After India abruptly banned its most popular mobile game title, Sea Ltd. lost more than $16 billion in value in its greatest daily market decline. Investors are fearful that the ban is only the beginning of the company’s problems.
Sea, based in Singapore, went public in 2017 and immediately became Southeast Asia’s most valuable company, owing to its ability to grow its gaming, e-commerce, and financial services offerings beyond its native market. The move by New Delhi to restrict Free Fire, a lucrative moniker for the company, showed Sea’s struggles in the face of rising competition from rivals such as Alibaba Group Holding Ltd.’s Lazada.
Over the last two years, India has blocked hundreds of Chinese apps, but the extending of that restriction to Sea caught management and investors off guard. Forrest Li, who was born in China but is now a Singaporean citizen, created the company. Tencent Holdings Ltd., the Chinese social media behemoth, is its largest shareholder.
Investors are concerned that India may restrict Shopee, Sea’s second pillar of commerce, which had roughly 300 workers and 20,000 local traders in December. At the company’s annual general meeting on Monday, Li reassured shareholders that the matter was under control. He remained silent on India’s ban on an open fire.
The markets were not convinced. Analysts tried to decipher India’s reasoning and appraise Sea’s growth potential as its New York stock fell more than 18% overnight. Since October, shares have lost over two-thirds of their value.
According to industry tracker App Annie, the Free Fire game was the highest-grossing mobile game in India in the third quarter of 2021. Analyst Ranjan Sharma of JPMorgan lowered his price estimate by nearly 40% to $250, citing increased concern about Sea’s gaming franchise.
According to Oshadhi Kumarasiri, an analyst at Lightstream Research who offers Smartkarma research reports, the prohibition on Free Fire might hurt Sea’s entire digital entertainment business, reducing its capacity to fund Shopee’s expansion into new regions. “With Free Fire being prohibited in India, Shopee’s expansion in India is in jeopardy,” he stated.
Sea, an online shopping and entertainment empire that generates about $10 billion in annual revenue, is one of Southeast Asia’s biggest success stories. The stock still has to buy or overweight ratings from 32 of 33 analysts. Cathie Wood’s Ark Investment Management is among its global backers. According to Ark data published by Bloomberg, the renowned fund manager bought more than 145,000 shares on Monday.
The most pressing question is whether Sea can successfully appeal India’s decision and get it overturned, or whether, if that fails, the ban will be extended to its other operations in the world’s fastest-growing internet economy.
On the surface, Delhi appears to have no reason to pursue the corporation. Sea is a Singaporean company: it’s registered there, and the majority of its employees, including Li and his lieutenants, are based there. Executives have actively supported programmes in Singapore to help with employment and education, among other things.
Singapore’s Ministry of Foreign Affairs and India’s Ministry of Home Affairs did not respond to requests for comment.
However, its ties to the world’s second-largest economy remain strong. Li, Gang Ye, and David Chen founded the company in 2009, and the bulk of its senior executives are Chinese or have significant ties to China.
Tencent, a long-time supporter of Sea, is currently undergoing a national security evaluation in the United States. Last month, the internet behemoth announced intentions to sell $3 billion in Sea stock, reducing its ownership to 18.7% from over 20% and eventually reducing its voting stake to less than a tenth.
Some analysts interpreted the move as an attempt to answer queries about Sea’s origins and who runs the company. Apart from any attempt to allay those fears, Tencent’s slow retreat is a potentially devastating blow to the corporation.
Even though Tencent is Sea’s largest stakeholder, it has taken a similar strategy to its other Chinese investments. However, its support was critical to Sea’s rise, particularly in recent years, when it was one of the best-performing companies in the world.
Free Fire quickly surpassed one billion downloads on Google Play, placing it among the most popular games in the world, thanks to Tencent’s extensive experience with global distribution channels and business models. Li has been open about depending on Tencent’s knowledge and attempting to mimic its commercial techniques, notably in Sea’s early days.
The impact of Tencent’s sell-down on that relationship is unknown. Both parties have stated that they will continue to collaborate. However, following Chinese regulators’ crackdown on the gaming industry at home, Tencent is now expanding internationally, which means it will unavoidably compete with Sea for some of the same gaming consumers — just not in India.