Incorporated in 2009 as Garena Interactive Holding Ltd, a digital entertainment business, the company changed its name to Sea Ltd in 2017 and listed on the NYSE in the same year.
The group operate three businesses namely Garena (digital entertainment), Shopee (e-commerce), and SeaMoney (digital payments and financial services). Shopee is the largest pan-regional e-commerce platform in Southeast Asia and Taiwan. The founder owns 17% of the group's (A and B) shares and the co-founder 6%, while Tencent's subsidiaries own 19% (A shares). Directors and executives together own 30% (A and B).
The e-commerce platform was launched in Southeast Asia and Taiwan in 2015 and in Brazil in 2019. In 2021 the Shopee business was expanded into new markets in Latin America such as Mexico, Chile, Colombia, as well as Poland and Spain.
Shopee has significant growth potential. In terms of its offering, it mainly operates in fast fashion, accessories, footwear, and low- ticket home décor. This is a fragmented market where product differentiation counts. Shopee does not focus on electronics (it dilutes their differentiation) or phones (they don't have bargaining power) and offers this mostly as third-party inventory with low margins. Shopee runs an asset light model as it was a late entrant to ecommerce. Shopee previously attempted entry into India and France, but pulled out a couple of months in. The group is prioritising profit and India required significant long-term investment.
The digital financial services platform was launched in Vietnam and Thailand in 2014. In 2021 the digital financial service offerings was expanded across credit, insurtech and digital banking services. SeaBank was launched in Indonesia.
Financial review
For the year ended 31 December 2022:
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Revenue grew 25% y/y to $12.4 billion. Digital Financial Services grew almost three-fold to $1.2 billion while eCommerce increased revenue by 42.3% to $5.1 billion. Digital Entertainment revenue fell 10.3% to $3.9 billion.
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The total EBITDA loss widened from $593.6 million to $878.1 million but the group delivered a profit in 4Q22. For the year, losses narrowed in Digital Financial Services and Ecommerce, but profitability was weighed on by deteriorating profitability in Digital Entertainment.
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The business is in a net-cash position of $2.4 billion.
Investment case
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Sea Ltd is uniquely positioned to benefit from ecommerce and payments growth in South East Asia (incl. Taiwan) and Latin America. There is still plenty of runway for growth in the ecommerce and digital financial services business. Ecommerce and penetration rates are growing strongly in the regions that Sea Ltd operates in.
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Digital Financial services could benefit from the user traffic of Shopee.
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The company is expected to turn profitable in 2023 - well before previous estimates.
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The share price has dropped more than 70% from its highs in 2021. We think this provides a unique opportunity to get exposure to the South East Asia (incl. Taiwan) and Latin American markets.
Risks
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The major risk for Sea Ltd is that it suffers continued losses because of unexpected challenges, and not turning profitable as guided.
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Competition is intense - there is a risk of price competition intensifying and eroding margins.
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Execution risk on entering new jurisdictions (e.g., India).
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There is additional complexity involved in a business running across many jurisdictions, including currency risk.
Consensus considerations
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Consensus is positive on Sea Ltd stock, with 74% of sell-side analysts maintaining a “Buy” on the stock.
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Revenue is expected to grow by 8.5% y/y in FY23. Earnings per share are expected to come in at 68.2 US cents in FY23 on an adjusted basis
Valuation
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Sea Ltd trades on a price-to-sales of 3.5 times, lower than the company's two-year average of ~10 times.
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Our sum-of-the-parts model values Sea Ltd's stock at US$92, a 20% discount to the current share price.
