Sea Ltd (SE) Great performance, high risk

Investment Analysis Clubs Saul’s Investing Discussions
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Here’s quite an interesting very high risk stock discovered on my recent screen. Saul prefers I not post on that thread so I create this new one. The company Sea Ltd, a Singapore company, which has seen its stock price more than triple from January 3rd to today - $10.96 to today’s $36.08. It’s doing well recently at just 50? ($0.50) under its all-time high despite the recent general downturn in Asian stocks. It’s been trading since October 2017.

The company is primarily a gaming and e-commerce company. TMF wrote in April (https://www.fool.com/investing/2019/04/08/top-video-game-sto…)
“While the video game sector has proven to be a somewhat volatile one, investors who bought its top stocks at opportune times – and held on to their positions – have seen tremendous gains. The industry has experienced incredible growth over the past few decades, powered by expanding global demand, new technologies, and digital trends. And despite this impressive history, these may still be early days overall. The interactive entertainment industry is a large, fast-growing market that still has lots of potential. Companies that can continue adapting to – and shaping – the demands of that industry are poised to deliver great returns for shareholders.”

A Mar. 11 public TMF article illuminates (https://www.fool.com/investing/2019/03/11/why-sea-limited-st…:slight_smile:
“Sea’s two main segments, digital entertainment and e-commerce, each posted encouraging results in the fourth quarter. The company’s digtal entertainment segment saw revenues climb roughly 63% to reach $241.3 million thanks to strong performance from its software lineup. Sea’s internally developed game Free Fire was the fourth-most-downloaded game of 2018 on both the Apple App Store and the Google Play Store, powering the company’s gaming segment to better-than-expected performance.” The stock rose more than 50% since that article.

A May 22 public Seeking Alpha article earnings report shows revenues keep growing: https://seekingalpha.com/news/3466144-sea-limited-plus-23-pe…
Adjusted service revenue breakout: Digital Entertainment, $393.3M (up 169.3%); E-commerce, $149.2M (up 342.1%); Digital Financial Services, $2.8M (down 27.7%); Other, $33.5M (up 151%).

That same Seeking Alpha article raises a cautionary flag:
Net losses multiplied as well – to $689.6M from $216.2M – mainly due to a fair value loss of $436.1M from accounting treatment of convertible notes issued before the company’s IPO.
Sounds as if the added $216.2M loss is accounting treatment loss due primarily due to fair value loss of 436.1 million dollars on the 2017 convertible notes as the share prices during the quarter significantly exceeded the conversion prices of these notes. Cash in the first quarter of 2019 rose to $2,362.5B from $1,002B at the end of 2018. https://cdngarenanow-a.akamaihd.net/webmain/static/resource/…

Margins look good and are rising. Adjusted EBITDA margin increased to 57.4% for the first quarter of 2019, from 37.7% for the first quarter of 2018 and 45.5% for the fourth quarter of 2018. https://cdngarenanow-a.akamaihd.net/webmain/static/resource/…

Cash flow is negative but improving:
in millions

3/31/2019	12/31/2018	9/30/2018	6/30/2018
-17,815	                  -138,191	-73,916	               -188,753

Forrest Xiaodong Li is the founder, chairman and CEO serving since inception in May 2009. He retains a large interest in the company - over 30% of classes A & B stock and 44% voting power. He previously held positions in multinational corporations Viacom Media Networks, Corning Inc. and Motorola. Li holds an M.B.A. degree from Stanford University’s Graduate School of Business and a bachelor’s degree in Engineering from Shanghai Jiaotong University.

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Fwiw, some of the top hedge funds have large positions in this name: Tiger Global, Lone Pine, Farallon, Hillhouse.

Fidelity is the top holder. Again, just fyi but those first couple names are very, very astute investors with experience in this sector.

Lone Pine had a very very large position in ATVI which is out of their top 20, so seemingly rotated some of that into SE.

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MagellansQuest,

Great intro to SEA Ltd (SE).

I bought an entry level position after their last earnings report based on the strong revenue growth you covered.

Aside from looking like market leaders in their biggest product categories I especially liked:

A. The quality of their gaming mix that included their own massively successful game, Free Fire, that you mentioned plus:
• being the exclusive operator of top games in their region including League of Legends, FIFA Online 3, Point Blank, Blade & Soul and Arena of Valor
• their investments and encouraging results in esports

Selected stats from their earnings release - Gaming (Garena is the name of their gaming division):
• Our inaugural Free Fire World Cup attracted more than 27 million online views in total and recorded peak concurrent viewers of over 1.1 million on YouTube.
• In April 2019, we held Garena World 2019, our region’s largest eSports event, in Bangkok, Thailand. The event attracted approximately 270 thousand visitors, with total online views for the various tournaments topping 30 million.

