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Sea Limited Investment Thesis
In this report, I will cover the following:
Revenue and Margins
Stock Price History
Management and Ownership
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Sector: Communication Services
Market Cap: $129.9 billion
Sea Limited is a leading global consumer internet company founded in Singapore. Their mission is to better the lives of consumers and small businesses with technology. The company operates three core businesses across digital entertainment, e-commerce, as well as digital financial services, known as Garena, Shopee, and SeaMoney, respectively.
Sea’s Garena platform distributes video games from game publishers to users across more than 130 markets. As a comparison to the western world, Garena is similar to the Steam gaming platform. In the last two years, Garena has transitioned to becoming an international game publisher as well. As a result, it can advantage its own titles with promotions on its store, marketing its own titles at zero expense. Garena is the developer and publisher of Free Fire, a popular mobile battle royale game.
Shopee is Sea’s e-commerce platform and is the leading e-commerce platform in Southeast Asia and Taiwan by gross merchandise volume. Unlike the developed markets, the internet economies in Southeast Asia are still expanding rapidly and Shopee is on track to acquire a significant share of this expansion. Shopee also has footprints in Latin America including Brazil and Mexico. Shopee provides consumers an easy, secure, fast, and enjoyable online shopping experience that is enjoyed by tens of millions of consumers daily. It offers a wide product assortment, supported by integrated payments and seamless fulfilment.
SeaMoney is Sea’s most recent brand and has branched out into solutions for mobile and offline payments as well as financing solutions for sellers and buyers. ShopeePay and AirPay are SeaMoney’s mobile wallets. Sea operates in a region where many don’t have credit cards, and credit card payments are falling behind e-payments. SeaMoney has stated that their mission is to better the lives of individuals and businesses in their region with financial services through technology. SeaMoney barely contributes to Sea’s overall revenue but is likely the largest opportunity for the company yet. Garena and Shopee offer Sea a very strong launching pad for SeaMoney, due to the increasing network effects and potential to cross-sell across their already broad user bases.
At the end of 2020, quarterly active users (“QAUs”) reached 610.6 million, an increase of 72.1% year-over-year. Quarterly paying users grew by 119.5% year-over-year to 73.1 million, and represented 12.0% of QAUs for the fourth quarter compared to 9.4% for the same period in 2019. Average bookings per user were US$1.7, compared to US$1.4 for the fourth quarter of 2019.
The key driver in user growth has been the global hit game, Free Fire, which was the most downloaded mobile game globally for 2019 and 2020. Free Fire was also the highest grossing mobile game in Latin America, Southeast Asia and India in 2020.
In addition, their esports and community-building efforts continued to attract significant followings in the fourth quarter. Free Fire esports tournaments hosted during Q4 2020 have accumulated over 170 million online views to date.
In Indonesia, where Shopee is the largest e-commerce platform, it registered over 430 million orders for the market in the fourth quarter, or a daily average of around 4.7 million orders, an increase of over 128% year-on-year. Shopee also ranked first in Indonesia by average monthly active users, total time spent in app on Android, and downloads, in the Shopping category in 2020.
Both in Southeast Asia and in Taiwan, Shopee ranked first in the Shopping category by average monthly active users, total time spent in app on Android, and downloads, in 2020.
Shopee was also the third most downloaded app globally in the Shopping category in 2020.
Digital Financial Services
Mobile wallet total payment volume exceeded US$7.8 billion in 2020. In addition, quarterly paying users for mobile wallet services surpassed 23.2 million in Q4 2020 with monthly paying users in Indonesia surpassing 10 million during Q4 2020.
Sea Money have also continued to expand their suite of online and offline third-party use cases and partnerships. They recently expanded partnership with Google to offer their mobile wallet as a payment option for the Google Play Store in Indonesia, following the partnership with Google in Thailand from March 2020.
