Hi all, I’m 2 months new to the board and like many before, I have been mind-blown by the treasure trove of information here.
SE was briefly mentioned here a couple weeks back and I thought I would provide more details as a shareholder.
Sea Limited (Ticker SE), headquartered in Singapore, operates predominantly in Southeast Asia, home to a population of over 650m people. In recent quarters, SE has entered Latin America and India. It operates 2 main business segments.
Digital Entertainment: SE operates Garena Gaming which produces and distributes mobile games. It has a very strong presence in Southeast Asia, Latin America and increasingly, India and the Middle East. Garena produces its own games and has a right of first refusal for Tencent’s games in Southeast Asia. Think of Garena as the Tencent of Southeast Asia and Latin America.
E-commerce: SE operates Shopee, a relatively new entrant to Southeast Asia’s nascent e-commerce industry. Shopee runs a marketplace where sellers pay a fee to list their items. Think of Shopee as the MercadoLibre of Southeast Asia.
SE also operates a digital payments service called SeaMoney but that’s a relatively small part of the business right now.
Digital Entertainment: There are many global competitors but Garena is the largest in Southeast Asia.
E-Commerce: Shopee competes with Alibaba-backed Lazada and others. In spite of its relatively late entry into the market in 2015, Shopee is the fastest growing player. It is now the clear leader in the region in terms of GMV, MAU, downloads and time spent on the app.
According to my poll of the Mrs and a few female friends, Shopee’s mobile platform is by far the easiest to navigate. Prices are also competitive.
Management and Strategic Shareholder
Forrest Li (43 years old) is the CEO and Chairman. He’s a China-born Singaporean and graduated from Stanford’s MBA program. According to TMF, he adopted his English name from Forrest Gump because he identified with the character’s quiet and humble nature. He owns 30.6% of SE.
Tencent, China’s largest gaming and social network company, and also the 2nd largest Chinese company by market cap, owns 33.4% of SE. Tencent has been a strong strategic partner for SE, especially in the Digital Entertainment side.
Year Q1 Q2 Q3 Q4 FY 2017 93.9 101.5 94.1 124.6 414.2 2018 155.0 183.8 204.9 283.2 827.0 2019 351.9 436.2 610.1 777.2 2175.4 2020 714.9
Year Q1 Q2 Q3 Q4 FY 2017 2018 65% 81% 118% 127% 100% 2019 127% 137% 198% 174% 163% 2020 103%
GAAP Gross Profit Margin (the company does not publish non-GAAP figures)
You’ll see that margins are relatively low for a “tech” company but I’ll talk more about each segment later. Note that GP Margin has been improving yoy since 2018.
Year Q1 Q2 Q3 Q4 FY 2017 28.9% 25.4% 11.5% 18.9% 21.1% 2018 5.5% 4.7% 2.7% -2.8% 1.8% 2019 11.2% 22.3% 33.3% 34.1% 27.8% 2020 28.9%
Non-GAAP* Net Profit Margin (*I adjusted GAAP figures for SBC and change in FV of convertible notes)
Again, note that NP Margin has been improving well yoy since 2018.
Year Q1 Q2 Q3 Q4 FY 2017 -71.3% -85.5% -135.1% -160.2% -116.0% 2018 -120.4% -108.1% -115.9% -113.4% -114.2% 2019 -67.4% -49.3% -28.7% -30.9% -39.9% 2020 -33.5%
The company has been burning cash over the past few years. It does not disclose FCF on a quarterly basis. FCF margin improved in FY 2019 but it may continue burning cash as it grows. I want to see this metric improve. At end Q1 2020, the company had a cash position of $2.6b (and financial liability of $1.4b in convertible notes). FCF was -$176m in FY2019.
Year FY 2017 -81.8% 2018 -81.5% 2019 -8.1%
Earlier, I mentioned the low GP Margin. Diving into each business segment sheds more light.
Digital Entertainment GPM
Year Q1 Q2 Q3 Q4 FY 2018 42.6% 42.6% 43.2% 40.7% 42.2% 2019 51.2% 58.6% 64.4% 65.6% 61.6% 2020 61.4%
Year Q1 Q2 Q3 Q4 FY 2018 -118.2% -68.8% -58.8% -52.4% -65.3% 2019 -33.4% -19.7% -4.5% 0.6% -10.3% 2020 -7.1%
Looking at both segments, we can see that Digital Gaming enjoys pretty high GPM of > 60%. The E-commerce business started from scratch in 2015 and GPM has been increasing steadily since then. How high can it go? Mercado Libre has a GPM of 48% so I would use that as a rough reference. The e-commerce business potentially can improve GPM by over 50 percentage points.
Overall, financials show a company that is growing rapidly with fast improving margins.
TTM Rev = $2,538m. Assuming 40% growth pa over the next 5 years and 20% net margin, net margin = $2,730m. Applying a 40x multiple gives $109.2b value. Current market cap = $36.900.
As it currently stands, overall profitability of the business depends on the e-commerce segment. E-commerce is competitive by nature. Poor execution in this segment is a risk to the company.