1 Tech Stock That Could Be Asia’s Next Tencent

Imagine if you were bullish on China back in May 2009 and decided to invest $500 into Tencent Holdings Ltd (SEHK: 700), right after the global financial crisis.

You would have made around 30x your money on that investment and that initial $500 would have ballooned to $15,000 today!

As a long-term investor, part of our job is to find the next growth engine like China. Southeast Asia has long been favoured as the next China and it does bear a lot of resemblances. But who will be the new Tencent of Southeast Asia?

Sea Ltd (NYSE: SE) is the stock that I think has everything it takes to become the Tencent of Southeast Asia.

As a matter of fact, Tencent probably believed in this as well and it actually first invested in the company back in 2010. Here are some key reasons why I believe Sea will be the new Tencent of Asia.

Strong gaming segment in Southeast Asia

Garena is the gaming segment of Sea. Similar to Tencent, its gaming segment is the crown jewel of the company, contributing 50-60% of the company’s total revenue.

Historically, it focused on publishing games (i.e. licensing games from game development companies and publishing them in its core markets). As such, it has benefited significantly from having Tencent as one of its major shareholders.

A partnership has been entered between Garena and Tencent, which allows it to launch and publish some of Tencent’s most popular games, such as League of Legends, in Southeast Asia.

In 2017, it also ventured into game development and launched its very first game – Free Fire – which was developed entirely in-house. It was such a strong hit that it was the most downloaded mobile game globally in 2019, according to App Annie.

Given such an impressive track record, and with the backing of gaming giant Tencent, it is only fair to see Garena’s games to continue attracting more players.

Leading e-commerce platform

Meanwhile, Shopee is Sea’s e-commerce platform. It contributed 30-40% of the company’s total revenue.

Shopee has undergone tremendous growth over the past few years. The platform’s orders in 2019 doubled compared to 2018.

In 2019, Shopee also overtook the two major competitors in Southeast Asia, Lazada and Tokopedia, to become the largest e-commerce platform in the region. There is little doubt that the e-commerce sector in the region will continue to grow significantly.

This is a trend that is likely going to be accelerated by the outbreak of the coronavirus. Being the leading e-commerce player in Southeast Asia already, Shopee is very well positioned to ride that growth.

Fintech offers compelling synergies

SeaMoney is the company’s digital financial services arm that provides services, such as e-wallet and payment processing. It is the youngest business segment of the company.

At first glance, one might wonder why a company that targets such sectors as mobile gaming and e-commerce will try to grow a digital financial services arm.

But it actually makes so much sense as there could be many synergies. Just think about all the transactions game players make in the gaming world to buy virtual weapons, assets, to tip developers, etc. There are also all the transactions that go through Shopee.

With its own payment platform, this not only facilitates the whole transaction interface for its Garena and Shopee users, but also makes money out of each transaction by taking a cut via commission.

Unlike in China, there is no leading mobile payment app or company in Southeast Asia yet. SeaMoney can leverage its broad base of game players and e-commerce users. Couple this with support and expertise from Tencent’s WeChat Pay, and it could emerge as a leading digital financial services player in Southeast Asia.

Foolish conclusion

China would have never been the China we know today without companies like Tencent. It is only a matter of time before a “Tencent” from Southeast Asia emerges.

With all three business segments that are so well poised to benefit from the population growth and the technology adoption in the region, Sea Ltd is likely to be a long-term winner.