Chinese technology stocks have been cratering in recent days, as the Chinese government has been cracking down on major tech juggernauts within the Middle Kingdom. In addition to strengthening regulations around data security, the government in Beijing has also imposed new rules on the private tutoring sector, leading to gut-wrenching declines for those companies.
The moves underscore the broader risk that all Chinese companies face: Fortunes can shift rapidly based on the Chinese government, which exerts incredible control over China's economy. However, one company is being wrongly grouped in with Chinese tech stocks: Sea Limited (SE -0.85%).
Image source: Sea.
Sea has almost no exposure to China
Sea operates in Southeast Asia, Indonesia, and Taiwan. The company's two primary business segments -- digital entertainment and e-commerce -- have both enjoyed massive tailwinds from the COVID-19 pandemic as people played more mobile games and shopped online.
In the first quarter, digital entertainment bookings surged 117% to $1.1 billion while quarterly active users (QAUs) jumped 61% to 648.8 million. Gross merchandise value (GMV) in the e-commerce business (the Shopee platform) skyrocketed by 103%, driven by a 153% increase in gross orders. Sea's expansion into digital financial services, which is in its early stages, continues to show promise, with $3.4 billion in mobile wallet payment volumes last quarter.
Here's the important part: Sea has almost no operational exposure to mainland China, where all of the regulatory drama is unfolding. The company's most recent annual report notes that some of the sellers on Shopee are located in China without elaborating further, but that appears to be the extent of the risks that Sea may directly face related to the Chinese government.
The Tencent connection
There is one curve ball, though. Chinese tech behemoth Tencent (TCEHY -0.94%) was an early investor in Sea, offering the company strategic guidance and advice on how to grow digital platforms. That relationship has proven incredibly valuable for Sea over the years. Tencent currently still holds nearly 23% of shares outstanding and wields a comparable amount of voting power, so the company still exerts considerable influence over Sea's corporate governance.
Additionally, some of the most popular games that Sea publishes in Southeast Asia are developed by Tencent, such as League of Legends and Arena of Valor, with the company paying $110.7 million in royalties to Tencent last year to license the titles.
Image source: Sea.
That arrangement could represent some risk to Sea if the Chinese government takes adverse action against Tencent's gaming business in some way, but Sea has spent the past few years growing Free Fire into the highest-grossing mobile game in multiple markets. As an internally developed game, Free Fire is insulated from any events in Beijing.
Buy the dip
After tapping a record high of $300 just days ago, Sea shares have pulled back by 10%, including a 7% drop yesterday alone. Some of the selling seems to be related to China's crackdown, and Sea's lofty valuation may also be contributing to the volatility.
Still, with Sea positioned as the clear leader in both e-commerce and gaming in Southeast Asia -- where digital adoption is rapidly accelerating -- the dip in Sea shares looks like a clear buying opportunity, especially if the stock continues to trend lower.
