Rolf’s Tech Stock Series – Sea Limited

Singapore tightened its Covid-19 social gathering rules again, and this indefinitely implies more time at home for the next one month at least.
Thus, I decided to start my “Tech Stock Series” where I will analyze some of the Tech Stocks of interest.
Earlier, I had also written some articles on Amazon, Alibaba and Pinduoduo.
Before I start, please also refer to my disclaimer.


In this series, I will focus on our own Singapore’s Sea Limited.
This week, it was announced that Singapore-based Sea Ltd will replace Suntec Reit in the MSCI Singapore Index after May 27, 2021. MSCI is a flagship global equity index while Sea Ltd is listed on NYSE: SE (Sea Limited).
Sea Limited was founded by Forrest Li Xiaodong and Gang Ye in Singapore in 2009 and originally known as Garena. Both founders are Chinese-born Singaporean billionaires. Li is the Chairman & Group CEO while Gang is the COO.
The company was floated in NYSE in Oct 2017 with opening price of USD16. One year later, the stock priced at USD10.5 a piece. Little will many expects that the share price of Sea will have top at >USD 280 in Feb this year, with a market cap of more than USD 113B based on share price of USD 216 close of last business day.
Sea Limited is a holding company for Shopee, SeaMoney and Garena.
Most Singaporeans should have heard of the e-commerce app Shopee. For my family nowadays, it is almost a must-have e-commerce app to replenish our household supplies, together with Alibaba-Lazada, Amazon etc. To pay in Shopee, you can use ShopeePay, a mobile wallet that is also part of SeaMoney’s Fintech offerings available in seven market across SEA, Taiwan under various brands such as AirPay, SPayLater, aside from ShopeePay.
Gamers who like Battle Royale Games will have heard of Free Fire, developed and published by Garena. Free Fire is a “person shooting game” liken to Counter Strike when I first played during my University time in hostel. Free Fire was the most downloaded mobile game globally in 2019 and 2020 and the highest grossing mobile game in Latin America, Southeast Asia and India in 2020.
For the first quarter of 2021, a data release by “Sensor Tower Intelligence Store”, shown that Free Fire had surpassed Tencent PUBG as the top mobile Battle Royale game by player spending in US, generating ~US$100 million in revenue during the Q4, 2020, ~ 4.5x increase from the same period a year before, compared to PUBG USD68’s million.   Garena also exclusively licenses and publishes games from global partners, and is a global E-sport organizer.


Sea generates revenue from four main services as summarized below.
4Q2020 GAAP Revenue
• EC: e-commerce (USD 842m)
• DE: Digital Entertainment – gaming platform (USD 693m)
• DFS: Digital Finance services (USD 24m)
• Other Services (USD 7m)
In the last Quarter of 2020, GAAP revenue is USD 1.566b compared to USD 777m a year earlier. For the FY2020, total GAAP revenue is USD 4.375b compared to 2.175b a year ago (i.e. 101% growth).
The segments driving the business now are mainly DE and EC, while DFS and other services have comparatively smaller revenue.
EC & DE are recording 178% and 111% Growth in revenue yoy.


If we look at Sea’s Ebitda, it is without doubt that Sea’s Gaming (DE) segment is driving the earnings/profit.
• Ebitda of DE grew to USD 2b in FY2020, compared to US 1b a year earlier.
• EC and DFS Ebitda are still greatly in red, with losses of USD 1.3b and 511m, respectively. The rest of the services are also not profitable.
• Overall, adjusted Ebidta turned positive at USD 107m in FY2020 compared to losses of 179m in FY2019.


The company is still in net losses.  Last reported-quarter net loss widened to USD 524.6m, compared to loss of USD 281.9m a year earlier.
This is mainly due to the higher expenses associated to the expansion of e-commerce services (i.e., logistic, value-added services to users etc), and continued efforts to integrate the company’s mobile wallet services with the Shopee platform across different markets.
Despite the losses, the positive news is that Gross Profit for FY2020 has increased yoy to 123%. And this is more than the increase of revenue at 101% for the FY2020, thanks to Garena’s higher revenue from self-developed game Free Fire.


The company has not made a single cent of profit to date. Since 2014, Sea has reported negative cash flow every year, at an average rate of USD 383m p.a. Looking at the results, it is undoubtedly that Sea is buying revenue for its e-commerce business.
That said, this is also because Sea has the financial muscle to buy revenue. At the end of last year, it had cash reserves of USD 6.17b, thanks to an upsized offering of new shares that raised USD 2.57b.
And with its current cash pile, the good news is that it will still take 16 years to exhaust all the cash, assuming the worst-case scenario that the company will not generate any positive cash flow during that time.
China Tencent Holdings, who has abundance of financial resources, owns 22.9 per cent of Sea Limited.


When will Sea Ltd (or Shopee) be profitable? Or will Shopee ever be profitable?
I don’t know! What I know is that not all e-commerce companies are profitable in the beginning. Amazon turn profitable after 7 years, having started in 1994. Alibaba is more impressive, becoming profitable after 3 years having started in 1999. China Pinduoduo is still loss-making having started in 2015.
While Sea’s bottom line is still very much in the red, there are many positive signs pointing to Sea’s progress to profit.
Aside from Free Fire game, Sea collaborated with Tencent and America Activision Blizzard to offer another top grossing game, “Call of Duty”. This allows Garena to expand beyond its own developed games.
And of course if Sea can develop another in-house game equal to the popularity of Free Fire, profitability will take a big boost.
End last year, the Monetary Authority of Singapore (MAS) awarded a digital full-bank (DFB) licence to Sea together with a consortium formed by Singtel and Grab. DFBs enables Sea to offer deposits, loans, and investment products through its online platform to retail and corporate sectors, though not small medium enterprises in Singapore.
With this good news, Sea’s Digital Finance Services will definitely have more room to grow, considering that revenue in DFS now is still very insignificant. Furthermore, it can cut down transaction fees currently paid to banks to increase gross margin.
Shopee continues to establish herself as one of the leading e-commerce companies in South East Asia, and in Taiwan. In particular, Indonesia is Shopee’s largest market, making up about 42% of Shopee’s total gross order. It is said that Shopee is one of the largest e-commerce platform in Indonesia, with the most number of website visits in 2020 (90 million visits) ahead of Tokopedia and Lazada.
As Indonesia continues to improve her internet connectivity infrastructure, I believe that more and more of the population will resort to e-commerce in time to come.
Shopee has also started online shopping portal in Brazil since 2019, and is gearing up for further expansion into Latin America. It was reported this year that Shopee had launched an online sales App in Mexico.
Considering Garena’s exceptional success in Latin America, I have little doubt that Shopee will be successful in Latin America, slowly but surely.
That said, Shopee still have many challenges to overcome, as it generally has higher logistic cost, outsourcing to third parties, compared to Amazon and Alibaba who have their own in-house logistic providers.
Competition is also very intense in the e-commerce world with the already many players, let alone new emerging players.
Last but not least, Sea Limited share price has already ballooned more than 500 per cent since the Covid pandemic with a current Price to Book of ~33x (mrq) and Price to Sales of ~26x (ttm).
For comparison sake, Alibaba has PB~0.61x (mrq), PS~0.8x (mrq), and Amazon has PB~16x (mrq), PS ~3.9x (mrq).
PS: I am invested in Sea Limited. 

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