Good morning and good evening to all and welcome to the Sea Limited Third Quarter 2023 Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I’d now like to welcome Miss. Minju Song to begin the conference call. Please go ahead.

Thank you. Hello everyone, and welcome to Sea’s 2023 third quarter earnings conference call. I am Minju Song, from Sea’s Group Chief Corporate Officer’s Office. Before we continue, I would like to remind you that we may make forward-looking statements, which are inherently subject to risks and uncertainties and may not be realized in the future for various reasons as stated in our press release. Also, this call includes the discussion of certain non-GAAP financial measures such as adjusted EBITDA. We believe these measures can enhance our investors’ understanding of the actual cash flows of our major businesses when used as a complement to our GAAP disclosures. For a discussion of the use of non-GAAP financial measures and reconciliation with the closest GAAP measures, please refer to the section on non-GAAP Financial Measures in our press release. I have with me Sea’s Chairman and Group Chief Executive Officer, Forrest Li, Group President, Chris Feng, Group Chief Financial Officer, Tony Hou, and Group Chief Corporate Officer, Yanjun Wang. Our management will share strategy and business updates, operating highlights, and financial performance for the third quarter of 2023. This will be followed by a Q&A session in which we welcome any questions you have. With that, let me turn the call over to Forrest.

Hello everyone and thank you for joining today’s call. At our last earnings call, we shared that we would accelerate investment in e-commerce. In the past, our e-commerce business has made some significant shifts in operational focus to adapt to major business environment changes. Before diving into the details of the third quarter results, I would like to first share how the thinking behind each shift has been underpinned by our long-term view of the business. Our strategy for e-commerce is driven by the principle that maximizing the long-term profitability of the business will generate the greatest returns to our shareholders in the long run. And, maximizing long-term profitability requires scale and strong market leadership. To achieve this long-term objective, we look at three key operational factors: growth, current profitability, and market share gain. While all are important and positively correlated in the long-run, near-term focus on one can create trade-offs for another. As business conditions change, sometimes rapidly, we need to decide which factor to prioritize for that period. During the pandemic, we focused on growth first, ramping up rapidly to meet surging demand for e-commerce despite the great operational difficulties created by lockdowns. This allowed us to achieve significant scale and strong market leadership when growth was very efficient. Subsequently, capital became very expensive and less available. So we made a rapid turn to achieve immediate profitability for Shopee as a first priority, while sustaining the platform’s scale and market leadership. In both cases, we believe we made the right decisions in response to the shifting business environment. As we focus on long-term profitability and adapt to changes in the business environment, some short-term fluctuations in our results is inevitable. However, our demonstrated ability to adapt quickly and execute major transitions effectively is a core strength for the…

Thank you, Forrest. Let me now share more details on the recent performance of each business segment, beginning with e-commerce. Just now, Forrest discussed the long-term objectives of our investment in e-commerce. For the immediate period, we assessed the effectiveness of our investment by looking at how our market leadership, as well as the scale and strength of our e-commerce content has been trending. On both fronts, we made strong progress in the past quarter. In the third quarter, growth in Shopee's users, growth orders, and GMV accelerated sequentially. We saw average monthly active buyers growing 11% quarter-on-quarter with increased order frequency and improved buyer retention. As a result, our growth orders and GMV achieved 24% and 11% sequential growth respectively, further increasing our market share. We also saw a material improvement in MTS scores broadly across the markets quarter-on-quarter and year-on-year. We believe this to be a good early indication of the effectiveness of our investment. Another key driver of our solid growth during the third quarter was the ramp-up of Shopee Live. During this period, we have made a strong push into e-commerce live streaming and increased collaborations with a growing ecosystem of content creators and live streaming sellers. We have also successfully acquired many new buyers and deepened our engagement with existing buyers. For example, in Indonesia, one out of five daily active users watched live streaming in October on average. With our efforts to help our sellers and creators, we saw a significant increase in their participation in Shopee Live. Our number of average daily unique streamers, total daily hour streams, and the number of daily stream sessions for October all grew by more than three times compared to June. Our streamers are also becoming more engaged, with the average stream duration per streamer increasing by…

