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BRAZIL – 2023/05/23: In this photo illustration, the Shopee logo is displayed on a smartphone screen. (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)

Rafael Henrique | Sopa Images | Lightrocket | Getty Images

Shopee, the e-commerce arm of Southeast Asian tech giant Sea Limited, may face “greater pressure” from the combined forces of GoTo’s Tokopedia and TikTok in Indonesia, analysts said.

On Monday, GoTo and TikTok announced a “mutually beneficial strategic partnership” in Indonesia to serve micro-, small- and medium-sized companies, which make up more than 90% of business merchants in the country.

GoTo is a merger between Indonesia’s ride-hailing giant Gojek and the country’s e-commerce platform Tokopedia.

“We feel that the transaction may also place greater pressure on Shopee as it is also struggling to maintain profitability,” said Kai Wang, senior equity analyst at Morningstar in a Monday note.

Sea’s U.S.-listed shares closed 5.33% lower at $37.87 on Monday. The firm posted a third-quarter net loss of $143.9 million, reversing from a net income of $331 million in the previous quarter, as the company focused on growth instead of profit to defend market share.

As part of the deal announced Monday, Tokopedia and TikTok Shop Indonesia’s businesses will be combined into an enlarged Tokopedia entity, in which TikTok will take a controlling stake of 75.01%. Over time, TikTok will pump $1.5 billion into the entity.

“The shopping features within the TikTok app in Indonesia will be operated and maintained by the enlarged entity,” the two firms said in a joint statement.

“I think [the announcement is] pretty interesting, but at the same time, worrying times for Southeast Asian e-commerce or consumer tech space, especially for local incumbents in various countries,” said Venugopal Garre, managing director at Bernstein on CNBC’s “Street Signs Asia” Tuesday.

“Tokopedia or GoTo has essentially given up a direct presence in e-commerce and transferred it out to TikTok for a minority stake. Now, this is what the market did not like,” said Garre. “The reality is that the market was expecting GoTo to monetize [Tokopedia].”

The deal comes after Indonesia banned e-commerce on social media platforms in October to protect local merchants, forcing TikTok to halt its e-commerce service TikTok Shop.

TikTok strengthens

The GoTo-TikTok deal is a “masterstroke,” according to Jianggan Li of Southeast Asian tech research firm Momentum Works.

“TikTok Shop will gain full operational control, legitimacy of operating ecommerce and some useful local allies,” Li said in a Monday analysis.

Shopee needs a very clear strategy to win this game, and the key to winning might not be in ecommerce.

Jianggan Li

Momentum Works

“Purely on e-commerce products, operations and warchest, Shopee will not be able to beat TikTok Shop head on. Shopee needs a very clear strategy to win this game, and the key to winning might not be in ecommerce.”

Indonesia has 125 million TikTok users — the largest Southeast Asian market and second-largest global market after the U.S., according to the company.

Wang of Morningstar pointed to Sea’s pivot to growth over profits amid rising competition from the likes of TikTok and Alibaba‘s Lazada in Southeast Asia.

“Given that livestreaming e-commerce has grown faster on social media platforms such as Kuaishou and TikTok than traditional e-commerce platforms recently, we believe Sea will likely incur increased operating expenses,” said Wang, adding this could lead to “depressed margins for Sea in the medium term.”

Shopee did not respond to CNBC’s request for comment.

GoTo investors react

GoTo’s Jakarta-listed shares traded more than 3% higher at 89 Indonesian rupiah on Tuesday morning, after dropping about 20% on Monday.

“The 20% decline in GoTo shares after the announcement likely reflects market sentiments of the loss in upside from selling its e-commerce business and disappointment that GoTo will no longer be its majority shareholder,” said Wang.

“When this transaction came through, it was a bit disappointing for investors. So I wasn’t very surprised at the kind of scale back in the stock price we saw yesterday,” said Garre of Bernstein.

Morningstar lifted its price target of GoTo to 78 Indonesian rupiah on Monday, from an earlier price target of 63 rupiah.

“The increase in our valuation reflects that GoTo will no longer incur significant cash burn from Tokopedia and can now reach profitability in 2025, from 2027 in our model as we also removed the operating and corporate expenses that are associated with the e-commerce unit,” said Wang, adding that GoTo will be better-positioned to reach profitability.

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