OPTIMAS GLOAL ALPHA FUND - Optimas Capital Limited · Free Fire was first launched in October 2017 by 111dots, and officially distributed under Garena brand since January 2018. After

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OPTIMAS GLOBAL ALPHA FUND

Newsletter, August 2019

The impending ASEAN Internet market boom With the trade war between US and China increasingly become an incremental source of volatility of China

ADRs and HK-listed TMT stocks, and the China internet sector is gradually entering into a mature stage

(hence slower growth), it is merited for us to strategically seek some investment opportunities outside of

China. Indeed, through studying the development of the China internet companies, we found much similari-

ties in the structural trends and growth paths in the ASEAN markets.

We will take a closer look at 2 successful cases in the Gaming and e-Commerce sectors: Free-Fire and Sho-

pee.

Free Fire: Differentiated positioning helps its success in a vital genre.

After the launch of PUBG PC client version in 2017 and subsequent mobile versions named “CJZC” and “QJCJ”

developed by Tencent, battle royale games have become the most popular genre across the world, thanks to

its provocative gameplay and unpredictability in every single game.

Free Fire was first launched in October 2017 by 111dots, and officially distributed under Garena brand since

January 2018. After the launch, popularity of the game quickly exploded across ASEAN, Latin America and

then mid-east European. It has ranked the 1st most downloaded game in 22 countries across the world with

an accumulated 350mn user base by the end of 2018. Currently, even it has entered relatively mature stage,

it is still the third most-download mobile game and the most downloaded battle royale game globally across

the Google Play and iOS App Stores combined, according to App Annie.

Figure 1: Snapshot of Free Fire

Fund AUM

$360 million

Portfolio Manager

Thomas Wong

Strategy

Pan Asia Equity

Long/Short

Inception

August 2016

Liquidity

Quarterly

30 days notice

Minimum

$1 million

Management Fee

2%

Incentive Fee

20%

Administrator

Northern Trust

Auditor

Ernst & Young

Legal Counsel

Deacons (Hong Kong)

Campbells (Cayman)

Prime Brokers

Credit Suisse

Morgan Stanley

Goldman Sachs

JP Morgan

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Figure 2: Free Fire’s grossing rankings in major markets

Even though other competitors like PUBG mobile and Knives Out (developed by NTES) also showed their strong momentum in the gen-

re, Free Fire was still able to deliver sustainable market expansion given their differentiated strategy:

1. Positioned as light-experience game adapted to mid-low-end devices: Free Fire’s major competitors, Fornite and PUBG mobile,

require more than 1GB storage space for its well-simulated gaming details, which is a luxury for emerging market gamers since their

phone often only costs US$150or less. Being first to market, as well as having an effective promotion and distribution strategy in

selective markets which SEA has solid competitive edges (e.g. ASEAN, TW at the beginning) also propelled the game’s adoption.

2. Marrying international distribution capability and localized operation helped to dominate Latin American market: Brazil, the

country with largest population in Latin America, has become one of the most important internet markets recently with more than

120mn internet users. However, we see very few successful first person shooting (FPS) games in Brazil before Free Fire, which could

due to large installation package of classic FPS games, and unique gaming preference of Brazilian users. Free Fire targeted Brazil as

one of its core markets from the very beginning, even though Garena first tested and launched the game in ASEAN markets. With

their on-the-ground team, SEA launched a highly localized version in Brazil with specific promotion events (echoing with Brazil’s

traditional carnivals), costumes and gaming incentives. As a result, Free Fire significantly expanded its market ceiling via Brazil exe-

cution and even helped to lift the total TAM of the genre. At present, FF still ranks the 1st mobile game in Brazil by grossing and

contributes ~25% of SEA’s total gaming revenue in 2Q19.

3. Sufficient cash revenue from Free Fire further triggers Garena’s transition into game developer: FF’s success providentially solved

the cash burn problem in order to support the fast growth of their E-commerce division. Moreover, it significantly increased man-

agements’ conviction to invest more on self-developed products, which led to a rerating of SEA’s game business.

