Investing in Chinese stocks was been a risky endeavor. Many investors around the world have been concerned about the Chinese government's ability to keep some of the public companies independent from government affairs, and there have been ramifications for businesses that fail to comply with the Chinese government's wishes. This was seen with Didi Global, China's largest ride-hailing service, which decided to go public in the U.S. instead of Hong Kong as Chinese officials wanted. As a result, China pulled Didi's app from app stores.
China is a touchy subject, and governments and investors around the world are cautious of the country's political ambitions. India, in particular, is worried about the country's ability to obtain data about Indian consumers, and it recently announced it would ban 54 Chinese apps from its app store. Free Fire from Sea Limited (SE -0.69%), was among those apps. Sea Limited is based in Singapore, but the reason for the ban comes because Tencent Holdings (TCEHY -0.94%) -- a Chinese company -- owns a considerable portion of Sea Limited shares.
Shares of Sea Limited sank nearly 18% on the day of the news, considering that Free Fire is a major business line for Sea Limited. However, the news is not as bad as first meets the eye. Sea Limited investors could even see this as a buying opportunity. Here's why.
Image source: Getty Images.
1. Put it in perspective
India is a rapidly growing market for Sea Limited, but in terms of revenue, it is relatively small. The company touted that its mobile battle royal game, which is one of the most popular games in the world, was the highest-grossing mobile game in India in the third quarter, but this does not mean Sea Limited had lots of gaming revenue coming from the region. India represents less than 3% of Sea's gaming revenue and just 1.2% of its total revenue.
Sea Limited's gaming engine, Garena, is a strong growing business with revenue in the third quarter of 2021 jumping 93% year over year to $1.1 billion. The only real thing Sea is losing from this ban is the opportunity to compound this growth by gaining steam in India. However, the company's total revenue, which topped $2.7 billion in Q3, is much more diversified over three major businesses. Garena is not the biggest revenue stream for Sea, and it is also not the one expected to grow the fastest over the next decade, which is why this loss for Free Fire is even less worrisome.
2. The focus is on Shopee
Sea Limited's e-commerce business, Shopee, is the real growth story going forward for the company. It is one of the most popular e-commerce websites in Southeast Asia and Latin America, and it is now expanding successfully into Europe. The company has the most revenue and the fastest growth of any of its business segments, posting revenue of $1.5 billion in Q3, which grew 134% year over year.
More importantly, the company has major growth opportunities ahead. It just expanded into Poland, Spain, and France in the past few months, and it has seen tremendous success there. Shopee is the most popular IOS and Google Play Store app in the shopping category in Poland, and it is the most popular shopping app on the Google Play Store in Spain. Right now, Shopee operates in 16 countries across the world, and if Sea continues to expand its e-commerce businesses as it has over the past few months, it could see continued growth.
3. The hidden benefits
Going back to Garena, the ban in India could have actually been beneficial financially for Sea Limited. The company has Free Fire and Free Fire MAX -- a stand-alone and enhanced version of Free Fire meant for more engaged players. With more engagement comes greater monetization for Sea Limited, meaning that MAX is a better product financially. India banned Free Fire, but not MAX, so Sea Limited's more profitable game is still available to play in the country. What could potentially happen is Free Fire users in India could instead play Free Fire MAX.
According to Apptopia, this exact scenario took place. As of Feb. 15, MAX is the most popular free video game and the second-highest-grossing video game in India.
What to make of the news
There are still a lot of moving parts in this relationship between Sea Limited and India. The country could decide to ban Shopee, Free Fire MAX, or both, which would sting more than just the ban on Free Fire. However, considering Shopee's geographic diversity, an Indian ban on Shopee might not be a business-killer either.
Investors might have overreacted after this news. The company sank over 18% after this came out, and while shares rebounded the next day, the company is still down 59% from its all-time high. At this lower price, Sea trades at just nine times sales -- a bargain for a company growing its top line at triple-digit rates. Sea Limited looks like it could come out of this unharmed, so it might be an opportunity to add some shares to your portfolio at these lower prices.
