopefully in that event C decides to just lose the business. And then the last one is going to be on the e-commerce side is that you know Tik Tok shops is pretty promotional. A lot of subsidies right now. It seems like some of um kind of the flat profits they guided to is in response to Tik Tok shops to make sure that they don’t totally lose market share or at least can stoke some growth and be competitive with them. And so it is a little bit like a new competitive cycle here. And the hope is that these things aren’t lasting forever because eventually everyone needs to make money. But that’s a risk. This lasts for a long period of time. So we’ll talk more about e-commerce profitability, the range around that in the valuation segment. Uh the next risk I want to flag is regulation. There’s already been interest rate regulation. Uh it hasn’t gone to the point that it’s actually um demotivated uh different players from uh lending because the caps have not been that low. But if they decide to lower them even more, it could get to the point that the interest rates no longer really cover what their expected um losses could potentially be, you could get more spread compression or you could get them stepping out of the market entirely, which it’s a risk if you’re losing this business that you’re counting on to generate a lot of profits for you and now you you have to exit it. That’s what the risk is. Now, the next risk is going to be back to Greta and uh gaming. This is going to be if Tencent decides to self-publish their games. They actually have a a publisher called Level Infinite that just self-published uh one of their games called Honor of Kings. And so if they’re self-publishing more games across Southeast Asia, obviously going to be a bad thing for C Limited. Uh in addition to that, uh Riot Games, which Tensson owns, uh recently decided to self-publish League of Legends, which is one of the biggest games, and so uh Riot Games opened up offices uh internationally, and they no longer worked with Grena for that. So that again was kind of uh probably part of that volatility we saw in the gaming sector. So you could say they kind of already lost some of the big wins and you know right now a lot of the profits again are just from freef fire. Um and you know at least they got EA games kind of in there balancing things out a little bit but this is a risk you know companies self-publishing and so uh thankfully they’re not hugely dependent on it but you know it could be a headwind for sure. And so the biggest risk if we’re looking at all these besides you know a potential credit event I think is going to be really a subsidy war with Tik Tok shops and that potentially just hurting profitability because if you do have too many aggressive competitors and really it could just be one you could kind of ruin the economics of the industry for everyone. Um, and so we’re hoping that doesn’t happen. Uh, because eventually everyone needs to make money. And we did see that take rates increased uh over time where before shopppee was just, you know, a 5% take rate. Uh, they used to actually sometimes have a free to list uh in Brazil. And then over time they needed to make money so they took up their take rates. And so, you know, competitors are probably going to have to go through a similar thing. But right now, Tik Tok shops is very much in market share growth and so they could weigh on their profitability. Um, but to understand all this better, we need to see what is priced in today. So, at a stock price of $86, they have an enterprise value of $53 billion. Right now though, they have net cash of $10 billion. So, lot of cash on the balance sheet. That is going to get us to a market cap of $43 billion. Now, if we’re just looking at their $2 billion EBIT, we’re taxing it. They’re trading at about a 28 times earnings multiple. So with that earnings multiple, you only need really one more year of 30% growth. Last year they grew topline 36%. So one more year of 30% growth and you could get to a market multiple. The problem with that though is next year they’re not expected to grow profits, right? So they guided to profits flat. You could look past that though and say at maturity, you know, if they group topline 30%. You know, earnings should at least grow a similar amount. So that’s just kind of one thing to kind of keep in the background. Now, the way we’re going to do this valuation is we’re going to look 10 years out. So, this is the farthest we’ve ever looked out before, lot of different ways you could do this. This is just one framework I’m kind of introducing, but you could look out three years, 5 years, you could change every single number and assumption I’m giving you. And it’s also a good idea to vary a lot of the assumptions that we’re going to talk about here today, because I’m under no illusions that the estimates I’m giving you are accurate. In fact, I could say the one thing for certain is that they’re going to be wrong. But it’s still a helpful framework to have. And what I do is I’ll do this once and then I’ll vary a lot of the numbers to get a range an idea of all of the different sort of potential outcomes. And if a lot of the numbers I’m putting in that seem pretty reasonable are showing me good outcomes, then that could be an attractive opportunity. So all of that kind of playing around with it will be for you to figure out. But let’s get into kind of this framework and it’ll give you some sense of how to value the business. So mature margins for the e-commerce operation. They’ve talked about being about 2 to 3% IBIDA as a percent of GMV. I do not like IBIDA. I am allergic to IBIDA. And anytime I hear that, I need to convert it to EBIT. So if we’re taking that low