Sea Limited went public on the 20th October 2017 through an IPO raising an initial $$880 million valuing the company at $5.4 billion. Today the market market cap is $129.9 billion meaning if you had invested at the IPO date you would have over 24x your initial investment in less than 4 years. Despite this performance the company is still very much a growth stock.
4. Revenue and Margins
Sea Limited has been growing revenues at a phenomenal rate over the past couple of years whilst also improving its gross margins. During its most recent financial results for full year 2020:
Revenue was $4.375 billion, an increase of 101% year-over-year.
Digital entertainment revenue was $2.016 billion, an increase of 77% year-over-year.
E-commerce revenue was $1.777 billion, an increase of 116% year-over-year.
Sale of goods revenue was $582 million, an increase of 169% year-over-year.
Gross margin was 31% compared to 28% in 2019. It is encouraging to see the gross margin increasing year-over-year.
Management has estimated 2021 full year revenue for Digital Entertainment and E-commerce to increase by 38% and 112% respectively, year-on-year. This guidance is extremely bullish considering E-commerce already increased by 205% and 116% over the past two years.
5. Valuation Multiples
Sea Limited is a growth stock and by its nature trades at high valuation multiples. As the company is not yet profitable the P/E ratio is not a relevant valuation metric. Below are some of the key valuation metrics that I have identified:
The valuation multiples for Sea Limited have significantly increased over the past year. The Price/Sales ratio has 3.5x in the space of one year with the share price having increased over 6x during the same period.
6. Balance Sheet
Almost $6.2 billion in cash and cash equivalents.
Inventory on the balance sheet representing 0.6% of total assets meaning the risk of impairment is immaterial.
Total Liabilities as % of Total Assets is 67% which has improved from 77% in 2019.
Current Assets to Current Liabilities ratio of 1.93 improving from 1.87 in 2019.
Goodwill balance making up 2% of total assets of which the majority relates to the acquisition of Phoenix Labs, an independent games development company and the studio.
7. Stock Price History
The share price had been moving along nicely for the first couple of years after it’s IPO before really taking off over the past year hitting an all time high in February 2021. Since then, the stock price declined over 30% and appears to be heading for its next leg.
One of Sea Limited's biggest competitors in Southeast Asia is Alibaba who own the Lazada e-commerce platform, a direct competitor to Shopee. Other competitors include Tokopedia, Bukalapak and Zalora. Lazada was the top dog in the region for some time but Shopee has successfully managed to gain the upper hand.
ShopeeFood has been muscling into food delivery in direct competition with regional rivals including ride-hailing and delivery unicorns Grab and GoJek. In Vietnam, Sea-owned food delivery service Now is the market leader, while Grab is No. 2, according to a January 2021 report by advisory firm Momentum Works, whose COO Yorlin Ng, said Southeast Asia’s food delivery sector grew 183% in 2020.
In terms of Digital Entertainment, Garena has got plenty of competition in the mobile space. Despite this, Free Fire is no longer just a Southeast Asia sensation but it is now one of the most downloaded games worldwide.
9. Management and Ownership
Sea Limited was founded in 2009 by Forrest Li when it was known as Garena Interactive Holding Limited and started off as an online games portal. As you might have realised, the digital-entertainment division of Sea Limited retains the Garena name to this date. The company has come a long way in the intervening time period as we can see below.
Forrest Li the founder has served as the chairman of the company and the group chief executive officer since inception in May 2009. He is a member of the board of directors of the Singapore Economic Development Board, and serves as an independent non-executive director of Shangri-La Asia Limited. He also serves on the board of trustees for the National University of Singapore, and on the advisory council of Stanford University’s Graduate School of Business.
In Forrest Li, Sea Limited meets my criteria of being led by a visionary founder.
1. Cash Burn
Digital Entertainment is currently the only profitable division within Sea Limited. Firstly, in terms of gross margins, Digital Entertainment has a very healthy 65% margin whilst E-Commerce and Sale of Goods are cutting it very fine with 1.89% and 0.29% respectively.
