TIVP072 (Video): Sea Limited (SE): Can Sea Limited 10x Again? w/ Daniel Mahncke & Shawn O’Malley

16:19Shawn O’Malley:But that's all pretty speculative. And if I buy C-Limited, I don't do it because I want to own the gaming business. It's needed right now, but I hope it won't be at least needed in 10 years time. Maybe it's still there. Maybe it's still producing profits and revenue, but I don't want to bet my money on that. The fintech business, for example, is something that should be a lot more prominent and important by then.

16:40Daniel Mahncke:So talking about the fintech business, C-Limited's fintech arm, as I mentioned, is called money. And I think it was launched about 10 years after Melly launched Mercado Pago, but they did so for very similar reasons, right? And so Melly had this problem that it had built an e-commerce platform, but it did so in a part of the world that was still dominated by cash, meaning most people couldn't buy things on Melly's marketplace, even if they wanted to, if you don't have a credit card or a debit card. So the most logical thing was to then build a fintech business that allowed people to pay online and become MercadoLibre customers.

17:18Daniel Mahncke:And as far as I know, something similar happened with C Limited and their gaming businesses. Is that the right way to think about it?

17:25Shawn O’Malley:Yep. Similar problem just with a mobile game instead of an e-commerce site. So the way mobile games like Free Fire make their money because technically they're free to play is by in-game purchases. And those in-game purchases are mostly weapon or character skins. People who still played Fortnite or also Counter-Strike know that. But since credit card penetration was low, it was difficult to effectively monetize the game. And because of that, Garena launched what was called AirPay. And the way it worked was that AirPay users could go to physical stores that served as AirPay counters, and then they could deposit cash and then receive that amount in the digital AirPay account.

18:01Shawn O’Malley:And those AirPay counters were in all sorts of small businesses, kind of similar to Western Union counters with the difference that you don't send your money around the world, but just into your own digitized account. And you could argue that AirPay's success was the reason C-Limited was even possible a couple of years later, because the monetization increase that cost it for the gaming business basically turned into the cash engine that, again, as we have discussed, was kind of subsidizing Sharpie and also the fintech business in the next couple of years.

18:31Daniel Mahncke:So there was C-Money that's now just money. and then it sounds like it actually started as AirPay, which sounds like what Apple Pay should be called. But this is all the same business we're referring to.

18:46Shawn O’Malley:It is all the same business, just many different names over the years, but it's the same business. It even gets a bit more difficult or complicated because money runs many different services that all have different names and most of those names are connected to the Shopee name. So for example, there's Shopee Pay, which is their digital wallet, or Shopee Pay Later, which is their buy now per later operation, or also Shopee Partner, which is their merchant financial services arm. So a lot of different products, a lot of different names, all under the same umbrella.

19:17Daniel Mahncke:Well, since we're already talking about it, how about we dive deep firstly into money before we get to the e-commerce business? I know from our episode on Melly that there were a lot of synergies between these types of businesses anyway. So I'm sure that by understanding the fintech business, that will help inform and support our understanding of the e-commerce business and maybe whatever moats they have around it.

19:40Shawn O’Malley:It might help when I compare money to Mercado Paro from time to time, although I got to say they are quite different generally. So I think that will still show some similarities, but also the differences. And since both companies have similar flywheels, it hopefully also shows which one is stronger when you compare them at the end. So the first similarity is that both fintech operations are valuable in terms of data generation. So when people buy something on MercadoLibre and pay with MercadoPago, that payment data stays within Melly's ecosystem. And that's where they base many of their credit decisions on today.

20:15Shawn O’Malley:So I think it's about more than 30 % of the credit algorithm, which is based on just their own payment data, nothing that's coming from banks. Money also collects payment data from users, but obviously the payment data that it started with had significantly less value than marketplace data. So let's say someone is spending$2 on a skin in a mobile game. Well, that tells you very little about the financial situation, especially because gaming spending is deeply emotional and often disconnected from the underlying financial health of a person or a customer. And also many players were teenagers who probably still spend their$5 in savings on in-game items, even when their parents' financial situation might not look too great.

20:55Shawn O’Malley:So yeah, I think the amount and also the category of spending aren't that useful as a signal for making credit decisions. This is where the interconnection between the gaming business, the fintech corporation and e-commerce already shows up. While the payment data from the gaming business isn't as valuable, C-Limited also obviously used its gaming business to start the e-commerce business in the first place. And it was not only about subsidizing it, it was also about user acquisition. So Shopee leaned into a highly gamified approach with in-app games, live streamings, and also rewards that mirror the mechanics of the Free Fire game.

21:31Daniel Mahncke:I think it's a really interesting point that we should go back to. And I never would have thought about this, but you're absolutely right. There are certain types of transactions that are more reflective of credit worthiness than others. So if you're routinely paying off your grocery bills, that's a much better sign of how reliable you are than maybe what you're spending on a mobile game indicates and not to stereotype too much, but if anything, I might even argue that splurging on mobile gaming shows that you have something of an addictive personality and are, you know, maybe not a great person to lend money to.

22:05Shawn O’Malley:I mean, that might be true. I'm sure there are patterns that they can recognize that show whether they are spent on the game and Shopee would kind of indicate that they might have an addictive personality. So I don't know, Imagine they see that your spend on important daily goods goes down, but their spend on Free Fire stays the same. I mean, that's kind of a bad signal, I guess. But anyway, when money started its credit business, which was around 2019, Shopee already had hundreds of millions of users buying, of course, multiple different segments. So we're talking fashion, electronics, beauty and home goods.

22:36Shawn O’Malley:So money's underwriting is primarily built on Shopee purchase behavior, which is, again, marketplace data, which is very similar to what MercadoLibre also had. Where Shopee's data might still be slightly weaker than Mellie's is in the category mix. So Shopee screws more toward fashion and beauty than essential household goods, which are marginally less predictive for financial stability and how much money can actually be spent on certain goods. But this gap is certainly closing as Shopee expands into groceries, as you mentioned before, and also these higher value categories, for example, electronics.

23:09Shawn O’Malley:And by the way, it's not a coincidence that shop is screwed toward clothing and beauty products because those products work well unbranded, which means that customers don't go to different sites and then compare prices. And your customers are mostly women. And interestingly, both of that is good for young e-commerce companies because women tend to buy more frequently. And because, again, these products are unbranded, it's more difficult to compare prices. I also listened to a podcast by Drew Cohen, and he had Fred Leo there, you know, a hedge fund manager and pretty good resource on C-Limited.

23:39Shawn O’Malley:And he actually mentioned that women tend to write more reviews. And that's something I didn't know before. And it obviously helps an e-commerce platform, especially in the beginning when you want to build trust with the buyers on your platform. Another advantage of those items and the purchase behavior is that they are higher frequency, which makes the logistics obviously more efficient. And at the same time, buyers don't really care how long it takes until the package arrives because it was more of an impulse purchase anyway. So they didn't go on the side and thought, oh, I need a t-shirt and it needs to be there tomorrow.

24:10Shawn O’Malley:It's more like they saw it, they liked it, they ordered it. But if it's there tomorrow or in just five days, they don't really care about that. The flip side though, is that those types of purchases once again, have less predictive power for a person's financial situation. So if you want to compare them, long story short, I think Melly's data has more predictive power, but that is kind of balanced out by at least to some extent, the many more data points that Sharpie is accruing over time, just due to the higher frequency of orders.

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25:57Daniel Mahncke:And if your application stands out, I'll be reaching out to you personally to schedule a call. Would you say that changes anything about how money is set up compared to Mercado Pago and perhaps the risks then that come with the credit portfolio? So for Melly, it generally seems like the biggest risk with the company is its credit portfolio blowing up at some point due to the relatively low quality of some of its borrowers. And so how does the actual credit product suite compare between the two companies?

26:27Shawn O’Malley:It's difficult to compare them just because Mercado Parco is way ahead still. So the core of money's credit business right now are these buy now per later solutions, which are embedded at the Shopee checkout on their page. So you buy something, you split the payment over installments, or you just defer to the next month. And this comes with short tenures. So generally you're talking about three to six months, which is kind of similar for Melly, but their entire mix shift is a bit different. So again, generally it takes three to six months for the average time in the credit portfolio of money, and it only has an average loan size of around$18.

27:01Shawn O’Malley:And that sounds tiny, but it's also kind of the best way to start such a business since many customers are first-time credit users with no formal credit history. So you build a credit history very slowly and with caution, which is the best thing that you can do. Then once money understands a user's repayments behavior, well enough, it then offers cash loans. So that means larger amounts, longer tenures, and also usable for anything, not just the one product that you just bought on Shopee. And then the final stage is off-platform. So a user who first got credit buying shoes on Shopee can now use, for example, Shopee Pay Later to pay at a grocery store or an electronics retailer, which generally has nothing to do with Shopee.

