For the first time in history, China’s two largest technology companies posted a decline in revenue as the nation faces unprecedented growth hurdles and an uncertain outlook. But 2,000 miles away, even bigger challenges await one of Southeast Asia’s biggest companies.

Sea, which operates online games and e-commerce portals, reported growth of 29%, the slowest in almost five years. We tend to think of revenue expansion as better than a decline, but in Singapore-based Sea’s case every dollar brought in through its e-commerce business is losing money. At least Tencent Holdings Ltd. and Alibaba Group Holding Ltd. have continued to return profits even when the top line shrinks.

Rising global inflation and unstable economic growth spurred Sea in May to trim its full-year revenue forecast for e-commerce, which accounts for around 52% of the company’s total sales, by US$400 million to a range of US$8.5 billion to US$9.1 billion. This month it threw out that guidance entirely.

In our efforts to adapt to increasing macro uncertainties, we are proactively shifting our strategies to further focus on efficiency and optimization for the long-term strength and profitability of the e-commerce business.

Management seems to have realized that buying unprofitable revenue isn’t a sustainable business model, but choosing not to do so makes predicting the future almost impossible.

In some online businesses — such as e-commerce and deliveries — companies have a certain power to hit top-line targets by boosting marketing, using enticements and subsidies to lure consumers to spend money. Investors should think of this as “false growth,” and we saw it in the early days of ride-hailing and food delivery when providers offered spending vouchers and discounts to get customers to use their platforms even when each incremental transaction lost money. By contrast, “real growth” would have each purchase bring profit to the provider even if structural costs such as administrative staff mean the company loses money overall.

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Sea’s e-commerce expansion over the past few years, while impressive, has been largely false growth. Meanwhile, its digital entertainment business, which comprises 44% of revenue, fell 12% in the second quarter as Covid-driven stay-at-home spending petered out.

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In many ways, Sea is a cross between Alibaba and Tencent, which are China’s biggest e-commerce and gaming companies respectively.

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Continued lockdowns, a crackdown on internet companies, rising inflation, a brewing mortgage crisis and heightened geopolitical tensions are all weighing on China’s gross domestic product outlook. While the government targets growth of 5.5% this year, the consensus in a Bloomberg survey of economists is for a figure of 3.8%. Goldman Sachs Group Inc. and Nomura Holdings Inc. are the latest to cut their forecasts.

Tencent this week reported a 3% decline in revenue, more than expected, and cut around 5% of its workforce after advertising slumped by a record. Earlier in the month, Alibaba also published a drop in sales. Net income at both companies fell, but at least they remained profitable.

Sea’s outlook is less clear. It’s Shopee service is the top-ranked e-commerce app in Indonesia, Taiwan and Southeast Asia overall, according to the company, yet the economic fortunes of its key markets remain unstable. Indonesia, Southeast Asia’s largest economy, is enjoying strong growth spurred by an expansion in exports fueled by commodity price increases. Yet inflation leaves open the prospect of interest rate rises that could hamper consumer spending.

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Singapore earlier this month cut its GDP forecast by one percentage point while Taiwan, Asia’s sixth-largest economy, has trimmed its growth outlook twice this year because of slowing demand for consumer electronics and lower private consumption. The Asian Development Bank has also reduced its 2022 and 2023 GDP growth forecasts for Thailand and Malaysia.

With little prospect that the broader economy will improve and pressure on consumer spending increasing, Sea’s chances of posting rapid revenue expansion and finally turning profitable look increasingly out of reach. That’s forced management to make some difficult choices, and growth is set to be sacrificed as a result. It’s the kind of fiscal discipline investors ought to cheer, but first they’ll need to accept a more tepid revenue pace.

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