Thank you, Yanjun, and thanks to everyone for joining the call. We have included detailed financial schedules together with a responding management analysis in today's press release, so I will focus my comments on the key metrics. For Sea overall, total GAAP revenue increased 5% year-on-year to $3.3 billion. This was primarily driven by the improved monetization in our e-commerce and the digital financial services businesses. Our group total adjusted EBITDA was $35 million compared to an adjusted EBITDA loss of $358 million in the third quarter of 2022. On e-commerce, our third quarter GAAP revenue of $2.2 billion included GAAP marketplace revenue of $1.9 million, up 18% year-on-year, and GAAP product revenue of $0.3 billion. Within GAAP marketplace revenue, core marketplace revenue, mainly consisting of transaction-based fees and advertising revenue, was $1.3 billion, up 32% year-on-year, as a result of both increases in advertisement uptakes by sellers on our platforms and commission rates. Value-added services revenue, mainly consisting of revenues related to logistic services, was $0.6 billion, down 4% year-on-year. E-commerce adjusted EBITDA loss was $346 million in the third quarter of 2023, compared to an adjusted EBITDA loss of $496 million in the third quarter of 2022. For our Asia market, we had an adjusted EBITDA loss of $306 million during the quarter, compared to an adjusted EBITDA loss of $217 million in the third quarter of 2022. In our other markets, the adjusted EBITDA loss was $40 million, narrowing meaningfully from last year, when losses were $279 million. Contribution margin loss per order in Brazil improved by 91% year-on-year, to reach $0.10 reflecting better monetization and higher efficiency in our ecosystem. Digital entertainment bookings were $448 million, and GAAP revenue was $592 million. Adjusted EBITDA was $234 million, compared to $239 million in the second quarter of 2023. Digital financials services GAAP revenue was up by 37% year-on-year, to $446 million. Adjusted EBITDA was $166 million in the third quarter of 2023, compared to an adjusted EBITDA loss of $68 million in the third quarter of 2022. We recognized a net non-operating income of $46 million in the third quarter of 2023, compared to a net non-operating loss of $9 million in 2022. The year-on-year improvement was mainly due to higher interest income in the third quarter of 2023. We had a net income tax expense of $62 million in the third quarter of 2023, compared to a net income tax expense of $65 million in the third quarter of 2022. As a result, net loss was $144 million in the third quarter of 2023, as compared to net loss of $569 million in the third quarter of 2022. With that, let me turn the call to Minju.

Thank you, Forest, Yanjun and Tony. We are now ready to open the call to questions.

[Operator Instructions] Our first question comes from Piyush Choudhary from HSBC. Your line is now open.

Hi, good evening, management team, and thanks for the opportunity. Three questions. Firstly, in e-commerce, can you discuss how long we may continue to be loss-making for Shopee, and what is the specific market share level or what other KPIs Shopee may be aiming to achieve before spending starts to normalize? In the digital entertainment segment, what led to quarter-on-quarter softness in pay users despite of new game launch, and any insights on the outlook for the pay user base? And lastly, in the DFS segment, can you talk about the outlook for the lending growth? Is there a scope for increasing lending user penetration, or will it grow in line with Shopee GDP?

Thank you. I will take the e-commerce question first. Regarding the probability of e-commerce, as we have demonstrated in the past few quarters, we have the capability to turn distances to break even quickly anytime if we want to. However, as far as shares, to maximize our long-term profitability, we will keep our organization nimble and flexible and adjust our operations based on the dynamic in the market conditions. For example, we look at both the growth of the market, we look at the probability for the current quarter. We also look at market share dynamics in the market. In terms of investment plan, we look at both the general investment efficiency and also the specific growth opportunities in each of the markets. For example, if we look at the general investment efficiency, we look at will we put some investment in the market, will we see the return if we want it, do we see market share gain, for example, with the better economic compared to our competitive market. For the specific opportunity in our market, one of the examples we mentioned earlier in the call was the content acquisition building, the live stream opportunity in particular, where we see a very good time for us to invest to grow this part of the business at this particular time. We target to invest within our means, just to emphasize on that again. We would like to maintain a strong cash position at all times and not rely on the external funding. It's also important to note that if we look at our investment efficiency in the past few months, I think we have the positive numbers as we shared by Yanjun and Tony earlier, but if you look at month to month, we do see the efficiency [Ph] are improving month to month. If we look at the trend, we see a clear trend for Shopee to break even while achieving our market share and content acquisition building goals. There are many KPIs to look at. Market share is one of the KPIs, of course, but there are many other things, for example, how is our growth of our user base, how is the growth of our time spent on our apps, our MAUs, EAUs, and also, of course, how much profitability that we achieve during the month. All these are important KPIs to look at rather than looking at market share only. Thank you.