27:42Shawn O’Malley:And Mercado Pargo has been through all of those stages many years ago and is technically just well ahead of them. And the equivalent of Shopping Pay Later, which is Mercado Creditor's installment product, is already deeply mature in Brazil, in Mexico, and also in Argentina. So in three pretty big markets. And the main growth driver for Pargo now is the physical credit card that works pretty much everywhere. So there is no merchant integration required. And about 50 % of the transactions are already volume happening completely off the MercadoLibre platform. By now, that certainly is that where Shopee or money is nowhere close yet.

28:20Daniel Mahncke:And just for context for the listeners, the flywheel effect of the fintech business is obviously bigger within a company's own ecosystem. So for example, on MercadoLibre or Shopee. However, if you want to build a fintech business that can also stand on its own feet, an important measure is the extent to which people use it outside of its own ecosystem. So when you say that Shopee is not yet at the same stage as Mercado Pago, I assume the off-platform share of transactions is correspondingly lower.

28:53Shawn O’Malley:Yes, the off-platform business for money right now is growing fast. So the BNPL part of that is, for example, growing 300 % year over year, but it is still only 15 % of money's total BNPL portfolio. So Malaysia, I think, is the most advanced market for off-platform with about 30 % of all the transactions being off-platform, which actually kind of gives you a glimpse of what money looks like at a mature stage in other markets. And a main difference to Melly is that money's off-platform tool is QR codes, while Melly mostly uses credit cards. And credit cards are just a more powerful off-platform tool because a card works everywhere.

29:32Shawn O’Malley:you know, Visa or MasterCard are accepted with zero incremental merchant onboarding, and Shopee Pay later requires integration with each new merchant category. So basically, money is expanding through national QR payment systems across Southeast Asia, which is smart for those markets since cash and card terminals are just less entrenched there. But it's also a slower path to ubiquity than a physical card. And you also miss out on some of the fees that you can earn if you issue the credit card that's being used. And you asked me before episode, I was even working that you have these QR codes, but no credit card.

30:07Shawn O’Malley:But you know, that's kind of where PIX in Brazil comes in. And many other countries, especially in Southeast Asia, have their own national payment rails. And those basically make it possible to just go from the e-wallet via QR code to the e-wallet or the bank of the merchant without ever touching any of those credit card rails.

30:25Daniel Mahncke:And what about the credit quality of their lending portfolio? That's one of the big debates when it comes to Melly's credit portfolio and NewBank too, which is the other emerging markets, fintech, in our equity portfolio.

30:39Shawn O’Malley:This is probably the most surprising part of it all and also the one that it's harder to figure out. So money takes a lot less risk than Melly does. Apparently, one of the most important metrics to check is the non-performing loans ratio, or in short, NPL ratio, which is pretty low for Sharpie. So usually, there are two things that you check. You check the NPLs after 15 days and after 90 days, with the idea being that after 15 days, you kind of get a glimpse of how the new loans are performing. And after 90 days, if there's no payment made, you're kind of thinking, well, you didn't pay anything for 90 days.

31:13Shawn O’Malley:Most likely, that loan will not perform at any time in the future. Unfortunately, C only gives us the 90-day NPLs. So money in terms of the 90 day NPLs stands at just 1.1%. That's pretty low. I mean, for comparison, Mally's at 17 % and even Nubank is at 7%. However, and that's kind of the problem here, you can't really compare these numbers because C is using a different method to calculate the NPL. They generally just share much less data, which makes it pretty difficult to get a full picture of what's actually going on at money. So just as an example, C doesn't disclose net charge offs. So the amount it's actually writing off after the recoveries.

31:53Shawn O’Malley:And they also don't give you a clear net interest margin, which is pretty essential because without those two pieces, you can calculate what's arguably the most important metric in lending. And that's the risk adjusted spread or what Melly calls NEMAL, the net interest margin after losses. And that's the number that tells you whether a lending business is actually creating value or, you know, is just going for the sake of it to make more revenue, for example. With Melly, we could look at it and say, okay, the 17 % NPL looks kind of scary, but they are earning a risk adjusted margin north of 20%.

32:26Shawn O’Malley:So the risk at least is being well compensated. I would see you kind of just have to take the 1.1 % at face value. And then to some extent, trust that the economics underneath are working. There's some math that you can do, which kind of suggests they have a similar margin, but it's kind of wishy-washy. Like I don't fully trust it. Now the book is growing at 80 % a year and the NPL ratio hasn't moved. And usually that's encouraging. But with SEA, that's kind of the problem because there's the potential that NPLs look much lower because new loans are masking old bad loans and you can't see it because you only get the 90 day NPLs, not a shorter timeframe.

33:06Shawn O’Malley:I hope this hasn't been too complex. If so, maybe you just go back a minute and listen to it twice. The point being, at any given moment, you have a denominator full of brand new loans that haven't had time to go bad yet in the numerator that reflects the smaller loan book from several months ago. And that's kind of the problem here. There's another factor, which is mixed shift. So C's loans are mostly what I mentioned, these buy now, pay later loans. And the typical loan tenure, again, is three to six months, so pretty short. They have structured repayment schedules. So just way more likely that you get your money back because if nothing is done after one month, you will get a certain amount of money the next month again.

33:43Shawn O’Malley:So we're not comparing like for like here because Melly is deliberately pushing into these longer duration loans, higher risk credit like merchant working capital loans and also larger personal loans. So it's not only about buying something on MercadoLibre for$20 and then you get a BNPL solution. It's also cash loans where they say, hey, whenever we gave you credit, you paid it back, but now we give you$2 ,000. So significantly more money. Shopee is not yet doing that to the same extent. And that's a big part of why the NPL numbers are significantly higher for Melly than they are for money.

34:17Daniel Mahncke:I got to say, it feels like there are some red flags here. The lack of disclosures aren't exactly inspiring. and even if it's not an apples to apples comparison, the NPL just seems impossibly low. So, I mean, you can't control for methodology and while the markets they lend in are very different in some ways, these are still both emerging market countries that they're lending across, which inherently comes with a certain amount of risk that you would expect to see reflected in the NPLs. And so maybe you could argue that Mellie's geographic exposure is more challenging, but it's still puzzling to me to see how C can have such vastly better NPLs.

35:02Shawn O’Malley:More than anything, the NPLs of C Limited are just a dramatically lagging indicator. So again, if you would grow your loan book by 80 to 90 % a year, and we only know about non-performing loans after 90 days, that's just not great. So I'm not saying that they give you wrong numbers, Are they kind of fixing them to make them better? But in theory, you could go from the 1.1 % that we have today to, let's say, 4 % without any signs or disclosures in between. That's kind of the risk that you're getting here. But yeah, a meaningful portion of Mercado Palabra's loan book sits in Argentina, which is a country where, you know, you have chronic inflation, a lot of regular currency devaluations, and it's just a pretty unstable market to be in.

35:43Shawn O’Malley:So if you're lending in Argentine pesos, for example, some degree of credit stress is almost unavoidable in any given year, just regardless of how sophisticated your risk model is. And money lands across Indonesia, Thailand, and the Philippines, but also Malaysia, Vietnam, and Brazil, and none of which have at least Argentina's degree of macroeconomic instability. And Melly's team is not making poor lending decisions in Argentina. They're just operating in one of the hardest credit environments in the world. And I would personally not penalize Mercado Pago for its NPL rate without acknowledging that context.

36:16Shawn O’Malley:Also, if you go into its financial the most profitable market for them is Argentina, both in terms of their fintech operation, as well as Mercado Libre, so the marketplace. But again, it's not Shopee's fault that Melly operates in some tough markets. Melly needs to be careful and Shopee's fintech business seems to be less risky, at least if we trust the numbers. But again, we lack the information for me to say that with 100 % confidence. So I don't know if I would call that a red flag. It's certainly a yellow one and something that you have to be aware of.

36:44Daniel Mahncke:So if we were to try and level the playing field just to compare which model you generally think works better for the overall flywheel that's being built looking past geographies. Are there differences in the quality of how the payments businesses support that overall ecosystem?

37:02Shawn O’Malley:I give Mercado Pargo a slight edge on structural durability for two reasons. So the first is the deposit funded model. So Mercado Pargo offers a money market account where users park their money basically in their wallet and then earn competitive yields with immediate liquidity. So assets under management in Pargo more than doubled year on year in 2025, and they now reached almost$19 billion. And this matters enormously, at least over time, because it might give Mercado Pargo a lower cost funding source for its loan book in the future. And since deposits are cheaper than capital markets funding, that's a huge advantage that you want to take advantage of in the future.