end of 2%, that should be about a 1.5% EBIT margin. So right now in the e-commerce operation, they’re doing about 45 basis points or 0.45%. So about three times that would be the low end of what they could do at maturity. Whereas they said, you know, at the higher end, you know, maybe it’s 2 and a.5% uh EBIT as a percent of GMV. There’s a lot of other players globally though that did much higher than that, much better than that. Kind of as a rule of thumb, a lot of times people would use 5% EBIT as GMV, but I think they were looking a lot at Amazon. Amazon right now today in North America is 6% EBIT as a percent of GMV. That’s an estimate, but that’s where they are today. And they’re, you know, still growing a lot, right? They’re not done. So, that’s probably the best market though. So, we shouldn’t, you know, look at that because on the other end, you have markets like China, which are very, very competitive. And this is actually in Hayden Capital’s hedge fund letter with Fred Lou, who we have an interview with, uh, which you could listen to after this if you want. He makes the point that in these ultra competitive markets, all of these players are still able to do about 2% a percent of GMV. So to me it stands to reason that you could kind of think of that as a floor. Maybe you disagree though. But if you do think of that as a floor, that 2% IBIDA is a percent of GMV. That translates roughly to the 1.5% EBIT is a percent of GMV. I know a lot of acronyms and numbers are are going to come at you fast here. So got to get ready for it. Now earlier in the video, I talked about how a lot of GMV was inflated. That’s going to be a problem if we’re looking at the economics on the basis of GMV. So, kind of throwing a ballpark number out there that I think is pretty conservative is let’s say 30% of GMV is like fake um non-existent then that would basically translate to roughly a 2% EBIT as a percent of GMV basis if we’re using the real GMV. So if 126 billion GMV is fake and we’re saying about 90 billion is the real economic activity, then that 1.5% on the 126 billion is going to translate to 2% on the 90 billion. If I lost you here, I’m sorry. You should see all of the liberations of things I decided to cut out of this section for simplicity. But I do feel like it’s important to say that we are still looking at it on both basises. You could use their actual GMV numbers or kind of a better estimate of real GMV and it kind of pencils out to the same figure. E-commerce penetration in Southeast Asia, it’s only about 20%, China’s higher 40 to 45%. So over the next 10 years, we’re going to assume e-commerce penetration grows from 20 to 45. So this is an assumption I’m making. You can change this assumption if you want to. I’m also going to assume over the next 10 years that retail spend is going to grow 5% a year. So, as the economy grows, as people spend more money, get more disposable income, they spend more. 5% a year is the assumption I’m using. You can also change this assumption if you want. Then, the other assumption I’m going to make is a flat market share for Shopppee. I’m not going to assume they lose and I’m not going to assume the gain. Maybe if you’re really worried about Tik Tok shops, you’re going to assume that they seed a couple points of market share a year. You could use whatever assumption you want. So laying out those assumptions, you get $330 billion in real GMV. That’s growing it from that $90 billion figure we had. And so on that, you’re taking 1.5% EBITD as a percent of GMV. You might want to, you know, take a range. Go 1.5 to 4% just to see how it looks in different environments. But on 1.5% that’s going to get you $5 billion in EBIT. Now, we’re going to do some math on the money segment. This is also kind of a tricky segment to grow as well. And I’m probably less confident in these assumptions than I would be for the e-commerce one, but you should definitely vary both of these. So, they have $970 million in revenue in this segment. They have a loan book of $9.2 billion. We’re basically going to just assume all of the revenues here are going to come from lending. I’m discounting, you know, the merchant acquiring business, whatever kind of other fintech revenues they have in this segment because the lending business is going to be, at least as of now, it seems kind of the majority of these profits. But if you want to figure out how to model in some of those other ones, you’re more than welcome to. I feel like this is kind of a good enough estimate to get us close uh to our goal. So, right now, they’re doing about 25% margins in this business. At maturity, you probably could figure 30 to 40% margins. Now, I’m going to assume that it’s going to grow basically in line with GMV and that they’re offplatform lending activity is going to stay flat. So, by some estimates, off-platform lending, which means lending not tied to shopppee, is about 40% of the lending book today. So, I’m assuming that number stays flat. Now, if you want to be more bullish on them, you’re going to want to assume that this number goes up. And so, that’s going to mean basically more lending, a bigger book at the end of the day because shopppee becomes a smaller part of it. So, I’m holding though that that number flat at 40%. Then, I’m taking their $9.2 2 billion in loans and I’m applying it to total uh shopppee GMV the real number uh that we calculated and that gets us about 6%. So if we take that $9.2 billion in loans they have and we’re assuming only 60% are on platform that is a 6% penetration rate of their real GMV of $90 billion. And so we’re going to assume that penetration rate goes from 6 to 15%. How did I get that 15% number? It sounded conservative to me. It sounded kind