Regarding the question on game Q-on-Q subnet users, I think this is actually to us some early indication of seasonality we start to see in the game performance. When we start to see seasonality, it’s also a good indication of stability in the game performance. That's why we do not see it as a negative sign. We also mentioned on the call that in Q3, we saw a lot of school reopening and there are also less holidays. So that does affect the user engagement. But overall, we are very happy to see the improvement in user retention and also in the re-engagement of changed users, as I mentioned earlier.

On the last question on the credit for DFS. In general, we do see both possibilities of letting growth on the GMB of Shopee and the penetration of credit in Shopee. Of course, that depends on quarter-on-quarter, depends on the risk profile we want to achieve and the growth that we want to control. In general, we grow on both Shopee GMB and penetration. On top of that, I just want to emphasize that our credit is not only to Shopee ecosystem. We do have a good growth on the credit portfolio outside of Shopee ecosystem. For example, the Shopee Pay channel offline, we do see a good penetration for credit on the offline for Shopee Pay channel as well. We do also have other scenarios we are developing over time.

Thank you.

Our next question comes from Pang Vitt from Goldman Sachs. Your line is now open.

Hi, good evening management team and thank you very much for the opportunity. Three questions from me. Number one for e-commerce. Can you discuss where Shopee investment went into in third quarter and whether you achieved the outcome you wanted? What are your considerations on spending and GMB growth target for fourth quarter, especially considering some of the reasons of regulatory changes we see in Indonesia? That's question number one. Question number two regarding Gaming. Can you discuss the latest development with regards to right of first refusal agreement with Tencent that supposedly expired this month? Can it automatically renew and how would that impact user pipeline? That's two. And number three for the fintech segment. Can you discuss about the credit quality of your loan book? We continue to see credit loss provisioning trending better every quarter. Will this be your new runway or how should we think of this margin of this business in the long-term?

For the first question of the Q3 investment, there are two main areas that we are investing on. Number one, to grow our market share, especially in the core categories like fashion and health and beauty. The second area we are investing on is to capture the market opportunity to grow the content type of system, especially with the live stream first. As Forest shared earlier, we always balance between the growth, profitability and market share. We believe that this is the right time to invest in terms of looking at market share growth. We do see a great traction in our investment, reflected from the market share gain, even with the better economic compared to our original competitors. On the content side, we believe this can be a profitable and also a very vital business for us over time. If you look at the timing as shared in the previous answers, we do see this is a good opportunity in terms of window of opportunity for us to capture the market. We have been a lot more educated by having investments from various parties in the past year. For example, the viewers who understand the concept, the sellers who have the capability to offer the content and also the ecosystem players like the MCN, etcetera. In the past few months, since we started investing more into the area, we have seen very good growth in terms of the adoption of our live stream services, both on the demand side and the supply side, not only from the creators but also from the sellers. We also see on top of that, which is also important to highlight, we see a significant improvement on the new economics of our live stream. Of course, when we first started building the ecosystem, it takes a bit of cost to build up, but we quickly see the economics improve month-to-month, actually much better than we thought it would before we started the program. Overall, I guess to answer your question, we are very happy with what we have achieved. Essentially, we achieved the market share gain that we wanted with much better economics than we thought. We also have seen good traction in live stream. The tick rate has been faster than we thought for the live stream services. To your question on the Q4 outlook, we will continue to invest into the shopping season. It's a holiday season, shopping season as we all know. Q4 in our market, generally is the best time of the year to acquire new users, gain market share, and strengthen our content ecosystem. If you look at the past one and a half months, we have seen very good traction. For example, I think we shared today that – yesterday actually for our W11, we have achieved more than 1 billion GMVs, which is a very good result, better than our anticipated, especially over the weekend as well. I think that's the question on the e-commerce side.