37:41Shawn O’Malley:So when your users are funding your loans by parking their savings with you, your net interest margin is just structurally stronger. I have to say though, Melly isn't yet doing that. So their assets under management as a funding source, that's not something that we've yet seen. This will likely still take some time and it's also dependent on whether they can actually get all the banking license that they want to have. Money doesn't have this at scale yet and thus it's less of a choice for them and more of a forced decision to fund the loan book through securitization and also capital markets, which again is just a bit more expensive.

38:15Shawn O’Malley:CBank in Indonesia and the Philippines and Meribank in Singapore are building towards deposits though. So C Limited is certainly going out there, getting banking licenses. So I would just assume that they have the same strategy for the long term. By the way, because they have banking licenses, I'm quite sure they have to report margins on the fintech business in the filings to those banks. So perhaps there's a way to get them, but I couldn't find them yet. If anyone has any idea where to find them or what the margins are, please say so in the comments, but it's something that I couldn't yet figure out.

38:46Daniel Mahncke:And the savings product that Pago offers to a degree creates customer lock-in as well.

38:53Shawn O’Malley:Absolutely. I mean, once your savings are in a financial ecosystem, you just become dramatically more loyal to everything else that system offers, right? I just don't want to push my money from one app to the next, and then, you know, basically change all of the things that I do on a daily basis. So if you use the wallet for daily payments, because the money is already there, that also makes it significantly more likely that you will spend money on Shopee later on, kind of be part of the entire ecosystem, and you kind of have this established relationship with the brand. And you're also less likely to download a competitor's app for any financial reason.

39:26Shawn O’Malley:Mercado Pargo, on the other hand, has already achieved that kind of complete financial relationship with tens of millions of users in Latin America, whereas money has still a more transactional relationship yet. So people borrow from it, they will pay it, hopefully, and use Shopee pay for Shopee purchases, but it hasn't yet built this kind of last stage. So the deeper savings relationship that is creating even more stickiness for the ecosystem. I'm pretty sure though, that it is only a matter of time until we see them having saving accounts too. Again, with all the banking licenses, there's just no way they're missing out on that opportunity.

39:59Shawn O’Malley:Another big advantage that Pargo currently has is obviously credit card payments. So the more data Pago accumulates from off-platform transactions, the better its credit models become and the better offers it can also make to acquire new customers. And then the more loyal customers will be in the entire Melly ecosystem.

40:19Daniel Mahncke:So Pago wins on deposits and with their card. Where does money have the better of it? Where's their advantage?

40:27Shawn O’Malley:Probably if you look at the totally addressable market. So money's top three markets account for over half of its digital financial services revenue, which means Indonesia is the dominant contributor. Indonesia alone has 218 million people with credit card penetration still in the single digits as a share of the adult population. When you look at Mexico, Brazil, and how quickly the market is growing there, you can only imagine how much potential is in those markets. And the Philippines, Vietnam, and Thailand are somewhat similar. So just the growth potential in all of Southeast Asia for a well-run digital lending business is generally enormous, comparable to and in some ways, again, larger than what Melly had available in Latin America.

41:09Shawn O’Malley:And, you know, they also just started scaling Pargo. So I feel like for both of these companies, there's so much room left to grow, which is also in part where I think that them competing in some markets, like Brazil, is not a death sentence to any of those companies. And then you obviously have significantly less risk on the credit side for money. At least that's how it looks right now. Again, take all of this with a grain of salt. We don't yet fully know how it will look in, let's say three months, where we have new numbers on the 90 days. But generally speaking, I believe Pago will keep the leadership in Brazil and South America, but I wouldn't be surprised to see money achieve somewhat similar network and scale effects in Asia that Pago has seen in Latin America.

41:49Shawn O’Malley:And should there ever be a meltdown of Melly's credit portfolio, That would potentially be a chance for money in the long term, although I definitely hope we will not see that anytime soon.

41:59Daniel Mahncke:The thing that's puzzling me about this company is that I agree there's a huge opportunity to do digital lending in Southeast Asia. So then why divide your attention with e-commerce in Brazil? You know, and they're going after all these huge TAMs and are having huge success across various geographies. But I also think they might ultimately do better by focusing on single geography or focusing on a single product market. So, you know, let's say focusing on fintech services in Southeast Asia, right? Why bother with Latin America? That's just my thought on it. But anyways, on that note, let's talk about the actual e-commerce business.

42:41Daniel Mahncke:When I looked at the headline numbers for C Limited in my research for Grab, there was one that really caught my eye, and it was C's GMV share in Southeast Asia, where GMV stands for gross merchandise value. And that's basically the total dollar value of all the e-commerce products that are sold. And so it's supposed to be at slightly over 50%, which is just an extraordinary number for Shopee as a marketplace to hold in a region this complex and then just really to hold generally. And so for context, Amazon has roughly 38 % market share in UIC commerce and MercadoLibre has a similar share in Brazil.

43:19Daniel Mahncke:So having 52 % share in a region with over 700 million people, that is truly an incredible achievement for C-Limited.

43:27Shawn O’Malley:especially given the complexity of the market so when shoppy launched in 2015 lazada was the clear incumbent founded three years earlier backed by alibaba which had essentially unlimited capital and the world's most advanced e-commerce technology stack behind it so lazada had a head start in every market established seller relationships and the operational credibility of being associated with the most valuable e-commerce company in asia so on paper shoppy had no business outcompeting Lazada and yet only four years later by 2019, Shopee had overtaken it to become the most visited platform in Southeast Asia and one of the key reasons has been what we talked about in the beginning, the mobile revolution.

44:09Shawn O’Malley:So Lazada was built for desktop and adapted to mobile while Shopee was designed from the start around the way people in its markets actually used the internet. So on cheap Android phones with intermittent connectivity in short sessions. the entire UX was optimized for that experience. And beyond that, Shopee introduced free shipping when Lazada still charged for it and Shopee successfully integrated gamified elements like flash sales, like daily coins and also in-app streaks into the process. Kind of similar to what we know from Duolingo, but for shopping. And then markets where shopping apps compete for attention against TikTok and Instagram and also mobile games, that distinction matters a great deal because it totally changes how you use those apps.

44:52Shawn O’Malley:The other thing that Shopee did well, which perhaps doesn't get enough credit, is localization. So Lazada tried to run a unified regional operation with centralized systems. Shopee put large local teams in every market. So people who understood that what sells in Jakarta is different than what sells in Manila. And that a seller support approach that works in, let's say, Singapore doesn't work in Vietnam. Today, Shopee has 20 million sellers and management reports that roughly half of them generate their primary income through the platform.

45:24Daniel Mahncke:So this also reminds me of something that we talked about in our TIP Mastermind community discussion about MercadoLibre. And that is that Shopee now has over 90 % of its Brazilian GMV coming from local Brazilian sellers. And so that's a huge difference from the approach that other Asian and especially Chinese competitors have taken and chosen to do in Brazil. And so this significantly benefited them, too, after the de minimis exemption was closed, which effectively made imported Asian goods pricier compared to locally produced items. And so I would bet that this also will assist in mitigating perhaps the potential political opposition that other foreign competitors might encounter when you can say that so much of your GMV is coming from local players.

46:18Shawn O’Malley:And the localization works perfectly. So by now, Lazada isn't really competition anymore. While Lazada achieved its first profit in 2024, that was the result of a strategic pivot away from volume competition, which is what Shopee does, into more of a premium brand with higher margin official stores and also cross-border logistics from China. And as a result, its GMV has been roughly flat to actually declining. And in Vietnam and Thailand, it now holds somewhere around 3 % market share. So Lazada is really no longer a meaningful threat to Shopee's, at least regional leadership.

46:52Daniel Mahncke:So then who are the biggest competitors to Shopee today, since Southeast Asia is a very competitive market, even if they have 52 % market share there, which would sort of suggest there's no viable competitor. I know there's a lot of competitors there. So let's zoom in on that.

47:09Shawn O’Malley:There are certainly competitors. And if that weren't the case, I assume the market would look very differently at the latest investments that Shopee did. So the stock is currently down more than 50 % from its September 2025 highs. And one of the key reasons is margin pressure from ongoing investments in the business and mostly into its logistics operation.

47:29Daniel Mahncke:And those are similar reasons for the decline compared with Melly, right? Melly is down 28 % though, not more than 50 % with its stock price.

47:40Shawn O’Malley:Yes, the entire sector has been sold off. Not as bad as SaaS, but it's certainly not in favor either. So in part, that's why I like the sector so much right now. We covered many SaaS companies, but looking at how quickly AI evolves, many of them just end up on at least my too hard pile. But in my opinion, the e-commerce players, they are getting punished without good reason. So there's this fear that AI will disrupt everything in the digital world. But many businesses we own in our portfolio, for example, have network and ecosystem effects that AI just can't replicate. So think of Amazon. Amazon's mode is not code.