B. Their e-commerce initiatives branded “Shopee” and payments solution branded “Airpay”. “Shopee is the leading e-commerce platform in Southeast Asia and Taiwan. It is a platform tailored for the region, providing both buyers and sellers with an easy, secure and fast online shopping experience through strong payment and logistical support.”

Shopee appears to be SouthEast Asia’s version of MELI. While I think more focused plays (like Etsy, Chewy or Wayfair) will do better when competing with Amazon or bricks and mortar retailer online initiatives in established markets, it sounded like e-commerce in some of their countries was still in its earlier stages when localization, free shipping, and solving payment issues should enable them to dominate and generate strong growth.

3 E-commerce highlights from their earnings release:
• Adjusted revenue was US$149.2 million, up 342.1% year-on-year from US$33.7 million for the first quarter of 2018. It was also up 17.6% quarter-on-quarter from US$126.9 million for the fourth quarter of 2018, despite the first quarter being traditionally a low season for e-commerce.
• Adjusted revenue included US$102.0 million of marketplace revenue*, up 362.6% year-on-year from US$22.0 million for the first quarter of 2018 and up 16.4% quarter-on-quarter from US$87.6 million for the fourth quarter of 2018, and US$47.2 million of product revenue2, up 303.6% year-on-year from US$11.7 million for the first quarter of 2018 and up 20.2% quarter-on-quarter from US$39.3 million in the fourth quarter of 2018.
*Marketplace revenue mainly consists of transaction-based fees and advertising income and revenue generated from other value-added services. – My underline – they are working to increase monetization of their properties.
• According to App Annie, in the first quarter of 2019, Shopee was the most downloaded app in the Shopping Category in Southeast Asia and in Taiwan.

Overall, the Q1 results were outstanding and even today after a post-earnings runup to today’s $35.6 (from $25 the day before Q1 ER) it still has just a P/S of 15.5. However, there are so many unknowns with this region and given the relative volatility of gaming/ecommerce vs SAAS I will wait and see how the next earnings report looks before changing my position.

I appreciate any feedback you have on my post.

Doug
Long SE with small “check it out” holding

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Doug, I did same as you - established a small entry position. Your post added a lot of color for a more complete description, which is the great thing about using a board like this.
With a small position we’re not going to get burned badly, but have the chance to make some significant money. Zero is as low as the stock can go the bottom limit; the top limit is much higher.

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Najorf, it’s good to have this info. Any idea when their positions were created? Curious if it was much earlier or after the last earnings report.

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I don’t have anything to add in regards to this company specifically, but I know that e-gaming in Asia is huge and growing absurdly fast, much more prevalent than in North America. I have a friend/old college roommate that works for one of the large brokerages so stock/company analysis is his life, and Tencent is one of his main holdings for similar reasons.

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A few questions based on my review of the latest quarterly: https://cdngarenanow-a.akamaihd.net/webmain/static/resource/…

  1. Why the sudden jump in revenue when it was flat for the previous 3 quarters?

  2. Why the sudden jump in paid users when it was previously flat as well? Was there a change in business strategy?

  3. Gross margins are ~21%. Why.

  4. Is revenue reoccurring? i.e., subscription model. If so, then I think of this like a Netflix of subscriptions. If not, then I assume this is like Electronic Arts, constantly trying to be creative for the next hit.

My assessment is that the revenue growth is either in early takeoff… or lumpy… and gross margins are questionable. I don’t know enough about the business model to know if revenue is reoccurring or not.

Final question: How dependable/defendable is the credibility and reporting requirements in the country? I’ve exited by Chinese investments for this reason.

Thanks,
Just a Fool.

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Jaf, answers to a lot of your questions can be found on the transcript of the last earnings conference on the company’s website. See https://cdngarenanow-a.akamaihd.net/webmain/static/resource/…
Of course, take it with a grain of salt since it’s soley from the company; but it does give a good overview of the business. If after poking around on that site, you find anything interesting not covered, we hope to hear from you.

As far as regulation, this is a Singaporean company, not Chinese. As Najor pointed out a lot of large successful hedge funds have substantial positions and I hope they did their due diligence. Fidelity has over $250M invested at last reporting. Really aren’t a lot of stocks purchaseson hope backed by our limited abilities to analyse? Couldn’t we say the same for a lot of SaaS stocks, some of which have tremendous EV/P ratios?