Regarding the -- question regarding right-of-first refusal with Tencent, the agreement has been also renewed under existing terms. As shared before, we'll continue to work on strengthening our game pipeline, both with our self-developed games and published games. And at the same time, we saw the strong trends in Free Fire, and we will continue to focus on making it a strong evergreen franchise.

I think for the credit quality, we do see the credit quality actually getting a bit better over the year. However, I think we stay -- we still stay quite vigilant in terms of how the market will evolve. And I think, in general, we are more on the conservative side in terms of managing our credit businesses to make sure that we always protect the -- manage the NPL well while we're growing the portfolio. We -- if you look forward, we don't anticipate that a big fluctuation in terms of the credit quality in the short term. But of course, if you look longer term, there are many macro conditions that will impact how the credit quality and the NPL look like. But generally, we do believe that our current level is sustainable and our credit businesses will continue to grow well without sacrificing the qualities.

In terms of long-term margins for credit business, of course, this is still early stage for us, as we mentioned before. We continue to expand our credit portfolio across products and across markets, and we also continue to expand our funding sources to reduce the risk exposure to our own book cash. So overall, I think it's -- we will strive to continue to maintain a very healthy profit level. But while also making sure that we have a healthy and consistent growth in the portfolio, as well as the diversification of our products and funding sources.

Thank you.

Our next question comes from Alicia Yap from Citi Group. Your line is now open.

Hi, thank you, good evening, management. Thanks for taking my questions. I have two questions. First, on e-commerce. I was hoping management could provide your view as we look beyond 4Q and further out. What is the long-term GMV growth we could achieve? And I think management had previously shared a potential steady state of the long-term EBITDA to the GMV margin guidance. Would that change given the live streaming now being an increasing part of Shopee's GMV? Second question is on your sales and marketing spend. Just wondering the time line or the inflection point that we are looking for. Or is there any sensitivity scenario that we will be assessed, the stickiness of the user engagement and purchasing behavior as related to the subsidy spend? So any color you could provide on the sales and marketing spend outlook would be helpful. Thank you.

Yes, -- for the long-term GMV growth, generally, we believe that we can outgrow the market given our competitive advantage. The -- as we see from the Q3, we still see quite a lot of new users being acquired. We also see more and less active users become more active. And we also see that the existing users increasing their share on our platform, both shifting from other platform, of course, but also shifting from their offline behaviors. In the opening, I think Forrest mentioned that the e-commerce penetration in our market is still low. We are still far away from the market saturation. So we believe there is still a sizable runway to go in terms of the long-term GMV growth. Compared to many developed markets on e-commerce, I think in South Asia, we are still underdeveloped. In our Latin American market, for example, in Brazil. I think the runway is even further. If you look at the Brazil, e-commerce order is still a lot less penetrated compared to our South Asia market. Regarding the question on the long-term profitabilities, there's no particular change to our purposes. I think you mentioned live stream. If you look at live stream in particular, we believe this is a probability over time. I think we have already spent the economics improved a lot in the past few months in -- as shared in the last remark. It's true that there is a higher content creation cost associated with these businesses. However, there is another aspect to this as well. Number one, the product categories that does well on live stream tend to be high-margin categories. Typically, the room of the margin are still a bit better for those categories. So we have better monetization capabilities from the platform. That's one. Second one…

Yes. I also want to add to what Chris mentioned is that the -- as we shared on the call earlier, when we look at the current cohort of new buyers, we actually see very encouraging signs, the inequality of the buyers. And overall, we see better buyer retention and higher order frequency on our platform during this period. We have demonstrated a very strong track record previously with -- during the past few years as we scale the Shopee platform. When we do tend to profitability, we were able to have a very healthy profit level for our platform, while maintaining the size of the platform and maintaining the user base. That shows that we have built very clear and strong competitive edge and capability in managing user growth and spending efficiency.