48:16Shawn O’Malley:It's not the website or any part of the software, really. Amazon's mode is mostly convenience and price. And it's cheaper for me to order something on Amazon than actually go out and buy it at a store. And even more important, when I order something, it's there the next day or even within in just a few hours and I don't even have to leave my house. Personally, I like to go out and get some fresh air and shop for stuff myself. You kind of get the point. Most people like the convenience and if I can't find anything in store, it's always a huge headache. I just go on Amazon, I order it, same evening, it's still there.

48:47Shawn O’Malley:So it's about convenience. And that convenience is based on a huge flywheel between network effects that make sure that Amazon has all the products I need because millions of products are offered, a huge logistics ecosystem and so, so much more. C-Limited and Mally kind of benefit from the same dynamic, even slightly more due to their payment business. And AI can help them personalize ad targeting, maybe increase the purchase frequency and also improve the risk modeling for their fintech businesses. But it can't replicate billions of dollars in physical infrastructure. And it also can't change the fact that people want to order online today and then receive a package to their doorstep, either still today, just a couple hours later, or next day.

49:28Shawn O’Malley:And it doesn't really bring down barriers to entry in this business either. So I do feel like this is one of the sectors that is benefiting from AI, but does not face the same threat.

49:37Daniel Mahncke:I am one of those people that is very much guilty of wanting to receive packages on their doorstep the next day. I am pretty deeply embedded into the Amazon product ecosystem, which is something we've joked about in the past. And now, Daniel, I'm sorry to say it's only getting worse. Of course, Amazon ran this promotion this past weekend where, and this is not a free ad for Amazon. I guess it is a free ad for them, but they're not a sponsor of the show. And so anyways, they had some initiative where you could get free delivery for a month from Whole Foods. And the only cost is the tip on top of the actual cost of the groceries.

50:12Daniel Mahncke:And so I have now moved from basically ordering just stuff on Amazon Prime to now really everything I order is being delivered because now I've got this grocery subscription and I don't know if I'll keep it, but now I'm getting all my groceries delivered. And that almost feels like even for me, I'm like, this has got to be the line, right? Because there is something to be said about going and picking out your own tomatoes and apples. And you don't necessarily want someone else to do that for you, but I'm a huge fan of convenience. Can't say that I'm surprised. No, absolutely not. And getting back on topic, another thing that we've talked a lot about in the past is how AI agents might change consumer shopping over time.

50:52Daniel Mahncke:And even in that regard, I just don't see how that could impact Amazon, Melly, or C, right? When I shop through an agent, that agent should still optimize for the things that I do when I shop, right? So they're going to look at customer reviews, they're going to look at price, and they're going to care about delivery speed. And so in the end, it's a means for more quickly scanning and browsing for things I care about, but it's not fundamentally making decisions on different variables than myself.

51:21Shawn O’Malley:Point being, I think, or maybe we think, there are a few industries right now with a better value balance when it comes to AI or maybe AI proposition, right? But the original question was about the competitive landscape. Again, Shopee's market share is pretty high, but competition remains quite intense and let's say more diverse than what Amazon or Melly face in their home markets, there are three different types of competitors. So the first one would be TikTok Shop, which is the fiercest competitor right now. And then you've got the legacy players like Lazada, and then you've got the cross-border platforms like Timu, Shein, or even AliExpress, which kind of represent a thread that's less about platform competition and a bit more about price pressure.

52:02Daniel Mahncke:Well, I want to talk about TikTok Shop, and neither of us are probably the best people to talk about it because honestly, we're probably one of the only people in the world in their 20s that have never had the TikTok app downloaded on their phones. But I do know through friends and family that TikTok shop is growing very, very rapidly in the US and around the world. And I just Googled it actually. And supposedly there's an 18 % market share in the US and that's a big number. And you see it growing 100 % year over year in 2025 after you'd already grown that by 400 % in 2024. So this is a real competitor that's kind of come out of nowhere and taken over the world, not just on social media, but now on the commerce side of things too.

52:46Shawn O’Malley:What's so fascinating about this competitor from the lens of the Western world, at least, is that TikTok was the first successful Chinese app in the US and in Europe. We talked about how normal social media shopping is in China and Asia, but it never worked the same way on apps like Instagram, Facebook, or even live streaming platforms like Twitch. But with the success of TikTok, that kind of seems to change. So TikTok shop has tens of millions of customers, even in the US. And by now, it sells more beauty products to people in the age range of 18 to 24 than Sephora or Ulta Beauty, which is kind of insane to think about.

53:22Shawn O’Malley:I mean, we used to own Ulta Beauty at some point. So you pitched it to me. It seems to be a phenomenal business. but also it seemingly, at least in that age cohort, cannot compete with TikTok Shop. And as you said, I'm not a TikTok user so my insights are somewhat limited. Although I think that everyone who uses social media generally understands how sticky that product is. So since my episode of Meta on this podcast, for example, I realized more and more how powerful Instagram's ads actually are. I mentioned on the episode that I sometimes go to Instagram just to go through the ads because the likelihood that I find what I'm looking for on there is bigger than when I just Googled the product I'm looking for.

54:02Shawn O’Malley:And just in the last few months, I spent more money on products that were advertised through Instagram than I did otherwise. It doesn't matter the channel. The biggest game changer to me is the quality of brands that you find on Instagram now. Five or so years ago, it felt like it was mostly lower quality stuff, just selling at high prices. But by now, you get really high quality stuff there advertising. I don't think there's any brand that wouldn't advertise on Instagram, maybe even MS. I haven't seen it yet, but I wouldn't say that's impossible. I mean, you see Patek Philippe and all of those brands.

54:35Shawn O’Malley:So there's not a single brand that I've personally felt like I would like to get something from it, but I haven't seen it on Instagram. It just hasn't happened. And I could see how that is also happening on TikTok, at least over time. Of course, most products won't be the highest quality right now, but many companies only just found it just to start selling on TikTok shops. So to stand out over time, I expect a similar trend towards higher quality. It's not yet there, but I wouldn't be surprised at all if in five years time, there are significantly higher quality products on TikTok shop as well.

55:07Daniel Mahncke:Yeah, I mean, I don't think quality is the main selling point for a lot of these products that people are shopping for on TikTok and Instagram. And Shopee is really not known for its high quality products either, even in contrast to TikTok. but the main value add is the really low prices.

55:26Shawn O’Malley:That's true. I think a certain quality is important if you want to successfully expand into Europe and the US, but internationally, the focus is a lot more on price. So it's not a surprise that TikTok Shop is also growing massively in Asia. In 2022, it was essentially irrelevant. A small social shopping feature on TikTok that was not yet widely used. Just one year later, the Southeast Asian GMV had nearly quadrupled to$16 billion. And by 2024, adding in its Tokopedia acquisition, which is another huge marketplace there, which actually used to compete with Shopee, but was then bought by TikTok Shop, now it's significantly bigger.

56:05Shawn O’Malley:The combined entity, so Tokopedia and TikTok Shop, hold about 28 % of Southeast Asian platform GMV. So that's only second to Shopee, which is at$67 billion. So still far away from that, but they're getting there. In Thailand, TikTok Shop's GMV more than tripled year on year in the first quarter of 2025. And in Vietnam, it grew 150 % just in the first half. So you don't got to know all the numbers, but they are growing incredibly fast. So the speed at which TikTok has scaled, it's just generally extraordinary and a bit scary for competitors. So if you just look at the most doable success of TikTok itself, I don't think it's unreasonable to think that TikTok Shop can also grow sustainably, which is something that we haven't yet seen before.

56:47Shawn O’Malley:But again, TikTok used to be a trend. Now it's there for a decade. So I would expect that the shop might be as successful too. The difference from legacy players, and I include Shopee here for this comparison, is that TikTok shop is not a search-driven marketplace. On Shopee, users go or arrive with purchase intent. So they open the app because they want to buy something. TikTok is more of a passive discovery machine. So its algorithms surfaces products to users who weren't shopping in the first place through content that they were already engaging with. So a creator in Vietnam, for example, demonstrates a skincare product in a 30-second video.

57:25Shawn O’Malley:I hope that's how long videos on TikTok are. Then the algorithm serves it to, let's say, 200 ,000 viewers who follow that creator. Some percentage click through and actually buy without ever having searched for skincare in the first place. You could argue that desktop first, e-commerce was good when you already had a product in mind. Then you search for it and compare prices. Mobile first, like Shopee, is great when you have a general purchase intent, but you don't yet know what exactly you're looking for. And then you have this third layer, TikTok shop, where you log in without any purchase intent.

57:58Shawn O’Malley:And then through the right content, suddenly, I don't know, you do buy a new lipstick. I know that's something that Sean and I do on a daily basis.

