23 | Punch Card Investor, Sea Ltd Deep Dive

My guest today is Punch Card Investor (@punchcardinvest). Punch Card is a private investor working in investment management in Singapore, with prior experience in M&A and investment banking. He is the author of the Punch Card Investor Substack blog where he does deep dives on companies in the technology, gaming, media and consumer sectors, and recently completed a series of articles on Sea Limited. In this conversation, we cover everything Sea Limited. From Shopee, Garena, SeaMoney, and everything in between, this episode has Sea Ltd covered.

I hope you enjoy my conversation with Punch Card Investor on Sea Ltd.

Show Notes:

[00:00:31] – [First question] – Why do a deep dive on Sea Ltd?
[00:04:03] – Sea’s background and goals
[00:06:15] – Free Fire’s life cycle risk
[00:13:02] – Free Fire’s expansion plans
[00:14:31] – Tencent’s deal with Garena and the future of it
[00:18:15] – Shopee’s business model and how they fit into Sea
[00:22:39] – Lazada and Shopee’s competitions
[00:25:47] – SeaMoney’s business model
[00:28:36] – FinTech regulation?
[00:33:34] – Sea’s management
[00:36:07] – Anything else from Sea to be aware of?
[00:38:00] – Punch Card Investor’s background
[00:40:26] – Most undervalued life experience?
[00:42:36] – Influential books?
[00:44:42] – Plans for the future?

Connect with Punch Card Investor:

Mentioned/Recommended Content:

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Kalani Scarrott (00:31): Alrighty, my first ever anonymous guest on the podcast today. So today I’m lucky enough to be talking with a Punch Card Investor. Punch Card is a private investor working in investment management in Singapore with prior experience in M&A and investment banking. He’s the author of the Punch Card Investor Substack blog, where he does deep dives on companies in the tech, gaming, media and consumer sectors, and recently completed a series of articles on Sea Limited. So today’s focus will cover everything, Sea Limited from Shopee, Garena, Sea money and everything in between. This episode will have Sea Limited covered. So please enjoy my conversation with Punch Card Investor.

Punch Card, thanks so much for being on today, but maybe I’d just love to start with Sea and why did you choose a deep dive on them in the first place? And what got you interested?

Punch Card (01:18): Sure. Yeah, so my involvement with Sea goes back several years. Actually when I was moving from Australia to Singapore, this is sort of back in 2018 and I was reaching out to my friends and networks here in Singapore. And one of the friends, here that I had was actually working in Garena at the time. So, which is, Garena is the gaming of Sea. And actually this was the first time that I heard about this business. And upon speaking to him, I was instantly pretty intrigued. I mean, back then in 2018, it was a business that was wasn’t very, well-known it only IPO, not long ago, sort of in 2017. And you know, it wasn’t really performing that well, it was down about 50% from its IPO price, but, you know, I was pretty intrigued. I mean, here was this business that was, you know, exposed to three structural growth trends of gaming, e-commerce and digital payments.

And on top of that, it was exclusively focused on, Southeast Asia. Which is one of the fastest growing regions in the world. And I think my perspective was there was nothing really out there like that in the public domain it was pretty unique. Yeah. And I guess I like most that are early stage tech companies, I liked the fact that you had a very profitable gaming core and back then in 2018, you know, when the share price is $10 or $11, all of the valuables really attributed to the gaming business, I mean, just even under a conservative valuation. And so you’re really getting Shopee, which is the e-commerce business and the payments, for free. So I invested at that point and I think most listeners from there will be well aware of the phenomenal growth that that business has had. It’s become now the largest, tech and internet company of Southeast Asia.

And it’s really become the, I guess the darling of Singapore’s technology scene and more broadly of Southeast Asia. And it’s become by far my largest position and the company that I follow most closely. And it’s just been fascinating to watch their growth and has been very impressive, you know, tracking this, this management team and what they’ve done. And certainly when I started writing my Substack blog about five months ago, I knew that this is a company that I would want to cover at some point. And so what I’ve been doing over the last two to three months is writing a series of articles, on this business, which I’ve, just completed. And that’s been a very fruitful process for me as a, you know, you think you understand something, but until you go to write about it, you actually realize actually there’s a few gaps in my knowledge. And, I think the whole writing process, particularly in a public context really helps to structure your thoughts. And it certainly helped me, deepen my understanding of the business and revalidate the investment thesis for me. So yeah. So here we are.

Kalani Scarrott (04:03): So yeah, that’s perfect. So before we dive into each individual arm of Sea could you just maybe walk through and set the scene like what’s happening, who Sea Limited are and what they’re trying to achieve, because I think that backdrop is pretty important of how their whole ecosystem works, I guess.