When we look at the operating results, Digital Entertainment again reports a healthy result whilst all of the other divisions are reporting losses.
Sea Limited is spending a colossal amount on Sales and Marketing Expenses with $1.8 billion spent in 2020 which represents over 40% of revenue for the year. Of the $1.8 billion, $1.2 billion is attributable to the E-commerce division related to the ramping up of marketing incentives and brand marketing efforts to fully capture the opportunities in their markets. While management has made it clear that sales and marketing spend is a strategic decision to invest in growth, could this level of spend be subsidising sales? Messi fans look away now!
Given the attractiveness of the markets that Sea Limited operates in, there is fierce competition from other players such as Lazada, Bukalapak and Zalora as mentioned earlier. Grab also appears to be strengthening its hand by going public in the U.S. in partnership with Alitmeter. This competitive pressure could cast doubt over future growth and profits.
New competition is also around the corner. Earlier this month Gojek and Tokopedia, two of Indonesia's biggest tech companies, sought approval from their investors to merge. This new entity will be a formidable competitor to Sea Limited in Indonesia, given Gojek and Tokopedia’s extensive business networks in the region.
1. Large Addressable Markets
Sea Limited operates in Southeast Asia which is a large addressable market. It is one of the largest and fastest growing regions in the world with a population of 670 million people and a GDP of $4.7 trillion estimated by 2025.
Internet usage in Southeast Asia continues to multiply, with 40 million new users in 2020 alone compared to 100 million between 2015 and 2019. Total internet users in Southeast Asia is now 400 million. The region’s internet economy has more than tripled over the past four years, reaching $105 billion in 2020 and is expected to grow to $300 billion by 2025.
The Google, Temasek and Bain, e-Conomy SEA 2020 annual report is the source of the above data. It is a fantastic resource and you can only be bullish about the future of SEA (the company and the region) after reading it.
The mobile gaming market is also expected to grow worldwide by 14% each year over the 2020 - 2025 period according to Mordor Intelligence.
2. Expansion into Latin America
Shopee launched a small presence in Brazil in late 2019 as a pilot initiative of its cross-border team and has been building out its operations ever since.
While Shopee doesn't have a major presence in the rest of the region yet, Garena does. Free Fire is currently the highest-grossing mobile game in the region, according to App Annie. Expanding Shopee across Brazil, Mexico and Garena's other top markets in the region should help leverage that growth.
As of 30th March 2021, Shopee is the most downloaded shopping app in Brazil and Mexico ahead of Mercado Libre but bear in mind that Mercado Libre has significant web traffic which Shopee does not.
3. Fintech and Banking
SeaMoney is the smallest division within Sea Limited at the moment but arguably has the most to gain in terms of future opportunities. The revenue generated at the moment is so immaterial overall that it is not split out on its own in the quarterly financial reports.
Digital financial services is expected to grow to $1 trillion by 2025, accounting for half the money transactions conducted in Southeast Asia. More than 7 out of 10 adults in Southeast Asia are “underbanked” - they have no access to credit cards or have no long-term savings product according to Bain & Company.
Further to this, Sea Limited was awarded a Digital Full Bank License in December 2020. It will be able to operate as a - fully digital - traditional bank, enabling users to open accounts and handle deposits. It will also have the ability to issue debit and credit cards and serve corporate accounts.
12. Investment Strategy
Sea Limited is probably one of the most exciting companies to follow at the moment. Not without its risks, the company should continue to strengthen its position as the dominant digital player in Southeast Asia whilst also making inroads in Latin America and further afield. In my opinion, the company could have a $500 billion market cap by the end of this decade.
Disclosure: The author holds a long position in Sea Limited.
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Wolf of Harcourt Street
Disclaimer: I am not a financial adviser and I am not here to give specific financial advice. The opinions expressed are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The information is based on personal opinion and experience, it should not be considered professional financial investment advice. There is no substitute for doing your own due diligence and building your own conviction when it comes to investing.