58:06Daniel Mahncke:We do. And that's why we were invested in Ulta, right? And I am sort of glad that we're out of that position because I love Ulta. I think it's a wonderful business. But this takeoff and growth from TikTok shop has just really come out of nowhere. And I think there's something to be said for the fact that beauty will always have an in-person component. You're not going to spend a lot of money on makeup that you haven't tried on in store. And you want to speak to a beauty consultant at the Ulta store who can give you recommendations and tips. So I don't know. I'm taking us on a tangent about Ulta.

58:41Daniel Mahncke:I still like Ulta's business, but I am in some ways a bit relieved that we have taken ourselves out of that position because TikTok shop is really just eating into the business on the lower end of the spectrum, which is an area that, you know, more price sensitive consumers, that's an area that Ulta used to dominate. And so anyways, TikTok's growth and Shopee's growth are not necessarily in direct competition with each other. The average TikTok order value in Southeast Asia is around$4.50 to$6 versus Shopee's $13 to$15 per order value. So we know that the most valuable purchases are intentionally being made via Shopee.

59:24Daniel Mahncke:And that is really, there's some value in that because it's a recurring process of needing to come back and buy these products. As opposed to with TikTok, they're capturing a lot of these very low ticket impulse purchases from consumers that happen to live in tier two and tier three cities that are scrolling for entertainment and then just happen to discover a product. So there's a degree of randomness there that doesn't make for a great compounding business. And that is not really Shopee's target customer in the same way, at least in Southeast Asia.

59:56Shawn O’Malley:If you want to frame it positively, TikTok Shop is kind of expanding the total e-commerce ecosystem rather than purely carving out Shopee's market. So some portion of those first-time TikTok shoppers in Tier 2 or Tier 3 cities will, as their online shopping habits mature, eventually, potentially, graduate to Shopee for more considered higher-value purchases. And there's also some reasonable doubt about how fast TikTok Shop is still growing right now, because in early 2025, TikTok Shop's GMV grew about 70 % year over year in Southeast Asia. In late 2025, that number dropped to 30%. And that's only modestly above Shopee's own growth, which is approximately 25%.

1:00:38Shawn O’Malley:More notably, TikTok Shop's relative market share versus Shopee in Indonesia, which is the region's largest market and the one that matters most for Shopee's overall trajectory, has effectively flatlined over the past year. Now, TikTok Bulls have looked at an alternative number that suggests TikTok Shop is still growing a lot because there's this company called J &T Logistics. It's a Southeast Asian logistics provider and TikTok's primary logistic partner. And since it is publicly traded in Hong Kong, we have some data to work with. So JT reported parcel volume of 74 % year-on-year growth in Q4 of 2025.

1:01:18Shawn O’Malley:So many people argue that if TikTok's logistics partner is growing 74%, TikTok must also be growing at least 70 plus percent, you know, somewhere in that range. But when you actually decompose JNT's growth, it might not solely be TikTok volume. So start with the overall C e-commerce parcel market. And when I say C here, I mean Southeast Asia, which grew approximately 40 % in the last year. If J &T had simply held its market share flat at simply 27%, the level that was in 2024, it would have grown about 40 % just from riding the market. That alone accounts for more than half the headline number.

1:01:57Shawn O’Malley:But J &T did not only hold market share flat. according to its own filings, J &T's market share rose from the high 20s to 35 % in the first half of 2025. That's about a six point gain driven by smaller logistics providers exiting the market, basically unable to compete on both cost and service quality. And that share gain adds roughly another 25 to 30 percentage points of growth. And then J &T also launched a new non-platform parcel business serving traditional retailers rather than just e-commerce platforms. So When you add all those three things up, you get almost exactly to JNT's reported growth.

1:02:34Shawn O’Malley:So point being, TikTok's own order growth appears to be closer to 30 to 40 % on volume basis and roughly 30 % on a GMV basis, given that average order values have been declining as the platform goes deeper into low ticket commerce.

1:02:51Daniel Mahncke:Is there anything else that suggests the competition is perhaps stabilizing rather than intensifying?

1:02:57Shawn O’Malley:There's one more data point that I find quite telling, and it's about pricing behavior. So when Shopee increases its commission rates or transaction fees, TikTok Shop typically follows within days. And that kind of synchronized pricing behavior, where a second place competitor kind of mirrors the leader's price increases, rather than just holding flat to steal share from it, is basically a signal of rational competitive dynamics and not irrational aggression to basically gain market share at the cost of the other competitor. So a generally hungry competitor trying to take share would either hold rates or even go lower with them.

1:03:33Shawn O’Malley:And that's what TikTok is not doing. So I would say that suggests that Sharpie and TikTok have both kind of eyed profitability in that market. So I think that's a generally positive sign for their competitive pressures there.

1:03:46Daniel Mahncke:So we've talked about fintech being so important to the businesses of MercadoLibre and C Limited. Is there a payment arm to TikTok Shop? I don't think there is. It's just social media and this marketplace for shopping. But it's interesting to me that they don't have a fintech arm, it seems.

1:04:05Shawn O’Malley:It might come with time, but currently TikTok Shop has no equivalent to, let's say, Shopee Paylator or just any BNPL solution. So there's no embedded credit product and there is no digital wallet that it controls. In Indonesia, it relies on GoPay and a third-party BNPL provider. So you're seeing a tendency to go into that market, but they don't have anything on their own. So in Vietnam and Thailand, it is just no meaningful payment infrastructure. And then building a credit underwriting business from scratch. I mean, all the regulatory licenses, the risk models, the default prediction algorithms trained on behavioral data, all of that just takes close to a decade.

1:04:43Shawn O’Malley:We kind of forget that when we look at Shopee and Mali and all these companies have done it, but it was a long time how they do it. I mean, money started in 2014 and only hit its stride around 2019 to 2020. So TikTok would basically be starting from zero in 2025. And this creates a switching cost. Shopee has that TikTok, in my opinion, cannot replicate quickly. So I do think that's a huge advantage for Shopee. It's also a huge advantage for Melly in Brazil. Not so much for Amazon, but I mean, Amazon compared to TikTok shop, I think that's a pretty clear bet on Amazon.

1:05:14Daniel Mahncke:I want to briefly go over Lozada again because we haven't talked about enough businesses today. But because you said it's in retreat and I want to understand why because this would have seemed like the obvious winner perhaps six to seven years ago. And I can't imagine any Alibaba shareholders would have thought that Lozada would eventually retreat and give up billions of dollars in potential business in this space. And I say that to tease you a little bit because I know that in the past you've been a Baba bull, Daniel. So I know you know better than I do.

1:05:48Shawn O’Malley:Unfortunately, Lazada wasn't a huge part of my thesis, but I'm sure that Lazada was part of many Alibaba bull cases back then, especially in the mid-teens. So it was founded in 2012, three years before Shopee, and Alibaba acquired it in 2016, so four years later, for roughly a billion dollars and has since invested several billion dollars more. So it's not about the money they spent on the acquisition, but more about the investments that they did over time. And at peak, it had Alibaba's logistics experience, obviously the technology stack, and also the cross-border sourcing relationships, which are quite important because getting goods from China into Southeast Asia is a pretty good way to make high margins for yourself.

1:06:26Shawn O’Malley:So by any rational analysis, Lazada should have helped the market. And yet it lost pretty decisively, to be honest. Lazada had multiple leadership changes. six different CEOs between 2012 and 2023. This has kind of been a red flag even back when you looked at that business because you just thought if they changed the CEO every second year, something there has to be off culturally. And apparently that's true. I mean, there were culture clashes between local Southeast Asian management teams and Alibaba's executives. And that instability just fed through strategic inconsistency from year to year.

1:07:01Shawn O’Malley:But the deeper issue was a product mismatch. So Alibaba's model from China, which was heavy first-party inventory, centralized logistics, top-down category management, was also used for Lazada. But this just wasn't the right approach for Southeast Asia. So Shopee's full third-party, seller-centric, and hyper-local model, which we talked about, was simply a better fit for the region.

1:07:24Daniel Mahncke:So there was a CEO carousel at Lazada, it sounds like. I mean, that's six different CEOs in like 10 and a half, 11 years is crazy. And we haven't even talked about the cross-border wave of players that came into the picture, like Timu, Shine, and AliExpress, and how they have impacted the competitive landscape.

1:07:43Shawn O’Malley:Yeah, let's add even more businesses to today's discussion. This is a different kind of thread, and Shopping's position relative to it is actually stronger than it might appear. So in the US and Europe, Tmoo operates as a standalone platform that crushes local retail on basically price and by shipping directly from Chinese factories. Kind of what I mentioned with Lazada and Alibaba back then. In Southeast Asia, Shopee itself has already built a large cross-border program years ago. So Chinese sellers listing on Shopee and shipping to regional buyers has been a meaningful driver of Shopee's low price positioning for a long time.