Punch Card (04:14): Yeah, sure. So Sea Ltd is now about $160 billion market cap company. As I mentioned, it’s the largest tech and internet company of Southeast Asia and just at a very high level, it’s essentially three businesses. So you’ve got Garena which is, the gaming business, highly profitable, almost unheard of 60% EBITDA margins. And it’s producing about $3 billion of cash earnings a year. And a large part of that is due to the huge global success of its self developed a game called Free Fire. Now, the basic dynamic of this business is that these earnings from Sea Ltd, are being reinvested in much higher growth, but unprofitable, Shopee which is the e-commerce business and Sea money, which is the FinTech business and Sea is not really focused too much on, you know achieving profitability of these businesses at this stage. The really the purpose for them is to try to aggressively scale these businesses.

And, you know, with Shopee they’re looking to really enhance their lead in Southeast Asia and now increasingly expanding globally as well. And really the benefit of having a highly cashflow generative, Garena cash engine is that they’re able to have the luxury of being able to focus exclusively on scaling of these businesses and not monetizing too soon. And I think that is a significant advantage that Sea Ltd has over its regional competitors, like GoJek in Indonesia, Grab who as of yet do not really have a profitable core businesses. And, you know, one other key sort of you know, important thing to understand is that the company is founder run by a founder and chairman Forrest Li. And under him is a very kind of capable management team who is very young, um, you know average around 40, you know, so it’s very young in a business sense, and then ambitious, driven. They’re very strong executor’s and generally regarded as one of the best management teams in the region. And so I think that’s certainly a key part of, most people’s investment pieces for this business.

Kalani Scarrott (06:15): Maybe we’ll touch on management later, but we’ll start with Garena. So with Garena, for people that don’t know, Garena’s basically the cash engine funding the loss-making growth businesses, and the majority of Garena’s earnings single-handedly come from Free Fire, their Battle Royale games. So should investors be concerned if at all that Free Fire’s lifecycle is coming to an end? Or how do you view the gaming life cycle and what that means for the rest of Sea, I guess.

Punch Card (06:36): Yeah, that’s a fair question. And I think that’s really, you know, I would say that probably forms the crux of any bare case argument for Sea that, you know, maybe a 60 to 70% of the earnings are coming from Free Fire. And then, you know, if that game is now in its fifth year, so if the popularity of that game unwind, then that will bring down, you know, the cash engine of Garena and before all the, you know, the other high-growth unprofitable businesses, Shopee, Etsy money, get to profitability. And so that will sort of you know, potentially hold the entire business. And this is something I’ve kind of, you know, spent quite a bit of time looking at. And, so my view is that it looks like Free Fire, you know, is going to become one of the enduring franchises in the battle Royale genre.

I mean, typically what you see with gaming is that there’s a very kind of heavy Pareto principle in action, where you’ve got a small minority of games, say two to three games in every genre that the market tends to consolidate around. And that’s due to strong network effects, scalability and popularity, right? And the rest of the games generally don’t even really make it past one or two years. And it looks like in the battle Royale genre, the big three are going to be Free Fire, PUBG, and Fortnite. And in fact, if you look at sort of Google search interest and total active players, I think Free Fire seems to be outperforming. And then I guess the other point is that if you look at, you know, top 10 multiplayer games, as of today, some of these actually quite a lot of them are over a decade old, you’ve got League of Legends, which has been around since 2009, you got Call of Duty mobile.

I mean, that’s based off a very old franchise, you know, games like Counter-Strike Go. So these games are still hugely popular, even though these names and these are the franchise of themselves are very old. And the reason this can happen is that these sorts of games are multiplayer and social first, right? Which means that their play ability is significantly enhanced as every time you play, it’s a new experience. It’s very different to traditional single-player game. So I think this whole idea that, you know, games kind of have a sort of a short life cycle. It’s probably more orientated around these traditional single player games, which you can finish within a few hours. You know, that’s certainly not the case with multiplayer social games like Free Fire. And I guess generally, you know, the business model evolution has seen that instead of like, I guess, traditional games where you’re paying up front for them and all of the revenues booked up front and then they’ve finished them in a few hours with games like Free Fire they’re free to play.

So, which means that they can scale incredibly well. And then they monetize through in game purchases. So things like skins and weapons and, and various virtual currencies, uh, et cetera. And so what you get is, and what you end up getting is a bit more of a recurring annuity, like revenue stream, which can last for many years. And I guess the other key point is that the multiplayer aspects certainly enhances the playability, but also with these sort of games, you have kind of a live ops development concept where there’s really fast development iteration cycles, where they’re constantly updating the games, content, introducing new themes, new sort of collaborations, and all of this helps keep the game sort of fresh. And it’s sort of the content evergreen, right? And there’s a bunch of other things that, Garena is doing to really enhance the longevity of Free Fire.