The difference as I see it may be in subscriptions as you astutely point out. Let us know what you find. This company is not just a game company. E-commerce is also a big part of its revenue.

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If after poking around on that site, you find anything interesting not covered, we hope to hear from you.

As far as regulation, this is a Singaporean company, not Chinese. As Najor pointed out a lot of large successful hedge funds have substantial positions and I hope they did their due diligence. Fidelity has over $250M invested at last reporting. Really aren’t a lot of stocks purchaseson hope backed by our limited abilities to analyse? Couldn’t we say the same for a lot of SaaS stocks, some of which have tremendous EV/P ratios?

ABSOLUTELY NOT.

I have not once invested in a company that I relied on hedge funds to do my homework for me. It is my money. They invest in everything and PRAY to beat the market.

I look for high margins, high growth, predictable growth, clear TAM, clear strategy, and great leadership.

I make sure I understand how they make money, what the key metrics I should track are, so that I know how to monitor my conviction.

I raised red flags that I would expect anyone who has money invested to answer fairly easily.

Never, ever, rely on others to tell you where to put YOUR money.

Sorry this is blunt, but I manage money for my family and my future, I’m not trying to let some analysts wild guess tell me where to put it. $250MM IS NOTHING to a hedge fund.

End rant
Just a Fool

Long using screeners, short not conducting due diligence

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JAF a lot of the points you bring up in your “rant” (your words) are valid. Unfortunately you took my reference to hedge funds as the reason I invested in this stock. In fact I made the reference to hedge funds only in response to your concerns about regulation. In this regard, the company is not Chinese but Singaporean and yes I do consider the significant investment as a factor but certainly by no means the one and only factor regarding regulation.

If you read my first post and then look at the companies SEC filings you’ll find favorable answers to your other concerns: “high margins, high growth, predictable growth, clear TAM, clear strategy, and great leadership”. Except for TAM perhaps, those concerns were very favorably addressed by the conference call and other outside reviews including public reviews on TMF.

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Found the answer I was searching for

The company makes the vast majority of its money off a single game: Firefight

It’s only other covered in its pipeline is the rights to market Call of Duty on Mobile

The company reference Vietnam and Latin America as its growth markets.

The company is also trying eCommerce through its platform.

In reference to other games being developed “We do have several development in our – new title development in the process. I think this is still too early to specifically talk about any individual of note. But we remain a very kind of fast execution approach. Clearly, we just a have very small team, probably 5 to 6 people, and to build our idea and start to build up the prototype.”

Sounds like this company is a bet on your confidence in Firefight. Out of my league until I see more convincing data.

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JAF, first let me say I construed the purpose of this board to find and discuss stocks with high growth and high growth potential. To that end I try to deliver a stock that fell into that category. To my knowledge, no one else had brought up Sea Ltd before. This is surprising really because it was the 3rd fastest rising stock in the past 52 week period of all stocks tracked on Yahoo. It was beat out by 2 SaaS stocks often discussed here.

Now to specific points you raised. I unclear why you say “The company makes the vast majority of its money off a single game: Firefight” when it’s clear that that’s not the case. A 3-11-19 TMF article at reveals substantial income from e-commerce. "Growth for the company’s online retail business was even more impressive. E-commerce revenue rose a staggering 1,262% to reach $126.9 million as the company’s Shopee platform continued to expand and saw the benefits of partnerships with new buyers and sellers and strong momentum in Indonesia – the app’s top market. " That $126.9M figure compares very favorably to its digital entertainment revenue of $241.3M but e-commerce revenue rose dramatically faster (1,262% compared to 63%).

Still none of this takes away from my caption that this is a high risk stock and I certainly have not sunk a high percentage of my portfolio into it. But at least for me, it bears watching and taking a small position. I doubt if I will regret if the stock dives; but I can’t make money if I don’t invest.

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I’ve been wrong on plenty of stocks before, yet, I learn.

For instance, I exited MDB soon after the Amazon build out of DocumentDB. I did not like the companies response and I believed Amazon had the capability to offer a competing service that would detract from MDB Atlas. As a result, I missed out on 80% escalation before reestablishing a small position after the last earnings report.

Why did I reestablish? Numbers don’t lie. Revenue was growing. Atlas was growing. I’m still concerned but I’m not seeing evidence play out as I feared.

So what did I do with this lesson? When Elastic had a similar announcement of Amazon competition, I’ve stayed the course and built out a position. Elastic revenues and customer base continues to be impressive. I’ll wait until they prove otherwise before exiting. High growth. High margins. High retention.