1:08:20Shawn O’Malley:So Shopee essentially got ahead of the Chinese cross-border wave before Timo even arrived. That said, Timo has been building a presence in some countries in Southeast Asia and also in Brazil. It's somewhat relevant there. I would still say if you look at the market share numbers, it's mostly about Shopee and Mali. And especially after you had these de minimis exemptions put out of place, it got a lot harder for companies like Timo or Xi to get into that market. But critically, Shopee's domestic Brazilian GMV, so local sellers selling to local buyers, is insulated from these rules, which is a huge advantage in that market.

1:08:55Shawn O’Malley:And this is one of the reasons Shopee's multi-year investment in onboarding Brazilian sellers, rather than just relying purely on Chinese supply, has been strategically important and basically gave them the market share they currently have in Brazil.

1:09:08Daniel Mahncke:I guess the most important question is the same one that we asked with MercadoLibre, and that is, with Shopee currently investing quite heavily, expanding their logistics, building fulfillment, launching their version of Amazon Prime, is it doing so from a position of strength or are they doing this because they have to, right? They have to invest this capital to remain competitive.

1:09:31Shawn O’Malley:If I had the answer to that question, Sean, I would have 100 % in either buying the stock or I'm selling it short. But the market has become concerned that the investment cycle is defensive and that the margin compression that we're seeing is a necessary response to TikTok competition rather than a voluntary choice to just strengthen the mode for the long term. And the terminal margins might therefore be structurally capped closer to 1 % or 2 % of GMV rather than 4 % to 6 % of GMV, which makes a huge difference for the terminal value of the stock. So with Melly, I'm quite confident that concern is largely mistaken.

1:10:07Shawn O’Malley:Of course, I can only assess the risk that currently exists. So if Amazon announces tomorrow that they will invest$20 billion in Brazil, that would change things. But it doesn't look like that. So for Shopee, you can make similar arguments. If TikTok Shopee's growth were generally accelerating and taking meaningful share in, for example, Indonesia, you would expect Shopee to be cutting prices and subsidizing growth to defend its position, which is exactly what it did in 2022 and 2023 when competition generally intensified. Instead, though, Shopee is raising take rates and investing in infrastructure.

1:10:42Shawn O’Malley:So those are not the actions of a company under siege, I would say. So they are the actions of a company that believes its competitive position is secure enough to spend on capability rather than on defense. And there's also a pattern of observe and then act in C's history that we've also seen with Melly to some extent. We talked about it. Before money scaled its lending book dramatically, it kind of waited for some time. It watched the Indonesian digital banks that had rushed into consumer credit start blowing up with non-performing loans. And only after competitors stumbled and the data kind of showed others had mispriced risk, did money accelerate aggressively on investing in those markets, gathering customers and market share at a point when the field had kind of thinned out.

1:11:28Shawn O’Malley:So C has a tendency to press hardest when competitors are weakening, not when they are strongest. And the current investment cycle to me looks more like that pattern than it looks like a desperate defensive response.

1:11:41Daniel Mahncke:And there's a broader question here about whether competition in e-commerce structurally leads to margin suppression. Because the TikTok bear case is not just about market share. It's about whether Shopee can ever earn real profit margins that drive excess returns on capital, that create shareholder value in the midst of a competitive market.

1:12:02Shawn O’Malley:This is where it's worth looking at China. China is the most competitive e-commerce market in the world. You have four large, well-capitalized platforms. all competing heavily with Alibaba, JD, Binduoduo, and ByteDance's own Duyin Commerce. And despite that four-way competition, all of them are earning approximately 2 % EBITDA to GMV margins. And that's actually three times higher than Shopee's current 0.7%. So the lesson from China is that competition and profitability are not as tightly correlated as the bear case might assume. What matters more is coordinated rationality, whether all the players in the market eventually face economic pressure to earn a positive return.

1:12:44Shawn O’Malley:In China, they did. And the industry settled at respectable margins. It's not the same that Amazon earns, which is probably active in the most profitable market you can be in, but it's good enough. So there's no reason to believe that Southeast Asian commerce, once it matures, wouldn't follow a similar path. So Shopee again has 0.7 % margins today based on GMV. And if you would assume that this market can grow somewhere to the stage of China, perhaps with a bit less competition, slightly higher, there's a lot more room to grow your earnings and margins.

1:13:16Daniel Mahncke:To recap, the overall competitive picture here is that there's a dominant platform and there's a real but decelerating threat from a fintech-less challenger in TikTok. and then you have, you know, there's a retreating incumbent in the legacy space and then there's this cross-border dynamic that Shopee is at least reasonably well-positioned to handle, I'd say.

1:13:37Shawn O’Malley:With the important caveat that Vietnam is also a huge factory and shouldn't be dismissed because Vietnam shows what TikTok can do when it fully commits to a market and basically the defensive variable, so logistics staff, fintech lock-in, seller ecosystem, inertia, they're all less entrenched. So the question every Shopee investor needs to have at least a view on is whether the Vietnam dynamics are propagating to Indonesia, which again is a significantly more important market for Shopee. I would say the data so far says they're not. Indonesia's competitive dynamics have been considerably more stable than in Vietnam and TikTok's share gains there have been much more modest.

1:14:17Shawn O’Malley:Again, over the past year, they've kind of flatlined in terms of market share. but it bears watching every quarter because Indonesia again is 44 % of the regional market and this is basically deciding over whether Shopee will be successful here or not at least in the long term so what I would say about the overall competitive position that we kind of end this chapter here is that Shopee today looks more like Mercado Libre in 2022 than in 2019 so it's a profitable structurally dominant platform managing real but kind of bounded competitive pressure so there are competitors, but it kind of feels like an oligopoly right now.

1:14:53Shawn O’Malley:So then investing in infrastructure from a position of financial strength rather than desperation seems to be the right idea. And the period of existential uncertainty, which Shopee generally went through 2022 and 2023, I mean, look at the stock chart that we'll talk about it later, is kind of over. So what remains is the hard work of executing the logistics and fintech flywheel in markets that are still early in the e-commerce penetration curves. And that's a much better problem to have.

1:15:21Daniel Mahncke:Let's talk about the flywheel because it's not always easy to see how all of these different segments reinforce each other, especially the payment operations that tend to be quite complex. And it just takes some time to be able to determine whether they are a strength for the business or a risk to the business where you're taking on all this lending and credit risk that has the potential to blow up in a downturn. It adds some fragility, but also it can strengthen the underlying business. So there's a tension between these two things. And when we covered MercadoLibre, one of the most compelling aspects of really the thesis is this part where Mercado Pago complements the marketplace and they reinforce each other, right?

1:16:05Daniel Mahncke:Mercado Pago drives more marketplace spending in short. So how does that dynamic compare with what C has built? Is there as much of a positive synergistic relationship for their side of the business?

1:16:20Shawn O’Malley:In parts, I would say. So perhaps we should start with Garena, the gaming business, since that is a part of the flywheel that Mali, Amazon, Alibaba, or Coupang just don't have. Again, at its peak, Garena had hundreds of millions of daily active users across Southeast Asia, but also Latin America. And those users, primarily young, male, mobile first, are a natural audience for Shopee. Again, like these young cohorts they focus on primarily. C actively cross-promoted at that time. So in Brazil specifically, Free Fire's enormous popularity in the country gave C somewhat of a brand presence and also a user relationship before Shopee even launched there.

1:16:59Shawn O’Malley:So it's one of the most unusual market entry strategies in e-commerce history, at least from the ones that I've seen. You go in through a video game, establish trust and brand recognition, and then convert gamers into shoppers on a totally new e-commerce site. Oh, it's fascinating.

1:17:16Daniel Mahncke:I mean, it seems brilliant, but perhaps that's also the benefit of hindsight speaking here because I'm not sure that I would have bet on that working in the US because mobile games just don't have a ton of staying power and probably would have much less success, at least in the US, converting players to something that is really completely unrelated. I can't imagine wanting to buy my groceries through a company that I also play my mobile games with.

1:17:45Shawn O’Malley:There's no doubt. Everything I say now is with a huge hindsight bias. But with that hindsight bias, I would say there is a good reason actually why this works in emerging markets, but not in developed markets. So once again, the mobile first nature of emerging markets plays a huge role here. I don't play any games on my phone, for example. playing games was for me only something that I did on a console or my PC and it's also probably 10 years ago but most people in emerging markets have skipped desktops so playing a mobile game and then switching to your social media app or an e-commerce app just a second later feels way more normal to them so of course the game itself and shoppy are different apps so it still takes some time to switch from one to the other and it's not like you're already halfway through a buying process whenever you open Free Fire.