And I think, you know, you’ve seen you see them now on earnings calls, increasingly referring to Free Fire as more of a platform rather than a game. Right. And it’s certainly been the case with, so the new enhanced version of Free Fire, which is Free Fire max, which is, sort of not only comes with, you know, enhanced graphics and sounds and effects, et cetera, which makes it more attractive to higher spec, phone users. But it also comes with a new feature called Crossland, which is, allows people to create their own maps and other user-generated content. And that’s what I mean, it’s now becoming much more of a platform. On top of that they also do, you know, various in-game events, you know, things like parties, like recently they had the fourth year anniversary party a week and sort of, you know, kind of just go in and hang out almost like in a multi-verse type.

You know, I know it’s a buzzword, but it’s, that’s kind of what they’re almost trying to emulate with these sort of experiences. So I think when you kind of look at all of this in totality, it seems to me that this is a franchise that will have staying power. You know, there’s probably, you know, one kind of maybe concern that’s probably come out of the quarter three results is that it looks like that the active player base growth has potentially slowed at least on a sequential basis. It’s slowed considerably. Um, and so, you know, there’s definitely, there’s probably a bit of a concern coming out from quarter three results, whether, okay, does that mean that there’s a slowdown in Free Fire? So my personal view on that is in the context of the last 12 to 18 months, given the absolutely exceptional growth that they’ve had, you know double their active user base in the last 18 months, a slow down is probably to be expected somewhat.

And even if the active user base now slows in, consider now over 730 million people, which is huge now. So one in 10 people in the world are literally playing a Free Fire, even if the active user base slows, this will quite early in the monetization journey. So what the company will probably be focusing more on going forward is actually, you know, not so much maybe growing the user base, but enhancing monetization, right? And so that means increasing the minimum number of people that are paying for the game. So at the moment, that’s just under 13%. 13% of Garena’s active users are actually paying users, which is a fairly low number. So if you look at some of their more mature markets where they’d been around for a while, so Indonesia, for instance, that paying ratio, there is 17%. So that tells you that there is quite a bit more upside potentially to increase the average paying ratio across the business. So I think even if the popularity of the game does start, you know, slowing, I think the actual ability to monetize and earn revenue can still persist for quite a number of years. And I think certainly many games have shown that they will monetize well past their peaks in popularity, you know, games like GTA and World of Warcraft. So from that perspective, I’m, you know, I’m fairly comfortable that this is as a game with staying power.

Kalani Scarrott (13:02): If they are going to try and continue growth, and you mentioned Free Fire max, but maybe a reason for Free Fire’s early success was its lowest specs that needed for the game in mobile first. So given it’s extremely popular in Southeast Asia, Latin America, and other emerging markets, how do you think maybe they expand into North America and Europe? And is that even on the radar for them? Or are they trying to focus on monetization first? How do you view that?

Punch Card (13:23): Yeah. So actually they already are in the USA. And that game, remarkably has been doing really well. So for the last three quarters, it’s been, the highest grossing battle Royale game, which is pretty impressive. I mean, this is just the kind of original version of Free Fire. So, and it’s out competing heavyweights like PUBG and Fortnite, despite it’s much more inferior, more cartoony type graphics. So what that suggests to me is that just on gameplay alone, this, game can do well, which gives me a lot of comfort. And then on top of that, when you add on Free Fire max, which the whole point of Free Fire max is that it’s designed for higher spec phones, it improves the graphics and, and the special effects. So, in a way it’s now trying to tap into that, you know, the higher spec type demographics, right? And so in a way, you know, that game should also help expand the TAM. And that’ll probably be a key part of trying to penetrate those more developed markets.

Kalani Scarrott (14:21): Yeah. And to be honest, I think people forget it at the end of the day, it is a mobile game. It’s not trying to compete with PlayStation, Sony and PC games, like it’s its own thing. So it doesn’t have to be the highest spec.

Punch Card (14:30): Exactly, exactly right.

Kalani Scarrott (14:31): Maybe in terms of other sources of cashflow for Garena, is it naive to think that Tencent will renew their distribution deal with Garena in 2023? And why wouldn’t Tencent take it out themselves and maybe just give some background, I guess, and some context around the deal. For people who might be unfamiliar.

Punch Card (14:45): Yeah, sure, so Garena was originally founded in 2009. So, you know, before Sea Ltd became a company, it was actually just Garena. And shortly after that Garena managed to secure their first publishing deal in the region, which was Riot games, League of Legends, which is a popular MOBA game, Riot games, at that point had a Tencent as a big investor and so that deal got the attention of Tencent and Tencent shortly after invested 40% stake in Garena. And as part of that date, you know, they got a sort of distribution agreement with Garena. And in 2018, that was formalized into a sort of, kind of proper agreement where what Garena gets is a right of first refusal on any Tencent and game, and to be able to distribute any Tencent game in the region.

