| 2018 | 2019 | ||||||
| Price: | 14.50 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 400 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 5,800 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | -1,100 | EBIT | 0 | 0 | |||
| TEV (in $M): | 4,700 | TEV/EBIT | 0 | 0 | |||
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Sea Limited is an internet company based in Singapore. At ~$14.50, it’s a ~$6bn market cap fully diluted with over $1bn of cash on the b/s, and it trades ~$30mm+ / day via the US-listed ADR (ticker: SE). Sea is a gaming, ecommerce, and payments platform. To frame what they do, you can think of it as a combination of Activision or EA meets Amazon + Paypal for all of Southeast Asia (which includes Indonesia, Malaysia, Thailand, Vietnam, Taiwan, Philippines and Singapore). The gaming business, Garena, is a profitable social gaming platform with ~80mm MAUs and ~7mm paying users that generated ~$55mm of EBITDA this past quarter and should do ~$250mm+ of EBITDA for the full year, representing a growth rate of ~40%. They distribute leading video game content from 3rd parties (Tencent, Riot, EA, etc), as well as their own internally developed IP, and they earn ~60-80% of what goes through the platform. It’s a gaming ecosystem with network effects and an embedded social network + e-sports franchise. Based on where standalone video game companies trade, you can make a case that Garena is worth the entire market cap today. But there’s more. They have an ecommerce platform spanning the region called Shopee that has a ~20pct market share, is growing triple digits, and is expected to do $8bn+ in GMV this year. Flipkart, an ecommerce business in India, just got acquired for an implied $20bn by Walmart representing ~2.5x GMV and it is arguably in a similar stage of growth. Obviously anything near that valuation would make the stock worth several multiples of where it trades. As a kicker, there’s also a small but rapidly growing payments business that is not being ascribed any value.
Taking a step back, Sea went public last October at ~$15 a share and despite decent performance in the underlying business, it turned into somewhat of a broken IPO. There were three main issues that seemed to spook the market. On their first release, GAAP revenue came in a little light, though cash revenue growth remained strong as the revenue mix of the Gaming business continued its rapid shift from PC to mobile (it was 50/50 late last year and should be ~70/30 by this quarter). While obviously a healthy trend generally, GAAP requires a portion of certain types of revenue to be deferred over a 36-month period for example, and one of the growing mobile titles, Arena of Valor, led to some mismodeling. Then in March, Alibaba invested a fresh $2bn into Lazada, Sea’s closest ecommerce competitor in the region, leading to obvious concern about a potential deceleration for Shopee in GMV. Lastly, while the Company had over ~$1bn of cash on the balance sheet, it was burning over ~$100mm a quarter as they invested in the growth, and there was fear of a dilutive capital raise. The confluence of all of these dynamics led to capitulation in the stock at around ~$11 this spring going into their 1Q earnings release. As it turned out, 1Q was a beat and raise quarter, demonstrating continued growth in their gaming business and accelerated growth in the ecom business which appeared resilient to any competition. Further, just a couple weeks ago, Sea announced a $575mm convert offering with a 2.25% coupon and a $20 conversion price (up 33% from where the stock trades and implies ~30mm shares on a 400mm base), which eliminates the capital raise overhang.
Going forward, with the stock now trading back at the IPO price and several of the overhangs addressed, both the near-term and long-term setup looks attractive. For one, big picture, their key markets in Southeast Asia (Indonesia, Malaysia, Thailand, Vietnam, Taiwan, Philippines and Singapore) grow real GDP at 2x the US and ~50% of their population is under 30, and ecommerce is underpenetrated at L/MSD compared to China in the 20’s%. Idiosyncratically, the video games segment is poised to accelerate over the next couple quarters with the beginning of the monetization of their hit title Free Fire beginning this month. For anyone following the video game space, Fortnite and the ‘battle royale’ genre has been wildly successful and Free Fire is like a ‘mini Fortnite’ of Southeast Asia. The game now boasts ~13mm+ in DAUs (nearly a quarter of their DAUs) and up until now was just free to play. It is currently a top 5 action game in 5 of their 7 markets according to App Annie and given the title was 100% developed in-house by Sea, they keep 100% of the proceeds. Moreover, the Company recently brought to market Fifa 4 which should do quite well given the World Cup and the fact that this is the first version available on mobile. Additionally, there are a host of additional titles in the pipeline including the new Contra game and several from Tencent and others that should round out the year. The Company also hosts eSports events to drive engagement and localizes 3rd party developed games. While the majority of the gaming content today is from 3rd-party developers, Garena has demonstrated an ability to create hit titles in-house with Free Fire and the Company aims to shift the mix of content to at least 50/50 developed in-house over the next few years. Beyond just the margin uplift from monetizing owned IP, owned IP also increases the TAM. Free Fire for example is one of the top downloaded games across several South American countries including Brazil. On the ecommerce front, in conjunction with the latest convert issuance, the Company mentioned it is now tracking ahead of the $8.2bn-$8.7bn of GMV guidance that they just raised in May, setting up another beat. Utilizing a 3P strategy, Shopee is able to offer a long-tail of categories (apparel/fashion, health and beauty, baby, toys, etc) and capture share in lower-tier cities vs the competition predominantly focused on selling 1P electronics merchandise in top-tier cities.
In summary, the Company’s got a leading position (teens mkt share in gaming, ~20% share in ecom) in secularly growing end markets within attractive geographies. The gaming business, Garena, has a network of ~80mm MAUs across their mobile app (which is among top ranked apps in terms of downloads in the region across iOS and Android) as well as via the 68,000 cybercafé partners across the region that use the Garena gaming platform. Gamers can socialize on the platform, chat, play games, and make in-app purchases. The ecommerce business has a leading market share position (estimated at ~20%) across its geographies vs primary competitors Lazada/Alibaba and Tokopeda. While Alibaba is obviously a deep-pocked competitor, Sea is 35% owned by Tencent who also participated in the recent convert offering and will continue to be a long-term strategic partner. In terms of alignment of shareholder interests, Forrest Li, the founder and CEO, also owns ~30%+ of the shares (excluding the convert). The key risks are the aforementioned competition in ecommerce, the ability to effectively monetize the GMV, the strength of the video game pipeline, and obviously general execution missteps. Finally, on valuation, this is certainly more of an art than a science given the stage of growth and monetization. That being said, the gaming business today has 40% EBITDA margins (similar to EA, ATVI, Tencent). Using a conservative mid-teens EBITDA multiple on 2020 gaming EBITDA (which is growing ~40% this year) plus the cash on the balance sheet gets you to the entire stock price today. In addition, the ecommerce business is growing triple digits and should do close to $9bn of GMV this year. Lazada, their closest competitor is valued at ~$6bn+ in sell side SOTP models and they will only do ~$5bn of GMV this year. Flipkart got bought for an implied 2.5x GMV, and Lazada at a $6bn valuation represents 1.25x GMV. Valuing Shopee at half the multiple of Lazada still implies a double from here and this excludes any value for the payments business that was growing 400% in the first quarter and processed $1.7bn of gross transactions.
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