Even when Free Fire is still young and has huge room for monetization, there are also potential risks: 1) Free Fire accounts for 40%+ of

Garena’s total gaming revenue, while classic games like AOV, Contra mobile are slowing down. They need more revenue contribution

from new games (some potentials include QQ speed drifter, COD mobile, etc.); 2) Tencent is going to globally launch a simplified version

of PUBG Mobile, named PUBG Mobile lite, which directly competes with FF on low-end devices and could challenge FF’s user share.

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Shopee: On track to be the No.1 player of ASEAN E-commerce.

Booming ASEAN E-commerce market: Riding the fast penetration of internet across ASEAN countries, E-commerce in the region was

enjoying exponential growth over last few years. According to a joint research by Temasek and Google, the total GMV of ASEAN E-

commerce has reached US$ 23.2bn in 2018 (+114% growth yoy), and expected to reach US$ 102bn in 2025 (28% CAGR over 2018E-

2025E).

Figure 3: ASEAN E-commerce market size

Zooming in some core markets in the region, it is obvious that ASEAN E-commerce market is still at an early stage which is characterized

by its low % of E-commerce spending vs. total retail spending. According to a research by Capgemini and BNP in 2018, the % of E-

commerce spending vs. total spending in Vietnam, Indonesia, Malaysia and Philippines is 4%, 3%,2%, 1%, respectively. Compared to

China’s 7%, the low E-commerce penetration level of core ASEAN countries suggests ample room for their market TAM expansion in the

distant future.

Figure 4: E-commerce Spend vs. total retail spend of major countries

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Shopee is gaining edge in core regional markets: In 2018, Top 3 ASEAN e-commerce markets in terms of market size are Indonesia (US$

12.2bn), Thailand (US$ 3.0bn), and Vietnam (US$ 2.8bn). Looking forward, Top 3 countries with highest growth potentials are Vietnam

(2015E-2025E GAGR 43%), Indonesia (2015E-2025E GAGR 41%) and Philippines (2015E-2025E GAGR 34%).

Figure 5: ASEAN E-commerce market size

Thanks to Shopee’s 1) strong localized product and operation capability, 2) experience derived from China e-commerce market, 3) ma-

ture supply chain and merchants in China; Shopee gradually expanded its leadership across aforementioned core regional markets. Ac-

cording to ASEAN E-commerce mediation platform iPrice’s research; Shopee’s ranking by visiting traffic/store ranking in those markets

are as below:

FIgure 6: Shopee’s ranking by visiting traffic/downloads in major ASEAN market

Competition getting moderate leads to better monetization ramping up: After years of competition, the market positions of top play-

ers in core regional markets has been largely stable, which allows its players to ramp up monetization sooner.

In Indonesia, a key market for E-commerce in ASEAN, Lazada and Tokopedia continuously lower their shipping subsidy level over last

few quarters to improve profitability. As a result, we also saw meaningful shipping subsidies declining trajectory on Shopee. Moreover,

Shopee started to charge commissions from all sellers in Taiwan and to charge from preferred sellers on Shopee platform in Indonesia.

Followed by Tokopedia, it also began charging 1% commission fee from its preferred sellers. In general, management is more confident

that long term take rate can stabilize at high single digits or low double digits.

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Key metrics illustrate Shopee’s healthy improvement: In 2Q19, Shopee’s GMV increased 72% YoY, and take rate improved to 4.6% (vs. 4.2%

in 1Q19); orders increased 93% YoY; SM as % of GMV fell to 4.3% from 6.2% in 2Q18. All these operating metrics reveal that Shopee has been

on a healthy track.

Figure7: Shopee’s GMV and SM % Figure 8: Shopee’s orders # and yoy

Figure 9: Shopee’s take rate trend Figure 10: Shopee’s cash revenue (US$ mn)

Even though Shopee’s business is still enjoying strong momentum, we see several potential risks in the mid-term, including:

1. Global trade war may indirectly affect ASEAN, dragging down GDP growth. In 2Q19, the announced YoY GDP growth rates of Indonesia,

Philippines and Thailand are all lower than 1Q’s level. Indonesia recorded the lowest GDP yoy growth (5.1%) in last two years, while Thai-

land guided down its full year GDP growth from 3.8% to 3.3%.