Right. So what that means is that Garena can kind of look through Tencent’s portfolio. You know whether that’s Tencent itself as a developer, any of its own or any of its subsidiaries, like Riot games and choose to publish them in the region. That is a five year agreement. So, you know, it’s meant to be expiring in 2023, and it’s certainly a risk. Is there a chance that Tencent may not renew their agreement? So my personal view on that is that it’s probably fairly low risk. You know, Tencent stake is now around 21% has been downloaded a lot, but is still a very substantial stake. And so I feel like that brings in a pretty strong alignment of interests. would they, you know, do something to destabilize, you know, Garena and Sea probably unlikely, but look, there’s, always the risk that they may want to, you know, pursue self-publishing in the region themselves over the longer term.

I think that’s not easy because, you know, Southeast Asia is a highly heterogeneous market. All the countries are so different, just in terms of culture and language and religion and, you know, the state of economic development, et cetera. And so it’s not easy to distribute across all of these highly, you know, different countries. And Garena has been doing this for over 10 years. And so they’ve really built up a capability and local knowledge and know-how in doing so, but look, having said that, you know, Riot games, which as I mentioned is owned by Tencent. I mean, they’ve in, I think in 2019, it was, you know, they sort of said, we’re going to be self publishing our games in the region from now on, so Garena gets to retain League of Legends.

Uh, but all new games Riot games will look to, you know, they’ll sort of invest in their capability of being able to sell publishing in the region. And, you know, is there a chance that, you know the rest of Tencent follow suit? I mean, possibly, but as I said, I think that kind of a strong alignment of interest with the large stake, should help manage that risk. And even if they were to do that over the longer term, I think they wouldn’t do it in a way that’s sort of disruptive to Garena. I mean, maybe they’re doing it on a gradual basis and maybe, you know, grandfather, some of the older you know, some of the existing games that Garena is already distributing. So, you know, Garena will get to retain them. So I just don’t think that they do it in a very sudden way.

Kalani Scarrott (18:15): Yeah, fair call, they’ve got that 20% at the end of the day, so why rock the boat? Maybe we’ll touch on, we’ll move on to Shopee after Garena. Obviously a lot of the cashflow from Garena gets funneled into other things like shopee and Sea money, but with Shopee maybe to get started on them, like, can you just give a bit of background to their business model and what their plan is and how they fit in with the Sea’s ecosystem?

Punch Card (18:32): Yeah. So Shopee is a sort of the e-commerce platform of Sea. And so it started off as a CTC marketplace. So therefore focusing on small sellers in a mom and pop type sellers, and it’s a marketplace. So basically it doesn’t really take inventory risk. It helps facilitate transactions between buyers and sellers and takes a commission, right? So therefore it’s a very asset light model and very scalable model. Um, I mean, they do have some inventory, you know first party inventory, but that’s a very small part of their GMV. So most of shopee’s, will find the large majority, majority of shoppies GMV is, kind of the marketplace model. In terms of what their plans are. So they’re, I mean, right now, Shopee’s become the number one or maybe number two, potentially, depending on which metrics you look at Indonesia, that has been it’s number one across all the other countries, in terms of market share.

So, you know, the focus is on really enhancing that lead in Southeast Asia, but the volts are now been expanding into other markets. So Latin is a big one. So they entered Brazil and then Brazil in 2019, and that’s now actually, you know, after many years of them calling it just an experiment and, and a trial they’re now actually, um, really changed the labeling to that It’s a core market, which is the first core market outside of Southeast Asia and Taiwan for them. So that shows that they’re, you know getting really good sort of a success there. You know, and they’re expanding in other Latin countries and Mexico, Chile, Colombia, and then more recently they’ve expanded into, into Europe as well. So in literally in the space of four, in the space of two months of this year, they’ve entered four markets, Poland, France, Spain, and any India as well.

So, yeah, so I think, you know, that’s really kind of, you know, the focus, you know, they’re probably quite like the answer, other markets in the future. Really the focus of this business is just on a growing kind of scale. And, I think in terms of how it fits in with Sea’s greater ecosystem, you know, it’s a interesting question because, I mean, certainly one may ask, like, why did they start an e-commerce business? They started this business in 2015, right. And someone may ask like what’s the synergy, or the fit there with the gaming business Garena? And I think the thread that sort of ties together, all of these businesses, is that Sea and really forcefully, you know, their vision is to use technology to kind of better the lives, you know and meet the unmet needs of populations and demographics in emerging markets.

