Shopee closes operations in India and should expand efforts in Brazil

RIO DE JANEIRO, BRAZIL – Sea (SE), owner of Shopee, is closing its flagship e-commerce operation in India just a few months after its launch, highlighting the uncertainty in the market. Shopee had about 300 employees and 20,000 local sellers in India as of December.

Sea, partly owned by Tencent, will close Shopee India as of March 29, though it will continue to handle orders placed before then and support local merchants during the transition. Its other global operations will not be affected, Shopee said in a statement.

New Delhi’s decision in February to ban Free Fire – Sea’s most popular mobile gaming title – highlighted the company’s challenges. The decision introduced a new layer of uncertainty into its business, according to the company.

India has banned hundreds of Chinese apps in the past two years, but the expansion of this policy to Sea took management and investors by surprise. The startup was founded by Forrest Li, who was born in China but is now a Singaporean citizen.

According to Itaú BBA, in a world where the cost of capital has increased substantially, Sea suggests that it is not possible to bet on a specific market without the assistance of CAC (customer acquisition cost) and cash flow from its gaming division.

Also, analysts point out that Sea changes direction quickly when it sees major changes in the attractiveness of a market.

The analysts point out that India was a major focus for Sea, along with Mexico and Brazil. With India closing, it is reasonable to assume that the other two markets could become even more important for Sea’s marginal growth.

Therefore, some investors may see the news as marginally negative for Brazilian e-commerce names, given the already high competition in the segment, analysts at Sea say.

The analysts point out that the market’s opinion is that Shopee/Sea will continue investing heavily in Brazil and Mexico. But they ponder: “if the news changes the outlook for Latin America, it would only be marginally negative, with no substantial effect for the shares,” impacting mainly Mercado Livre (MELI34).

In UBS’ view, from Shopee’s point of view, the news is not surprising, while it shows an increased focus on capital discipline.

For the Swiss bank’s analysts, the exit should be viewed positively by the market for Shopee: 1) as it supports the company’s commentary after its 2021 results, which indicated that the company would adopt a more calibrated approach to investments, especially in international opportunities outside Southeast Asia and Taiwan (with Brazil as the main focus); and 2) it eliminates the potential for high cash burn in an ultra-competitive e-commerce market like India’s, with global and local giants like Amazon, Flipkart, and JioMart.

Without Free Fire, Sea would have to inject fresh capital to support cash burn in India, impacting its ability to invest in core markets in Southeast Asia and Brazil.

Analysts maintained a buy recommendation on Sea Limited’s Nasdaq-traded stock with a price target of US$240, a potential upside of 107% from the last close, highlighting an attractive risk-return ratio given the multi-year growth opportunity. At 11 AM ET, the stock was down 0.70% at US$115.31.

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