of fair. I really don’t have a great basis for it. Uh this is why I like to sensitize everything I’m doing. There’s not a lot of great uh peers though that have this same sort of model in the same economic backdrop where you don’t have credit cards. And so, you know, lending through uh buy now pay later does become more of a value ad. And so, you kind of have to make your own judgment on this as to what really sounds fair to you. Uh you could though look for other comparisons in other businesses to see, you know, what could kind of help you get there uh in terms of uh building a basis for that number, but I’m going to use 15% and then I’m going to keep the offplatform uh portion of the lending book flat at 40%. And since we’re growing the rest in line with commerce, in line with GMV, we could then get into a loan uh portfolio figure of $83 billion, which is what uh the loans on the book will be 10 years from now. Now, we’re going to apply a NIM, a net interest margin figure to this. That’s going to basically be how much interest income we’re getting on the loans less our interest expense. That’s going to be 25%. We could kind of think of that as our spread. That’s the figure I’m using. This does not include losses though. So, losses for a bank are going to be a operating expense line item. So, they report net interest margin. That’s going to be their revenue basically. So the interest expenses are thrown in to that revenue line item, but all the losses are going to be below gross profit above operating income. That’s where the provision for losses goes. So uh we’re going to then assume a margin. I pick 35% kind of in the middle of a lot of other sort of um lending peers, fintech peers, and so uh nothing too special there. So 25% NIM, 35% margin, which already has loss rates embedded into it. That’s going to get us a pre-tax profit at 7.3 billion. Similar to EBIT, I didn’t say EBIT because technically it’s not before interest expense because interest expense, you know, all of the cost of funding is going to already be included in this. So, that gets us at $7.3 billion figure. Now, the last one we’re going to do is Genna. They have about a billion dollars in profits. I’m going to be honest, there’s not a great way you could really model this out. I mean, what you could do is you could say, you know, how much can players grow? you know, how much is paid penetration going to grow? How much do I estimate each individual player is going to pay? I just don’t have great basis for all of that. But you could model it all out. You could always do be more specific and really dig into your assumptions, which I I do recommend you do. But sometimes if it’s something that you don’t want to fool yourself with false precision, you could just make a very conservative estimate or maybe what you think is conservative and then you fool yourself into figuring out it’s not. But in this case, what I’m going to assume for Grena is just 5% growth. that’s kind of in line with, you know, retail spend growth basically. And so I’m just trying to not make big assumptions here. I’m not assuming, you know, they have another hit game or anything like that. And so that’s going to get us to roughly $2 billion in EBIT for this segment. So you add up the $5 billion for Shopppee 10 years out from now, the $7.3 billion for Coney, the $2 billion for Greta, then we’re going to uh back out about a billion dollars for unallocated expenses because these are all going to be segment profits, and then on the P&L, uh the way they break it out, there’s going to be unallocated like overhead. So right now, that’s only $500 million or so. It’s actually gone down a little bit the last couple years, and so let’s just assume a billion dollars. Then I’m taxing this all at about 23%. You know, tax rates kind of range in this area from 20 to 25%. So picking 23, that gets us earnings of $10.2 billion. So this is 10 years out from now. Again, assuming all of these assumptions hold. Now, we’re going to put a 20 to 30 times multiple on this. A 20 times multiple would be fair if they’re still growing mid to high single digits. If they’re growing low double digits, mid- teens, high teens, 30 times could be fair. If they’re growing even faster, you know, even higher multiple could be rationalized at that point. So, uh, 20 to 30 times is the range we picked. That’s going to get us 205 to $35 billion in market value. So, when we do the analysis this way, we’re technically not adding up all the cash flows for those individual 10 years. The assumption kind of is any cash they’re making, it’s just being reinvested back into the business. But you could at the end of this analysis, you know, estimate they’re generating another 10 billion, 20 billion in cash and add that on top of the market cap figure we have. We’re not doing that though. So within that range that I just gave you, that’s going to come out based off of today’s uh enterprise value of $43 billion to a 17 to 22% annualized return. So it’s a pretty good return. But of course, these are pretty lofty assumptions that we have here, too. were growing at pretty high rates for 10 years, which while not impossible, is certainly something that you have to get comfortable with. And the reason why I wanted to do it this way was so you could kind of see what it could look like a little bit further out, a little bit more at maturity, but you could, you know, do this math on three years out, 5 years out, whatever you want to pick. You could vary all of these assumptions. And again, I recommend you actually do even if you do like the assumptions I picked, it’s still good to see how it looks in different circumstances, whether that’s more bullish because again, we’re only using 