I mean, initially that was in Southeast Asia, but now it’s gone more global than that. And whether that’s through the provision of very accessible gaming, like in Garena or, with Shopee where they supported a need, that was really underserved. So the kind of, you know, serving kind of small sellers and mom and pop type merchants, you know, Lazada who was the original incumbent, you know, their focus was more on, uh, you know, kind of a really high end electronics and branded apparel, et cetera. And so Shopee realized a need in this low end of the market, and that’s where they’ve come in. And so, and then same thing with, you know, Sea money as well, like Sea money, you know, what the purpose of Sea money is to help, meet the needs of the large parts of population in Southeast Asia that are unbanked or underbanked, which is about two thirds of the population. So I think this has kind of, you know, your question of how to Shopee tied to the ecosystem. I think, you know, all these businesses are sort of tied together through this vision that Forrest Li has of using technology to help enhance the lives of people in these markets. And yeah, really fill a gap.

Kalani Scarrott (22:39): Yeah, for sure. And you mentioned Lazada, and so obviously Shopee’s competition. Like, who do you feel is Shopee’s greatest competitor? Cause they’re very different. Like Shopee is very mobile first, Lazada started more web-based browser-based. So who do you think maybe specifically with the ASEAN region, who do you think is the biggest competitor and their threat? Because Lazada is known not for localizing their product offerings. So like how do you view that competition landscape, I guess?

Punch Card (23:03): Yeah. I mean, there’s a few sort of key regional players, so Lazada’s certainly one. Lazada used to be the most dominant company until Shopee, you know kind of decisively overtook them in the last two years. I mean, it looks like certainly that Shopee has a pretty handy lead over them now, but I don’t think Lazada is to be completely dismissed. I mean, they’re owned by Alibaba at the end of the day and Alibaba’s got more than enough capital to keep you know, funneling into, into Lazada. And, particularly now with the kind of political troubles back at home and the tough competitive situation, they’re probably much more focused now on international growth. And so I think Lazada is a very important channel for them for that. So I don’t think we should be entirely dismissing them.

And I think they’ve certainly learned from some of their mistakes in the past. Where they’ve really failed on adequate localization and attracting, you know, local management teams and helping sort of certain merchants in a good way. I think they’re really focusing on fixing these problems. And the other key competitor is really, you know, Tokopedia, Go-Jek in Indonesia, which is now called GoTo. You know, that’s probably the more, I would say the more serious competitor to Shopee. The reason is because Indonesia is the largest e-commerce market and probably the most important e-commerce market in the region and GoTo is the local incumbent, you know, depending on which metrics you look at Shopee and GoTo the sort of number one or number two, depending on how you look at it.

This is an interesting one, because I think, you know, with the fact that they’re now merged with, Go-Jek, you know, they have the potential to be a much stronger competitor. You know there’s synergies there between being able to leverage, you know, Go-Jek’s transportation fleet, which is hugely important in e-commerce. Um, and also this company’s not going to have sort of capital problems. I mean, they’ve just raised a $1.2 billion pre IPO round, and the company is going to list, initially in Indonesia next year, where they’ll probably raise a few more billion and they’ll probably, it looks like they’ll probably do a second relisting in the US later as well. So, you know, they are not going to be there’s not going to be shortage of capital for them. Um, so again, you know, this is a sort of very kind of powerful competitor to Shopee. I think the one key advantage that Sea has, as I mentioned is that cashflow generation engine of Garena. Which means that they can be kind of aggressive on things like pricing and sales and marketing. But yeah, look, that’s broadly the landscape.

Kalani Scarrott (25:47): Yeah, so maybe we could do the same deal for SeaMoney now. So maybe, could you explain a little bit about who SeaMoney is? What they’re doing, what are their goals are, and again, how they sort of fit in with everything that Sea limited is doing.

Punch Card (26:00): Yeah, yeah, sure. So SeaMoney is the FinTech business of Sea and originally just started off as a payments tool. And that’s still probably the more important part of this right now, of SeaMoney. The E wallet that’s attached to Shopee and so it helps facilitate both on platform transactions for Shopee and increasingly that penetrating into offline merchants as well. And so they’ve been very aggressive on pursuing that, but generally, you know, payments is somewhat of a commoditized revenue stream. I mean, everyone’s providing, everyone’s capable of providing that on an equally kind of a comparable basis. And so really how you add value with the FinTech business is to expand into value added services and really, you know, the important one here is digital banking.

So providing services such as buy now pay later, as well as consumer and merchant loans. And so I mentioned before the huge amount of unbanked and underbanked parts of the population in Southeast Asia. So there’s a real big opportunity here for Sea money to help facilitate those needs. And, you know, one of the reasons tech players are generally getting into the space is because they’ve got these large user bases that they’re able to leverage, and they’ve got a large amounts of data and information on through the transactions that are facilitated on the platform. They’re able to have a good insight into consumers and, you know, from a kind of, you know, credit scoring and risk assessment perspective. And so, you know in some cases better than the better than the banks.