I’ve also made mistakes in exiting because of FUD with ENPH. I was in ENPH at $0.85 and exited at $3.21. Not bad! Exited when tariffs came down. ENPH recently soared beyond $20/share. I’m happy for those in it but solar still bothers me because I am too close to understanding the regulatory landscape to make any bets. I have a laundry list of losing renewable energy plays where I bet on single source revenues that are traditional sell the widget businesses. I’ve exited those businesses - which can be high growth - for reoccurring revenues with high margins. Because…I have reduced FUD in these stickier businesses.

Finally, I pressed for responses from you on the business because my personal style is to layout the business by numbers as my argument to answer questions. I did that with MITK and got great feedback from Saul, Bear and others on it. I exited MITK when the C suite exited, bought back in when a buyout was considered, and re-exited when they decided to end buyout considerations. It’s a good business, however, it’s struggling to accelerate based on the numbers. It had a fluke quarter it seems.

I’ve also brought EVBG and collaborated on PD on the board. I still own both. EVBG is up 133% for me and PD is up 10% or so. I see both as playing into an expanding TAM and I see PD as having more optionality into where it goes, particularly because they ascribe to the developer first model (think TWLO). This is particularly sticky.

So, please, don’t think my comments are any more or less than pushing my opinions into the discussions. I often don’t see my strength as being able to pile onto the “me too” of core stocks that others can articulate and cover so well (AYX, ZS, TWLO, TTD, MDB, etc). Rather, I play the edges and margins and scavenger to next as a practice to learn 1) how to identify and 2) how to run due diligence and share my knowledge in a single place without referring to others. I truly want to know this skill set.

As such, I’d be remisced if I didn’t reshare a link I keep track of stocks on the P/S vs Gross Profit Growth. I’m more and more convinced this is how we see relative valuation vs growth. As such, many new IPOd stocks are simply coming to market earlier versus obtaining another seed round. ZM, WORK, CRWD. And while their P/S are extraordinarily high, they are tracking on a path that the market establishes.

https://m.imgur.com/a/4BXjlan

Respectfully,
Just a Fool

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Thanks for the link to imgur. It’s an interesting site with a lot of good info.

By the way, SE’s EV/S is only 14.06 which may be of some comfort to those scared up by Zoom’s sky high ratio.

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I read a release where Sea Ltd forecast 81-95% revenue growth

Let’s say they beat and call it 100% revenue growth

Let’s assume we stay at 21% gross margins

To map our plot of P/S we Multiply 100% by 21% (Rev Growth * Gross Margin)to get 21%

At a 14 P/S this is a higher valuation than we typically find for other SaaS stocks who have that 21% of gross profit growth coming in.

http://imgur.com/a/4BXjlan

This is why Margins matter

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Good point to consider, JAF. Where did you get the 21% margin rate? Last I looked, margins had expanded to 57.4% for the first quarter of 2019, up from 37.7%. 1st quarters are typically slow for the company.

By the way, when you raised some earlier questions, I should have also pointed you to Soludag’s post in this thread (number three post) which has some additional info you might want to use.

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JAF,
I love that you have a list of your mistakes at your fingertips to try to not repeat them. I will put that on my todo list.

I glanced at their Annual Report and it seems like they have Digital entertainment which has grown modestly, but E-commerce is providing most of their growth with negative gross margins.

They are losing money fast and growing debt fast. Buyer beware!

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Magellan,

This discussion is crowding the board, so this will be my last post.

I went to the quarterly results on the Investor Relations page: https://cdngarenanow-a.akamaihd.net/webmain/static/resource/…

I grabbed the latest report

I went to the Revenues Line: $351.86MM
I went to the Cost of Revenues Line: $312.41MM
I calculated the Gross Profit: $39.45MM

Then I calculated the gross Profit Margin: 39.45MM / 351.86MM = 11%

However, because in their presentation they just an AdjustedRevenue, I gave them the benefit of the doubt: 1-(312.41MM/393.3MM )=20.6% Note: If I were planning to invest, I’d plan to understand what was Adjusted and why

As for “gross margin expansion”
Their previous year Gross Profit Margin was 5.5% (8.525/155.044)

This company only underlines the value of asset light investments, to me.

Best of luck, I hope this helps educate you into my thought process and why I don’t see this as a good investment, even if there is great revenue growth alone.