Yes. Just to add a little color on this. So typically, when we look at the users, each user will assess on each order on the profitabilities of the order. And also we look at each users on the totality of the profitability of the users. And we look at not only now, their current behavior, but we also look at the past behavior. We also have a model to predict the future behaviors. So at the order level or the user level, we have the capability to be able to predict the potential margins we can make from this particular user, which user to drop, which used to take, and all those will come together when we try to monetize our platform. And this is why, as Yanjun mentioned, last year when we tried to drive the platform profitability can do it very quickly. We know exactly what to pull the lever. It also helps us when we try to grow the platform again, which kind of user we want to bring to the platforms from the acquisition -- from the early acquisition to the early adoption, which one we want to drive them to early adoption stage to the mature user stage and to the later stage. And all those were very detailed work that we put into the platform to make sure we manage our subsidies, manage our user acquisition, manage our CINs, all these things very carefully to maximize our efficiency of spending.

Thank you.

Our next question comes from Navin Killa from UBS. Your line is now open.

Hi, thank you for the opportunity. Actually, I had three questions. The first one is a bit more long-term. I guess looking at all the new entrants across several of your markets, how would you describe Shopee's competitive advantage against them? And why do you think that advantage is sustainable in the long-term? The second question I had was with regards to the comments that you made about investments in logistics. How should we think about the quantum of those investments, I guess, both as it goes into your CapEx, but presumably also, I guess, as your lease payments, so I guess, cash outflow below EBITDA? And the last very quick question, the right of first refusal with Tencent, the new renewal, how long does this stay before the next renewal comes in?

Let me start with the first question you mentioned. In our businesses, there's always competition. It's very hard to be the only one offering e-commerce solution in the market. However, we do see the intensive competition might vary across our market, varies across the times. But as we shared in the Q3, we observed that even with -- even in the market with the higher competition, we are able to gain market shares. The key is investment efficiencies. This is what allows us to gain market share while having better economics, unit economics than our peers, competitors in our market. The key for that is our competitive advantage we have built over the past many years. I think number one, if you think about this, will be scale. As a clear market leader, we have a bigger scale that translate to a much better monetization capabilities and also better cost efficiencies, of course. Number two is the local leadership and operations teams. We have a deep understanding of our market with a strong localized execution across very diverse markets in our region. Our core team are many global talent, mostly home grown, so with us in the past many years, compared to our regional competitors with many expat leaderships in most -- in almost all the markets. It does make a huge difference when we come into the nuanced decisions we are making to the market on the -- for example, in my previous answers on the very detailed design making on where to invest exactly, which user to deprioritize, we user to prioritize, which time of order to prioritize, which kind of order to deprioritize. These are all detailed decisions we have to make by our local operation team. And the quality does make a difference as time goes,…

Also to clarify, the model of logistics that we have is not, at this point, a CapEx-heavy model. We're not looking to build mega warehouses or mega machinery type of logistics in that model. Our model is more about building a large network of small sorting centers, small hubs into many, many neighborhoods, and also build a team capability to expand our last mile coverage across a wider network of areas covered by us. So it's more OpEx. And for the past few years, we have already been consistently investing in logistics, which is one of the key reasons that has got us to the current position of continue to reduce the logistic shipping fees and also a key competitive advantage that we have.

Just want to add on this a little bit. Actually, compared to many other logistic providers, if you look at the three regions, our CapEx has been a lot lower if you compare. And there's a reason for that, actually, because we are able to predict our volume in a lot more accurate ways. Imagine if you are a third party logistics, you have to forecast what your volume be in the next year or next two to three years in order to invest in CapEx. It's extremely hard, especially in our market. For our own logistics, we have a good way, let's say, to predict what's the demand in our market, not only for next month, not for next quarter, but in the next two to three years, most likely. As a consequence of that, we are able to CapEx things, not only CapEx actually. Take on the designing of our networks, as Yanjun mentioned, to design our network in a very flexible way, to design our network in a very optimized way. After design network in a good way, then you can manage your CapEx in a much more efficient way. And every CapEx can be put to use right after you capitalize on it. Rather than sometimes you have to rush for it or you have to capitalize on things, you build something but you win to be used. I think in this aspect, we have a good advantage compared to the other offerings in the market. That's also why we can manage our cost down compared to the other offerings.