Um, and so therefore they’re in a good position to be able to provide things like lending, in a very frictionless way using kind of just mobile apps and, you know, digital tools without having all the costly infrastructure that traditional banks require. Um, and so, yeah, that’s certainly a key part of Sea Money’s kind of growth plan and, you know, and then the likely to be other value added services that they’ll offer as such as, you know, things like funds management and insurance and that’s really the objective it’s kind of to start off as a payment tool, initially an on-platform, payments or for facilitating on-platform transactions expanding to offline to increase the use cases and then really kind of work, build up from there into value added services.

Kalani Scarrott (28:36): Just curious, how tough is the regulation in that space? Like, is it more of a case of waiting for licenses with banking license stuff to get started? Or can they just go as quickly as they want? Like, how does that work?

Punch Card (28:45): So typically, you know, you really, you do need a digital banking license. I mean, you can potentially just start sort of offering loans, et cetera, but the problem is that, you know, you may get tripped up and get into sort of get into some trouble doing that. And so generally the more prudent thing to do is to you know, wait for the regulator to issue whether it’s digital banking licenses, as Singapore has done or guidelines around digital banking, which is what Indonesia issued this year. And so, yeah, look, I think generally the regulatory landscape in Southeast Asia has become a more supportive of the whole kind of digital banking and digital payment space. And I think the reason for that is that they see the value that, you know, the digital tech players can offer.

You know, I mentioned before the huge problems around underbanked an unbanked people, and I think they realized that how efficiently these sort of players can actually help sort of fix these problems and provide these services. And so generally the landscapes have been more supportive. So Singapore’s issued digital banking licenses last year, Indonesia, issued guidelines around digital banking. So that means that there’s not much more certainty around how you can launch a digital bank and what you need to do so. Malaysia is also kind of in the process of issuing digital banking license. And I think Thailand is either in the process or will be considering soon. So generally the landscape looks to be becoming more supportive of the FinTech space, more generally.

Kalani Scarrott (30:30): It’s a tough little space, Southeast Asia isn’t it? Like so much different regulations. And then, yeah, just managing everything. To maybe pull on the thread about sort of promotions and the aggressive marketing, maybe this is a combined question for both Shopee and Sea money, but I remember reading about how in Vietnam, it’s common to download multiple E- wallets, pulling up whichever has the best discount and then use that for shopping. But the challenge is often getting users to stick or continue using an app after those promotions end. So how does maybe Sea money or Shopee get their users to stick? Is it just a case of scale? Or how do you go about it, do you reckon?

Yeah, so that’s a great question. I think I mentioned before that you could say that the payments side is somewhat commoditized because everyone’s offering a kind of a, you know fairly kind of equal type product. So then how do you differentiate? So one part is, you know, yes scale in the sense that, you know, you want to have an ecosystem that’s got a very high use case. And so that’s certainly the case with Shopee and e-commerce, where you people tend to transact on it a lot. And certainly the case with things like ride hailing for Grab, right, which is the other major regional competitor. The more you use these sort of services, the more likely you are to want to just have a wallet with money on it to you know, kind of reduce friction, et cetera.

But then again, you know, how do you incentivize people to use the wallets? And I think, that’s where the aggressive kind of marketing comes in really in the form of promotions and discounts. So for example, you know if you use Shopee you can get, a Shopee pay, the wallet. You can get Shopee coins, which is the kind of, you know, I guess the virtual sort of currency that you can use to offset your purchases on Shopee. So that’s been a, very kind of important part of scaling Shopee pay. And really the idea is that once you get people kind of habitually used to using the wallet and then hopefully, you can sort of pare back these discounts over time since then, it’s really up to, you know, having the best sort of user interface and having the widest network of merchants, offline merchants, et cetera, to really increase the use cases.

So therefore, after you get the person through the door with the sales and promotions, it’s really comes down to execution, to sort of keep them there. So that’s really, you know, the game plan. And I guess the other key reason for why, you know, why these sort of companies, pursue wallets is that, you know, when you have some money on that account, you know, maybe subconsciously you’re more likely to keep coming back to that platform. And actually, you know, just sort of always sort of searching through more products and whatever else, because, you know, you’ve got some money there. So, you know, it does create a bit, more of that stickiness. And so I think, yeah, these are all sort of the types of effects that Shopee pay is going for in trying to retain customers.

Kalani Scarrott (33:34): Yeah, and maybe we will finish with Sea’s management. So how critical do you think Forrest Li and Chris Feng are to Sea limited success, like Forrest Li’s taken a bit of a different role recently, like last few years, more visionary founder, but how do you, how critical do you think they are overall to Sea’s success?

Punch Card (33:48): Hugely important. I mean so Forrest Li, he is really the visionary leader behind the firm and he was one of the original co-founders back from 2009 with Garena you know he really helps set the strategic direction of the firm. And I think just another point around his importance, the fact that Tencent pledged all of their voting rights to him, I mean, really highlights to me how important he is to the business. So even though he’s got, you know, about 11% shareholding, he’s got well over 30% of the voting power. And so you know he is hugely important to the business. Chris Feng, is probably the second most important person. So he is the head of Shopee and more recently promoted to the head of Sea money in 2019.