Just a Fool

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The company makes the vast majority of its money off a single game: Firefight

I think you meant Free Fire. Garena’s reach has broadened globally with the highly successful launch of its first fully self-developed game, Free Fire. This has resulted in quarterly active users QAUs) growing 5x to 272m in 1Q19 from 56m in 1Q17. Following the success in LatAm, Sea disclosed accelerating user growth in markets like India, Russia and Turkey. This potentially increases Garena’s addressable market by >50%.

Across 18 LatAm countries, Sea has already launched pre-registration and beta testing of Speed Drifters, its first publishing IP in LatAm, with 1.3 million people signing up already. Teamfight Tactics, an auto chess mod of League of Legends, is now available in SE Asia which increases the revenue potential of Sea’s existing publishing IP.

At a 14 P/S this is a higher valuation than we typically find for other SaaS stocks who have that 21% of gross profit growth coming in.

I think you’re using trailing P/S? For 2019 [we are half done already] it looks like just under 6.5x P/S to me.

EBITDA margins are expected to grow from 40% last year to 54% this year.

Gaming revenue is expected to grow at 140% this year, last Q the growth was 57%. Free Fire has 80% more users than Fortnite according to the firm, in 130 global markets. Given the high rate of growth this year, that will slow next year to the 20s. Paying users rose from 7.2m to 11.4m with an ARPU of ~$19-21. They now have 200 developers at their game studio in Shanghai enhancing Free Fire and working on new games.

Garena licenses the majority of online games from international game developers with license agreements typically ranging from two to seven years. Garena licenses games from key international developers like Tencent, Riot Games, Electronic Arts and PUBG Corporation. Garena has typically published games in ASEAN + Taiwan and it works with game developers to localize game content ahead of publication. In Nov-18, Garena signed a master license agreement with Tencent which grants them a right of first refusal to publish Tencent’s mobile and PC games in Indonesia, Taiwan, Thailand, the Philippines, Malaysia, and Singapore.

Total adj revenues will be ~100% this year and 60% next. Gross Margin should grow to 26% next year.

E-commerce revenues are estimated to grow 500% from last year through 2021, so 6x to $1.9Bn. Shopee is gaining market share amongst all ASEAN regions. 2/3 of their revenue is currently Indonesia + Taiwan. Shopee appears to have become one of the top five ecommerce companies across ASEAN + Taiwan within 2yrs, despite launching ecommerce operations later than its competitors.

Shopee’s take-rate adjusted for differing acc’tg policies is about 1% of GMV, much lower than peers like BABA at 3%, ebay at 8%, Rakuten at 11%, they are in the early stages of monetization.

AirPay will reduce their costs but not be a revenue driver for them.

Given the above, FCF troughed last year and is expected to turn positive by 2021. Sales and Marketing expenses which peaked in 2017 at 10% of GMV are already down to 4% as growth is rocketing upwards.

If you strip out the mobile gaming component alone at give it a 16x PE for 2019 versus peers of 22x, you get a valuation of almost $13.5bn already with no value for their e-commerce platform. $1.4bn net cash on b/s.

A discounted to China e-commerce platform GMV multiple of 0.2x gives you ~$3bn valuation for 2019.

In 2017 they issued converts to Hillhouse and Tencent, which have been converted into shares post Jan-2019.
Last year they issued $575m of 2.5% 4-yr converts with an initial conversion price of $19.80.

Sea has adopted a dual-class voting structure whereby Class A ordinary shares carry one vote and Class B ordinary shares are entitled three votes per share.
As of Dec-18, CEO Forrest Li had a 31% beneficial ownership of Sea while Tencent entities had a 33% beneficial stake. Forrest Li has 44% of the voting rights.

For now this is still a ‘mobile gaming’ stock with 5 titles comprising 80% of revenues. New hits will have to come along but offering Call of Duty mobile is a nice arrow in their quiver. There are certainly competition in e-commerce and gaming, and regulatory risks as with all of these names in Southeast Asia. E-commerce taxes may be introduced.

No position, may add a tiny starter one to keep watch on this name,

Naj

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Thanks Najdorf. You laid this out very well - much better than I. It is a concern that the greatest portion of revenue is from games, which sell to a fickle public. But the company seems to be aware of this and is getting into e-commerce (it’s the region’s largest provider) and “AirPay”, a digital financial services platform. Such services have really taken off in China and most Chinese now do not pay with credit cards are cashed. I don’t mean to infer this company is a Chinese company. It mostly serves the rest of S.E. Asian, excluding Japan.

Revenues in these “divisions” are increasing strongly. For me, with a small position, the stock bears watching because the momentum is so great. The company seems to have a habit of being the leader in its endeavors in the region it serves such as games, e-commerce, etc. I like that.