Regarding the question on ROFR agreement with Tencent, it is automatically renewed every year unless terminated by either party. The agreement is also publicly available.

Our next question comes from Jiong Shao from Barclays. Your line is now open.

Great. Thank you for taking my questions. I have two questions and a follow-up. The first question is that since you pivoted for growth a few months back, it's great to see the GMV now is growing year-over-year. I was wondering, could you talk about the linearity as you went through the quarter? I suspect the momentum picked up during the quarter. And could you talk about sort of, so far in Q4, how that GMV growth momentum has been? That's -- any comment on FX impact, that would be great. Second question is, I think you talked about live streaming, obviously, the key focus for growth. You mentioned 10% GMV. I wasn't sure, is that for Indonesia? Or is that for the whole region? My question is about your long-term expectation. As you know, in countries like China, live streaming is called 20%, 25% of total GMV. For the industry, what do you think that number could be or should be for Southeast Asia, I don't know, in a few years, and where you are currently for the region? And related to that, since the TikTok sort of shut down in Indonesia, what have you seen, if anything, the impact for your growth for your market share? And lastly, for the follow-up I had is that you mentioned a couple of times that you committed to investing within our means and will not raise any financing going forward. And in Q3, you did a great job. You grew your GMV, grew your revenue while making some profits for the group. I was wondering, is that sort of a breakeven or small profit is sort of the guardrail you meant by investing within your means? Thank you.

Let me start first. In terms of the growth over the quarter, I think the -- we don't have a detailed month-to-month break number shares. But in general, if you look at the year-to-year growth, we do see a better year-to-year growth over the months. That for Q4, we do see the trend continues. So, so far, as we are right now, we see the broadly similar trend in terms of the growth levels floating from Q3 to Q4. And the impact on Forex, generally, I think the number we shared is in the U.S. terms. But if you take the constant currencies, we actually grow better. In quite many of markets actually, there is a depreciation against U.S. dollar. So operationally, if we take the constant currency, we grew better than the U.S. dollar basis. In terms of the live [Ph] expenses, the percentage I think mentioned in the earlier comments was for the region. The -- if you look forward, I think the percentage of the penetration might be country by country. So if you put everything together, it might not be fair. Let's take -- if you take the biggest market, like Indonesia, the way you look at things is we look at the content, e-commerce as a whole, content, including live streaming, including videos actually, which is another part of the -- important part of the content. The -- if you look at everything together, the -- in Indonesia as a market, we do believe, let's say, somewhere a range around 20% to 30% is a reasonable which we look at. The -- probably still a little bit kind of lower than what you see from China, but has the reasonable side. In the other markets, maybe slightly lower than that, but the -- it wouldn't be too far. But again, this is a very early time that we develop the market and we see how it develops. Generally, we are on the more positive side than the negative side in terms of the potential for these businesses. For Indonesia, of course, mathematically, after TikTok closed the shop, the market share -- everybody's market share grew a little bit, of course. And we do see good traction on the sellers and creators who joined our platform. I do believe they joined some other platform as well as they are looking for the growth opportunities. So generally, it has been -- we have seen the behavior. The -- in terms of the breakeven level, I think we are happy with the fact that we breakeven at the group. But I think, as Forrest mentioned very early, we would like to balance between the gross market share and profitability. And that might -- we will have to make decisions based on how the mine condition moves.

Due to interest at the time, we will be concluding our question-and-answer session. I'd now like to turn the conference back over to Miss. Minju Song for any closing remarks.

Thank you all for joining today's call. We look forward to speaking to all of you again next quarter. Thank you.

The conference has now concluded. Thank you for attending today's session. You may now disconnect.