And actually in the third quarter, he was promoted to the president of the company, which effectively means is now formally the 2IC, to Forrest, and he’s still got the roles of running, Shopee and Sea money, but now he’s got a bit more of a kind of you know, oversight role across all the businesses and, helping trying to kind of create synergies between which works well because he also, before he started running Shopee in 2015, he was working in the Garena mobile business. So he’s obviously highly familiar with that business as well. I think there was a great move to put him in as a president, because he was often seen as a key man risk. I mean, he is really the, guy that’s driving Shopee and Sea money. As I understand it, Forrest Li’s pretty, hands-off he kind of lets Chris really run the operations day to day and like the whole success behind Shopee and SEA money more recently has been really driven by Chris. Um, and yeah, so the fact that he’s now been promoted to president, I think, is a recognition of that and is a great way of helping the retaining in the business. The only thing I would say is that at the moment, his shareholding is less than 1%. So I really hope that with this new promotion, they kind of fix that and give him more shares. Cause I think that’s really something that needs to happen. To kind of help ensure that, you know, his retention in the business.

Kalani Scarrott (36:07): Yeah, no interesting point. And before we wrap up with Sea limited, is there anything we haven’t talked about that’s consequential about Sea’s future in your opinion?

Punch Card (36:14): Yeah. I mean, with tech businesses more broadly, but it’s certainly a business, like Sea you know, it’ll likely evolve in a very kind of non-linear and very, kind of difficult to predict manner. We as humans sense of thinking in a very kind of linear way and just extrapolate, you know, what’s in front of us, but if you just look at I mean, I think when you do that makes forecasting of a business like Sea really fraught with danger. I mean, if you just look at the history of Sea alone, right, the fact that they would be able to produce literally kind of strike lightning with a bottle, with Free Fire to become the biggest game in the world, you know, that in 2015 they would launch a Shopee which would become the largest, you know, e-commerce business in Southeast Asia. Later on that they would expand into, beyond Southeast Asia into kind of Brazil and now increasingly other markets as well.

I mean, I don’t think anyone would have had that in their models, two three years ago. Right. So, you know, it’s really hard to predict how this business will evolve and even nothing two, three years from now would look very different to today. So I think, you know, what does that mean? When there’s so much uncertainty with the business like this, what do you anchor to it? And I think it really does come down to management, you know, as the stewards of this business, I think you know, you need to be able to trust them that they’ll do the right things. Uh, they’ll act in the interest of shareholders and with a long-term vision and they’ll continue executing well and really sporting opportunities as they come up and, and capitalizing upon them. And I think, uh, I’ve certainly got a lot of comfort that whatever happens, I think Sea is in good hands with Forrest Li and his management team.

Kalani Scarrott (38:00): Yeah. That’s great. Great way to wrap up. So yeah, maybe to finish off before I get my closing round of questions, maybe just talk about you as much as you want to, obviously you’re anonymous, but you’re in Singapore now from Australia. Like, where are you now? What are you doing? And how’d you get here? Tell as much as you want, tell us a little as you want. It’s up to you.

Punch Card (38:14): Yeah, look, I’ve got a pretty sort of traditional finance background. So I did a sort of commerce finance, back at Sydney university. And I joined, investment banking upon graduation, prominently doing TMT and consumer sectors. And then I had several little kind of buy side and corporate MNA roles in Sydney, as I mentioned in 2018, I moved to Singapore to join a large investment management platform here. And so, you know, predominantly my focus is on private equity. So looking at private equity deals, you know, all this public market stuff I’m doing is really more for my, kind of my own interests and my own passions. I’m certainly not a fund manager or an equity research analyst. Even though I think there’s definitely a lot of you know, synergies between sort of private equity and then kind of looking at public markets. I think the way I approach public market investing is with a very kind of private equity, like mindset, which means as you can probably sort of tell from my writing, I tend to go into a lot of detail, almost forensic amount of detail, and I’m really focused on, you know, potential returns going forward. So yeah, that’s broadly where I am.

Kalani Scarrott (39:26): Yeah. And if I’m allowed to ask, so from Sydney to Singapore, what was your thought process? Was that always a plan or what was your decision making behind that? I guess?

Punch Card (39:33): Yeah, so yeah, I guess both sort of personal and on the professional side of things. But personal side is that, yeah my wife’s actually Malaysian. So, family in the region, and then on the, I guess on the professional side, it’s, you know, as you probably know, I think with Australia does tend to be, the market tends to be a bit more kind of domestic and narrow focus. And I think, um, you know, coming to a place like Singapore was always pretty exciting to me because I think it’s a much more international market. Singapore itself is very small. So it’s forced to sort of, kind of, you know, look internationally. And some, a lot of the coverage that you do here is not just Southeast Asia, but I think, uh, you know, really global. And so I think that part of it has been really exciting for me just getting exposure to new types of businesses, business models, sectors, and markets that I think from Australia is probably a little bit harder to get that access.

