New Indonesian Law Should Protect Sea and GoTo in Long Run, but Short-Term Challenges Remain

With reference to the July 27 Indonesian government regulation to ban imported goods under USD 100 on e-commerce platforms, our view remains and our fair value estimates for Sea SE and GoTo are unchanged at USD 70 and IDR 75, respectively. We reiterate our previous stance that both platforms will still likely have challenges on achieving both gross transactional value growth and profitability at the same time. While the new law is an incremental positive in the long term for both companies, there is no effect on their near-term headwinds which relate to how consumer demand is declining as a response to increasing commission fees and subsidy cuts on the platforms.

While the new rules aim to protect Indonesia’s small and medium enterprises, we view they are likely targeting Bytedance and trying to curb its e-commerce business to prevent Chinese goods from taking market share. We do not believe this will have any short-term effect on the platforms given that Bytedance GTV was estimated at USD 2.2 billion according to third-party reports, compared with our GTV estimates for Sea and GoTo at USD 35 billion and USD 20 billion, respectively. This should redirect consumers back toward Sea and GoTo, but we are unsure if the law will affect imported items that are already on these platforms as well.

Regardless, profitability has been a long-term issue for both companies and the new rules are unlikely to have any short-term influence. While operating margins have improved significantly due to greater subsidy cuts and monetization, it has come at the expense of long-term GTV growth. While we estimate revenue to increase about 35% year on year for both platforms, GTV growth will likely be 0%-2%. This is a stark contrast to a year ago when the GTV forecast was in the midteens on a short- to mid-term basis. Unless both companies demonstrate robust growth in GTV, accompanied by material margin expansion in 2023, we do not expect our fair value estimates to increase significantly.