1:18:29Shawn O’Malley:But Shopee is the place where you buy in-game currency, for example. So there's a reasonable bridge between the game and the marketplace. And for example, you see a new skin while you play the game, right? You want to buy it, you go over to Shopee, you buy some credits, you go back to the game, you get the skin, and that's kind of how a transaction can look like. There were also some offers in Brazil, which I found pretty smart, when Shopee first entered the market, where you could get free skins when you sign up for Shopee or bought specific products. So there were certainly some cross-selling opportunities.

1:19:02Shawn O’Malley:And if I think back to my 15-year-old self, if I really liked the video game and I got free skins, if I signed up for some marketplace, I would have certainly done so.

1:19:11Daniel Mahncke:Well, and it's important to note that money, right? M-O-N-E-E, their fintech business plays a role here too, right? So for example, a player could then use Shopee Pay later on Shopee to pay for the credits that are then going to be used while playing Free Fire.

1:19:29Shawn O’Malley:Exactly. That's one of these scenarios. Of course, the connection to the video game is not as strong from a mode perspective because it only benefits players of the video game. But every other Shopee customer obviously has similar benefits through money as Mercado Libre shoppers when they use Mercado Power. So it works very similarly and the gaming business just adds a bit more stickiness to CES ecosystem for the people who do actually play the game. So as we said earlier, the most valuable transaction data comes from normal shopping behavior, not transactions for a video game. And then beyond that, you have the same closed loop that we've seen with Mally.

1:20:05Shawn O’Malley:So better credit data enables more lending, more lending means more purchase power, more purchase power means higher GMV for Sharpie, and higher GMV means more credit data. Management has actually said in, I think it was the Q4 call of 2024, that off-Shoppy loans now account for about half the loan book in their Asian markets, meaning money is expanding well beyond the platform it started on. And that's not yet the case in Brazil, but in parts of Asia. Generally, I should say that money doesn't seem to be as competitive as Mercado Pago is. So the main focus is to strengthen the overall Shoppy ecosystem.

1:20:39Shawn O’Malley:and Mercado Paro and the credit business, on the other hand, they are supposed to be the key drivers for growth and profitability formally in the future. I don't see the same importance of money for Shopee.

1:20:51Daniel Mahncke:One thing I do want to talk about quickly is the stock's enormous volatility, which I think can be partly explained by this boom and bust cycle we've seen after the pandemic for really a lot of e-commerce businesses. During the pandemic, Shopee benefited from this huge uptick in online shopping. And then Garina's games benefited from, well, everybody being second home and not having much else to do other than gaming. And then you had money, which benefited from the acceleration of digital financial services adoption. And all of that led the stock to rise from around$40 at the start of 2020, this all-time high of$370 in late 2021.

1:21:34Daniel Mahncke:And then when it became obvious that this 100 % annual growth couldn't persist, you saw a massive multiple re-rating around the entire company and the stock dropped accordingly. But you told me before that this is not really the only reason why C-Limited struggled so much. So what else was going on during this time?

1:21:57Shawn O’Malley:One of the other things that happened is that India, which had been one of Free Fire's fastest growing markets, banned the game in 2022 as part of a broader crackdown on apps with perceived Chinese ties. So given C's partial 10 cent ownership, that basically wiped out$60 million from the market cap in just a single day. And then there were also these pandemic tailwinds that reversed. Obviously, you just mentioned that. So Garena's quarterly active users dramatically dropped. and Shopee had really been burning cash aggressively across multiple new markets. So with the game being down, which is the cash cow of the business, and Shopee burning a lot of money on expansions, for example, it launched in France and Spain and Poland and Mexico, among other markets, those experiments were just not working out and the market just didn't like it.

1:22:43Shawn O’Malley:And as if that wouldn't be bad enough, Tencent also started selling about$3 billion of its about$20 billion total stake in C-Limited. and it is still the largest holder today with about 17 % ownership of the company. That's, by the way, economic. I think their voting shares are about 10 % of the company. But the fear back then was certainly that Tencent might just sell even more of their stake. And how did they rebound from all that? Basically, a decision that we discussed very briefly in our Melly episode. So the CEO, Forest Lee, chose to stop the expansion strategy and focus more on the core market.

1:23:16Shawn O’Malley:So Sea Limited pulled out of France, Spain, Poland, Mexico, a lot of the South American markets as well, except for Brazil, and then concentrated capital on the main market. So Southeast Asia, especially Indonesia, Taiwan, and the only market left in Latin America, which was Brazil. And they also just cut costs aggressively. There are stories about the company literally switching from single ply toilet paper in the offices to kind of signal a culture of frugality. I got to say, that would have been a no go for me. But honestly, I mean, see needed to show that it can operate profitably. And if it takes single ply toilet paper, then that's what they need to do.

1:23:51Shawn O’Malley:So thousands of jobs were also cut. Maybe that was also a part of the cost cutting measures, maybe more impactful, but they certainly did turn around the business. I mean, in 2023, there was the first profit. It was not a lot. It was about$160 million, but it got a bit better. The year after that, we talked about almost half a billion dollars. And last year, they generated over one and a half billion dollars. So more than a triple of the prior year and all three business units, which is also kind of important, were profitable on an adjusted EBITDA basis. You don't really like adjusted EBITDA, but at least you're getting there slowly.

1:24:24Daniel Mahncke:And so the stock did recover significantly, even though we are, once again, in a somewhat similar situation with the stock just being beaten down, down 50 % from the most recent highs that were made last September. So anyways, I want to ask you more about Brazil specifically, because this is such a key market to a number of companies we're monitoring, right? Nubank, MercadoLibre, and C Limited. I know part of the reason you wanted to cover C is to really better understand one of Melly's biggest competitors. And it's just interesting because a couple of years ago, I don't think anybody would have thought that Shopee had any chance here and that they would fail, just like most of the other e-commerce players that had tried to come into Brazil.

1:25:07Daniel Mahncke:But you fast forward two to three years and Shopee is selling more items in Brazil than MercadoLibre and has almost exclusively local sellers on its platform, which is another real point of strength for them.

1:25:19Shawn O’Malley:It has been pretty astonishing what Shopee achieved in Brazil over time, especially if you consider that they pulled out of all other Latin American markets. So at least everything beyond some cross-border activity in some of those markets. But Brazil is so interesting because it's just a massive market and feels like a home game for many Asian e-commerce players. It's much more similar to Asia than, for example, Europe or the US. So Amazon kind of learned that the hard way. While I have no doubt they still could take this market if they wanted to, it just makes no sense. They would probably need to outspend Melly or Shopee by a factor of 10 simply because they have to change their model entirely to fit this specific market.

1:25:56Shawn O’Malley:And that just wouldn't be a high return on investment at all. So that's why it doesn't make sense for them. But for players who are native to these sorts of environments, Brazil is a huge opportunity. It has a population of over 215 million people, many of them are in the age range of 20 to 40, and you have an urban concentration of 87%, which is actually a lot higher than I thought. This matters for the logistics ecosystems, right? Because you don't have to go into these areas that are far away from the city and a lot more difficult to deliver to. It's also a$2.5 trillion economy, and e-commerce penetration is still only half of that of the US, Europe, or Asia.

1:26:34Shawn O’Malley:So you can easily expect the double-digit growth tailwind just from the industry going overall. Every listener who listened to our Melly episode knows all of that.

1:26:42Daniel Mahncke:You mentioned that Free Fire was also used as a customer acquisition tool, and apparently it was a huge success in Brazil as well. And thus, players and consumers already knew the C-limited brand when Shopee dropped in Brazil, right? So I imagine that helps a lot.

1:26:59Shawn O’Malley:The game had been enormously popular there for about three years before Shopee launched. So Brazilians already knew the C brand, even if they knew it through a game, not a shopping app. In Sao Paulo's internet cafes in 2017, apparently Free Fire was the most played game. So C had an affinity amongst Brazilian youth that most foreign e-commerce entrants had to spend hundreds of millions of dollars to acquire. So when Shopee launched, it had a brand shortcut and nobody else in the market could match that.

1:27:26Daniel Mahncke:And how would you say Shopee's Brazilian position looks today?

1:27:31Shawn O’Malley:Shopee is considered one of the big three, together with Melli and Amazon, although only Melli and Shopee continue to take market share. So Shopee currently stands at about 15 % market share. MercadoLibre stands at 35 % to 40%, depending on which number you pull. So Shopee turned it just a debita positive in Brazil in 2024, although it would still look different if you account for overhead costs. And Brazil was described as the fastest growing market in 2025, faster than any other Southeast Asian market. But Melly's Brazilian marketplace is structurally more mature. So it's been profitable for way longer and is running at much higher absolute margins.