Kalani Scarrott (40:26): In terms of your life experience. What’s been the most undervalued life experience that maybe university age students don’t give way to, like what’s an underrated skill or experience that you think they should have?

Punch Card (40:35): Yeah. I think, you know, something like networking is hugely important. I think, in a university and maybe certainly that was my experience, but I think it’s very easy to just sort of stick to your group and really kind of stick to people within your discipline. But I think it’s a really good, really good idea to sort of branch out and meet people across different fields, different disciplines, get exposure to different mindsets and way of thinking. And it’s not just university, I think even as you do these, you know, internships in universities, or you get your first sort of, you know, graduate jobs, just also having kind of conversations with people across the business and in different teams and just learning a bit about what they’re doing and, and, and just the, you know, the business more broadly. I think that’s hugely important, I mean, you don’t know what sort of relationships you’ll be able to create and, you know, I think you want to welcome some of that serendipity into your life. So generally I think networking is a skill that will set you up. Um, it’s hugely important in life.

Kalani Scarrott (41:40): Yes. So how have you gone about it? Or how do you think others should go about it? Is it just putting your work out there, like with your writing or, how do you think, maybe?

Punch Card (41:46): I mean, that’s certainly a great way. I mean, I think that’s been one of the really unexpected benefits. I think as I started writing this blog five months ago, I mean the amount of people that have kind of reached out and wanted to strike up conversations and just like this one, so that’s been, I think that’s a really great way of doing it, but yeah, but otherwise I think just kind of putting yourself out there and reaching out to people, um, I think generally I find people want to be pretty kind of helpful and, you know, generally people want to sort of ,kind of, you know, pretty happy to get to know you and help you out where they can. And I think, just sort of taking the initiative to do that, right. So it’s always, probably much more comfortable to sort of not do that and just stay within your circle, but I think really putting yourself out there, yeah, just trying to sort of strike up those relationships and conversations.

Kalani Scarrott (42:36): Yeah, that’s a great answer. And in terms of you and your worldview, has there been any maybe books or experiences or anything that’s been influential in shaping your worldview?

Punch Card (42:43): Yeah, so I think really, maybe probably two books in particular have been the most impactful on me. So the first one is Antifragile by Nassim Taleb, the author of the famous, Black Swan, the ideas in Antifragile sort of extend on his ideas in Black Swan and really, you know, what they’re about is systems or setups, where things like volatility and shocks, help strengthen them. And I think, you know, as opposed to fragile systems, which, kind of, so tightly bound that with any volatility or shocks, they, get destroyed or even just robust systems, which kind of stayed the same. Um, and I think what I like about this idea of antifragility, is that it just applies to so many different aspects of life, and the world, whether it’s business or markets or, investing, um, even things like fitness and health and really personal lives.

I think the more you can kind of put yourself in a position where, you know, you welcome a bit of volatility and testing periods to your life, because it helps strengthen you and evolve you. I think the more you can do that, I think the more successful your life will be. And the second book is in a Poor Charlie’s Almanack, which is a popular book Berkshire Hathaway’s vice chairman, Charlie Munger. He is an incredibly intelligent person and, you know, he was really a learning machine and he espouses the ideas of worldly wisdom and having knowledge across a broad set of disciplines. And I think that book, you know, I read it quite a few years ago. I think it really set me on a path of wanting to read more widely and learn about a whole range of ideas, you know, outside of my field. And I think that’s, you know, that’s hugely important in life.

Kalani Scarrott (44:42): Yeah, No two great book recommendations. I don’t know how much you can expand, but what’s your plans or visions, I guess, for the next five, 10 years or going forward? Like, what areas are you most curious about?

Punch Card (44:51): Yeah, I think probably the focus for me, you know, sort of five to 10 years is I think really just to keep, you know, improving my skills as an investor, both in public markets and private markets. Which means, you know, continuously learning, you know, staying curious and doing what I’m passionate about, which is just learning about new business models, new companies, new sectors, new markets. I think that’s the part that really interests me and I hope to sort of keep writing about it on my blog. So I think that’s really it.

Kalani Scarrott (45:20): Yeah. Perfect. Oh, and before I forget anything you want to plug? Where can people find you?

Punch Card (45:24): Yeah, so Twitter, @punchcardInvest. And yes I’ve got a Substack blog. You can just Google Punch Card Investor, or just the find the link on my Twitter account.

Kalani Scarrott (45:36): Perfect. Punch Card thank you so much today. I’ve had like, yeah a blast. It has been great for me, so cheers.

Punch Card (45:40): Really enjoyed it. Thanks for having me.