2. Regional E-commerce giants may increase competition level if TAM and economics were proven worthy: Funding improvement or #1

player position challenged by Shopee may re-activate competition amongst top players.

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OPTIMAS GLOBAL ALPHA FUND PERFORMANCE SUMMARY

The Optimas Global Alpha Fund recorded a net return of +3.4% in August 2019. This brings the performance of the fund to +8.7% YTD and +44.3% since inception (with 1.8 annualized Sharpe ratio). Gross/net exposure was 145%/-7% at month end. We had good attribution from energy and real estate sector, while tech sector underperformed. Market wise, we did well in Hong Kong and US.

Several observations in August: (1) August is a busy result season, and our fundamental analyses have contributed significant alpha via pre-cise positioning/sizing. In Particular, we have good attribution from oil & oil services and Internet e-Commerce. (2) China Politburo meeting indicated a more dovish stance by suggesting more room for fiscal easing, but maintained hawkish tone on property market. PBOC has fur-ther introduced the Loan Prime Rate (LPR) mechanism, which was a de facto interest rate cut. This will benefit machinery/infrastructure related sectors, at the expense of banks.

Looking forward: (1) Trade tension between China and US re-escalated again. The US vs China situation will likely be a multi-year theme, and ASEAN countries will be beneficiaries. (2) the debate on the speed of further Fed rate cuts continues. Inversion of the US 2Y-10Y yield curve also raised concerns on recession and put downward pressure on equity market. As always, we keep our focus on earnings trajectory of indi-vidual companies and seeking alpha ideas during market volatilities.

Top 10 Positions

ALIBABA GROUP HOLDING-SP ADR

CHINA OILFIELD SERVICES-H

CNOOC LTD

HONG KONG & CHINA GAS

KWEICHOW MOUTAI CO LTD-A

LENOVO GROUP LTD

MAPLETREE NORTH ASIA COMMERC

SUN ART RETAIL GROUP LTD

TAIWAN SEMICONDUCTOR MANUFAC

TENCENT HOLDINGS LTD

Return (Last 12 Months) 12.0%

Volatility (Last 12 Months) 4.0%

Maximum Drawdown (Last 12 Months) -0.9%

Sharpe Ratio (Last 12 Months) 2.4

Avg. Net Exposure (Last 12 Months) -1%

Avg.Gross Exposure (Last 12 Months) 147%

Return (Since Inception) 44.3%

Return (Annual CAGR Since Inception) 12.6%

Sharpe Ratio (Since Inception) 1.8

Avg. Net Exposure (Since Inception) 9%

Avg. Gross Exposure (Since Inception) 163%

Source: Optimas Capital, as of Aug 31, 2019.

Note: Top 10 positions based on gross exposure (in alphabetical order), could be long or short positions.

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LEGAL NOTICE

This report is intended exclusively for the person to whom it was given by Optimas Capital Limited and does not constitute an offer to

sell or a solicitation to buy any securities or an offer of any investment advisory services. The statistics presented are based on estimates

and assumptions which may be materially incorrect. No representation is made as to their accuracy. Past performance is not indicative of

future results.

References to market or composite indices, benchmarks, or other measures of relative market performance (indices) over a specified

period of time are provided for the intended recipient’s information only and do not imply that a portfolio will achieve similar returns,

volatilities or other results.

This document is intended only for professional investors as defined under the relevant laws of Hong Kong and is not intended for the

public in Hong Kong. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. No action has

been taken in Hong Kong to permit the distribution of this document. This document is distributed on a confidential basis and may not

be reproduced in any form or transmitted to any person other than the person to who it is addressed.

Thank you for your continued support and interest in our fund. Please contact us with any questions or to request additional

information at [email protected]

Documents

OPTIMAS GLOAL ALPHA FUND - Optimas Capital Limited · Free Fire was first launched in October 2017 by 111dots, and officially distributed under Garena brand since January 2018. After