1:28:09Shawn O’Malley:So Melly's contribution margins in mature markets, which is mostly Argentina, they exceed 40%. And Brazil's e-commerce business for Melly is not yet at that level, but it is significantly ahead of Shopee. the key gap right now is average basket size or average order value so shoppy's aov average order value in brazil is significantly lower than mellies due to mellies strength in mid to high value categories such as branded goods and electronics and for those shoppers what matters most is delivery speed and offering branded products so shoppy reduced buyer waiting time in brazil by around one and a half days year over year and in the big cities shoppy already has a sizable logistics operation, but the major differences are outside of the big cities.

1:28:53Shawn O’Malley:So Melli's network covers all major population centers. So you're talking Sao Paulo, Rio, Belo Horizonte, Porto Alegre, and many more, while Shopee has only three fulfillment centers, one in Sao Paulo, one in Recife, and one in Guana. So even though Shopee already covers half the space that Melli covers through its logistic network, it's very concentrated. And some estimates guess that Mali covers close to 40 % of Brazil's population and about 50 % of its GDP with their logistics operations, whereas Shopee covers only 14 % of the population and 17 % of the GDP.

1:29:29Daniel Mahncke:And what about money in Brazil? I guess that's also far behind based on your assessment that even in Southeast Asia, they'll not be able to reach the level that Mercado Pago has in Brazil.

1:29:40Shawn O’Malley:Well, yeah, in Brazil, Shopee Pay Later penetration is, as management put it, still in very early stages. So comparable to where Indonesia was years ago, money customized the product for Brazil. Notably, users share a single credit limit across Shopee Pay Later and cash loans, which is kind of different from how they do it in the Asian markets. And Brazil also has more credit data available, which kind of makes it easier for them to assess the risk of the users. But generally, it's just significantly smaller. So the growth has been strong and consistent. Management said that they expect Brazil to be one of the faster-growing money markets, money in terms of the fintech arm, going forward.

1:30:21Shawn O’Malley:In the meanwhile, though, Mercado Pargo in Brazil is already multiples of the size, growing rapidly still. And I think in the long term, the dominance on the payment front will help Melly to keep the dominant position also for higher quality goods on the marketplace.

1:30:35Daniel Mahncke:It's only taken us an hour and a half. So we're making breezy work of this, right, Daniel? But yeah, let's talk valuation. I think it's time to pull it all together.

1:30:42Shawn O’Malley:All right. So the three segments have very different margin profiles. And that's actually one of the most important things to understand about this investment. So Larena today operates at roughly 50 % EBIT margins. Again, it's the highest margin part of the business. It's capitalized, obviously. And money is running at about 25 times EBIT margins. Although we have to make a lot of assumptions here because, again, we don't have a lot of data. And Shopee, I'm modeling in my model at about 6 % EBIT margin near term, expanding to 12 % by 2030. So I do expect them to grow and also stop their investments at some point.

1:31:18Shawn O’Malley:And that would kind of work out to roughly 0.78 % EBIT on GMV in the early years. And then basically doubling by 2030. That's a slightly lower than what all the companies achieve in China. So I think it's realistic. And again, if you will look at Amazon or Melly, they're in the 4 % to 6 % range of EBITDA GMV. And the timing is a different story. I could very well imagine that C keeps investing for a while, and we still see the mature margins only later on, let's say in 10 years time. But for today's model, I kind of have to assume that in five years time, the most significant investments are behind us.

1:31:55Shawn O’Malley:Otherwise, we would just depress margins and earnings for the entirety of the model.

1:31:59Daniel Mahncke:And what do those assumptions produce? when you look at them in aggregate?

1:32:04Shawn O’Malley:Total revenue compounds at about 20 % annually up until 2030, which is actually below what the business has been doing in the past. And then if we apply an exit multiple law of 20 times EV to net profit, so we're taking the market cap and we basically subtract the cash, which I think is kind of conservative for a company that is still growing at those rates that I assume you would kind of get a fair value of roughly$140 per share today. And with a 20 % margin of safety, the intrinsic value target is about$111. So$85 today, that implies a compound annual return of approximately 15 % if the base case plays out.

1:32:43Shawn O’Malley:If you will also account for the cash that would be earned in the meantime, assuming no more aggressive reinvestments in the business, you could also argue that the EV is kind of lower, and thus you would get a high return. But you know, I'm not doing that to make model even more complex. I got to say though, if we don't assume any bare case scenarios, meaning a credit shock or a sudden shift in popularity or free fire, or maybe just a significantly faster expanding competitor, be it TikTok shop or anyone else that we don't even know yet. I do believe C limited is quite attractive here. That said, we mentioned how we wanted to limit our exposure to emerging markets.

1:33:18Shawn O’Malley:And by now we might also just want to limit our exposure to e-commerce platforms in general. So when I compare C to Melly. C is certainly cheaper, but I also believe that Melly is just the better business overall. And for a company that we buy based on our expectations of future growth, I would always choose business quality over valuation. Nevertheless, again, I do think C limited here looks quite attractive.

1:33:42Daniel Mahncke:I definitely have mixed feelings because yes, we do want to limit our exposure to these higher risk markets and business models to keep a balanced portfolio. But we also want to make sure that we're making the best bets, right? So I do see Melly as the better business between the two, while C offers a more favorable valuation today, you could probably say. So there is this classic question that arises of paying up for a wonderful business or getting a discount on maybe a marginally less wonderful business to dramatically oversimplify things. And Buffett, I think, would tell us to go with the former.

1:34:19Daniel Mahncke:So who am I to argue with him? But But seriously, the non-performing loans and their lending business, those numbers feel off to me. And I would really want to better understand their lending business before I could get comfortable with investing in C-Limited. And I also don't love that at the moment. The cash cow is this mobile gaming business where it's not like they have an empire of diversified games that are all popular. You're banking on one game to fund much of the entire business. So that feels incredibly fragile to me in a way. The vast majority of games out there have fleeting popularity.

1:34:57Daniel Mahncke:And so Free Fire is not a fad. It is something special to it. But point being, the games that people want to play can change on a whim. And you're competing with really a mind-numbing number of competitors that are all trying to build the next hit game and coming at you, right? So very, very intense competition around your cash cow. And so also, the lending business is just not as impressive as Melly's and has some questions around it. The gaming business is extremely concentrated. And then you have them dividing their focus across two continents for e-commerce, competing against companies like Melly that are singularly focused on only being the best at serving Latin America.

1:35:37Daniel Mahncke:And then on top of all of that, their e-commerce business seems so much more precariously positioned to me because they're competing with TikTok on impulse purchases, as opposed to being really the go-to destination for essentials. I talk about how much I love my Amazon Prime subscription. I have recurring monthly orders for toilet paper and paper towels on Amazon. And that kind of stuff, plus a bunch of other reasons, is what keeps me coming back consistently into their ecosystem. them. And that makes me certainly much less likely to ever churn, but also to spend more money with them. And so when your business is built on low ticket items and impulse purchases, sales volumes can just naturally swing dramatically on a win.

1:36:17Daniel Mahncke:You can get really, really rapid growth. You can also get really rapid decline. And so all that being said, I would sleep better at night knowing we own Melly, which we do, rather than allocating part of our portfolio to C Limited. And so maybe I'll come around on C Limited after I finished up my research on Grab and looked at the company from another angle. And that is a little teaser for one of our upcoming pitches. We haven't teased it enough already today. We will be digging into Grab in an upcoming episode. But anyways, I'm very much happy to pass on investing in this business for the time being.

1:36:54Shawn O’Malley:That's my Charlie Munger moment now. Nothing to add. I think we delivered but about a hundred minutes to our listeners where they can make their own picture of C Limited. I agree with all of it. I think for me, C Limited seems like a great business, but for us mostly it's now about having the positions compete with our new ideas. And the one it mostly competes with here is obviously Melly. And I do believe that Melly is a better business, a bit more focused further in strengthening its mode and its flywheel. And I personally prefer that. So without making it two hours a year, I want to end today's episode with the person who to some extent has started it, Steve Jobs, in the speech that inspired Forrest Lee to start C-Limited.

1:37:33Shawn O’Malley:Jobs said, your time is limited, so don't waste it living someone else's life. I feel like that's one of the best quotes you can use to end an episode. And with that, see you in the next one. Have a good day. Thanks for listening to TIP. Follow the Intrinsic Value podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs.

1:38:06Shawn O’Malley:Investing involves risk, including possible loss of principle, and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may Hold positions in securities discussed and may change those positions at any time without notice. References to any third-party products, services, or advertisers do not constitute endorsements, and the Investors Podcast Network is not responsible for any claims made by them.

1:38:37Shawn O’Malley:Copyright by the Investors Podcast Network. All rights reserved.

1:38:58Thank you.