New Proposed Indonesia Law Long-Term Incrementally Positive for GoTo and Sea, but Questions Remain

On Sept. 25, Indonesia announced that it may regulate the use of social media to sell goods in the country, which we view as a move to prevent TikTok specifically from selling cheap goods and to ensure fair competition in the country’s retail industry. We view the proposed regulation as incrementally positive for GoTo, Sea SE, and other Indonesia-based e-commerce platforms in the long run. Despite the positive development, our fair value estimates for both GoTo and Sea are unchanged at IDR 75 and USD 54, respectively, given that we are unsure how enforceable the new law will be, and whether this means peers could step in and continue the aggressive competitive spending. Nevertheless, we believe that in the long term, the restriction of a major competitor poses a potential structural change to the profitability of e-commerce peers in Indonesia. This is incrementally beneficial for Sea and even more so for GoTo, as the latter is almost 100% leveraged to Indonesia, compared with Sea, where only about 40% of its e-commerce gross merchandise volume, or GMV, comes from Indonesia. This could potentially mean that the platforms will spend much less money on sales and marketing expenses in keeping up with competitors, which has been one of the key factors affecting profitability.

The new proposed law is an expansion of the draft proposed in early September intended to restrict direct cross-border sales, which would prevent e-commerce platforms and their China suppliers from undercutting the existing prices of goods in Indonesia. The new regulation adds that social commerce platforms must be separated from e-commerce platforms which, in our view, targets basically TikTok, due to its ability to take users’ viewing data and apply them to purchasing behavior through its algorithm. Regardless, we believe this could reaccelerate revenue growth and reduce spending for both GoTo and Sea by removing a major competitor.