1 and a.5% EBIT as a percent of GMV. And it’s possible advertising revenue really helps grow that a lot more. 4% as a percent of GMV really isn’t outside the realm of possibility. Now on the other hand, these are very competitive markets, uh very promotion sensitive, I should say, markets with a lot of buyers that are very price sensitive. And so, uh, and same on the merchant side, too. Not a lot of margin they’re making. And so, it’s just structurally a little bit worse of of a market. So, then maybe you don’t want to do 4%. Maybe you want to see what it looks like if it’s even worse than that 1 and a.5% we’re doing. And so all of this is kind of about providing you a framework so you could see how to do this math yourself, see what you’re comfortable with. And if you’ve ever wanted to know how you look at a company that is growing a lot very quickly and has not fully monetized, well, this is a pretty good framework. You kind of do what are called fair me problems on this. And these are popular, you know, investment banking questions uh as well where basically they’ll tell you something like how many piano players are there in Chicago? And it’s your job to kind of put a bunch of estimates around this. Okay, how big is Chicago? How what’s the population? How many people play piano? Okay, how often do you need your piano tuned? Okay, um if you need it tuned that much, how many uh jobs can an individual piano tuner do? Okay, if he needs this many jobs uh to survive, then how many piano tuners can this market hold? The idea isn’t necessarily that your estimates are going to be right. You’re providing a framework. And then I think what makes the most sense is you sensitize around those assumptions and you see what the returns are in those circumstances. If I’m giving you very aggressive math and the return is low, it’s very easy to pass. If I’m giving you aggressive math and the returns kind of sound decent to you, then maybe you want to see, okay, well, is there a margin of safety? What does this look like if things are much worse? And then you got to get comfortable with all of the qualitative risk. There’s certain things that are not going to show up in your numbers that you have to get comfortable with. And so in this case, the numbers we’re running, it all assumes a pretty high degree of success for C Limited, right? We’re not assuming there’s this massive credit event and you know 75% of their book uh all of a sudden vaporizes something crazy like that or they were very loose in all the underwriting standards or maybe a new competitor comes in or maybe it’s Lazada they decide that they’re recommitting this market and they you know commit $20 billion to go after it or maybe it’s just Tik Tok shops really hammering them with a lot of the promotions and so there’s all sorts of different ways things can not go according to plan right and so you need to be aware of all these things ahead of time. And that’s not to say investing doesn’t have risk. It’s just that you have to get comfortable with the risk you’re accepting because you can’t argue against a risk. It just exists. And then maybe you don’t think it’s going to happen or not happen. But you won’t know if you’re right or wrong until you live it out. So a lot could go wrong for C Limited in the future. But I’ll also say a lot has gone wrong for them in the past. India was actually one of the biggest markets for FreeFire and it was banned there. That was quite the hit to that market. Uh in addition to that they whipsawed all throughout COVID between growth and uh moving to profitability having to abandon a lot of the markets that they just started in a lot of different sort of headwinds they faced throughout the years and through it all CEO and founder Forest Lee has been at the helm and he has been quite a creative and good manager of this business really capitalizing on a lot of opportunities certainly a lot more opportunities than I think most people would have thought if this business started is basically just helping computer game developers find their players in internet cafes. And you can’t deny that they’ve done a really good job of, you know, expanding in a lot of different markets and, you know, pretty competitive markets as well. And, you know, Forest Lee still has 16% of the company under his control and he continues to lead it. So part of this is going to be a question of how much you trust him and you trust management to continue to do the right thing uh and navigate the business through what is no doubt going to be some unforeseeable events in the future. I often like to think of a great company like a ship and the idea behind that is that you never go out to sea saying that there’s not going to be storms. The question is whether or not the ship is going to withstand the storms because we know that when you go out into the business world and across time, crap is going to happen, right? And ultimately, you want to invest in a business that can withstand all of that. And so ultimately, that is for you to decide whether or not you feel comfortable with C Limited as your ship and Forest Lee at the helm. Now, in order to have better context though to know how to really judge C Limited as an investment, you should look at competitors and peers. We have a video on Marcato Libre you could check out here. Another one on the South Korean player Kong who’s dominant in that geography. Also, we just put out an interview with hedge fund manager Fred Louu, which you could check out here where we talk a lot more about C Limited as well as his investment thesis. Thank you for watching and if you enjoyed, go ahead and hit like and subscribe and hopefully you didn’t take back that subscribe button by the end.