A 3-in-1 Hypergrowth Company in Southeast Asia- Should You Invest?
Brief History of Sea Limited
Sea Limited is a holding company that does not have substantive operations. They conduct their businesses through their subsidiaries and consolidated affiliated entities.
Mission:
To better the lives of the consumers and small businesses with technology.
3 Core Beliefs:
Our people define us.
Our products and services differentiate us.
Our institution will outlast us.
5 Core Values
We serve.
We adapt.
We run.
We commit.
We stay humble.
Management Team
Forrest Xiaodong Li is the founder and has served as chairman of Sea Limited and group CEO since the company’s inception in 2009. A founder-led company is one of the traits of a multi-bagger. The importance of having skin-in-the-game cannot be understated.
What They Do?
3 key businesses
Garena
Digital entertainment business, global game developer and publisher
Offering mobile and PC online games and developing mobile games for the global markets.
Launched the first game that was developed entirely in-house, Free Fire, a mobile game of the battle royale genre in Dec 2017
Exclusive operator of Arena of Valor, a mobile MOBA game developed by Tencent in collaboration with Sea Limited
Shopee
Shopee e-commerce platform was the largest e-commerce platform in the region in 2020 by GMV and total orders, according to Frost & Sullivan (adopted a mobile-first approach).
Monetize Shopee mainly by offering sellers paid advertising services, charging transaction-based fees, and charging for certain value-added services.
Purchase products from manufacturers and third parties and sell them directly to buyers on their Shopee platform.
SeaMoney
A leading digital financial services provider in our region in 2020, according to the International Data Corporation.
Offers mobile wallet services, payment processing, credit related digital financial offerings, and other financial products (in various markets in Southeast Asia under AirPay, ShopeePay, SPayLater, and other digital financial services brands).
Garena falls under the “Digital Entertainment” category. Shopee and SeaMoney falls under the category of “E-commerce and other services”.
How Does Sea Limited Make Money?
Digital Entertainment → 46% of total revenue (77% growth YOY)
E-commerce and Other Services → 40% of total revenue (116% growth YOY)
Sales of Goods → 14% of total revenue (168% growth YOY)
Investment Thesis
Growth Beast- company has been increasing its revenues by more than 100% YOY for the last few years
Tap into multiple sectors with 1 company- company is in the gaming, e-commerce and payments space
Risk Factors
Slowdown in growth, particularly in their digital entertainment business segment (i.e. Garena).
In their annual report, the company mentioned that they view QAU as a key metric to help them understand both the active user base and user engagement on their games.
The user base from 2Q 2021 to 3Q 2021 remained flat. Something to monitor over a longer period before jumping to conclusions.
Company remains in a net loss position- this is because the company chose to re-invest their cash to expand and grow the business
Valuation
Performing a DCF calculation (figures as of fiscal year ended 31 Dec 2020):
Operating cash flow: $555 mil
Total debt: $1,840 mil
Cash and short-term investments: $6,166 mil
Number of shares outstanding (diluted) = 477 mil
Some Assumptions:
Cash flow growth rate (Year 1 to 5): 110%
Cash flow growth rate (Year 6 to 10): 25%
Discount rate: 10%
As with any discounted cash flow projection, there are some assumptions that have to be made. Careful consideration has to be made to ensure that these assumptions are reasonable.
Using a discount rate of 10%, the intrinsic value of Sea Limited (SEA) is about $288. I like to give a margin of error of 20% in case I am wrong in my calculation. Anything below $230 (20% less than estimated intrinsic value) is a good entry price for me.
Intrinsic value is a fluid number. The valuation of a company is a range rather than an exact number. For a company that is growing at more than 100%, using an operating cash flow growth rate of 110% for the first 5 years and 25% thereafter for the next 5 years is quite reasonable. You may argue that 110% growth for the first 5 years is a little optimistic, in which case you might want to look elsewhere for opportunities. For the record, the operating cash flow increased 8 times from 2019 to 2020 (from negative cash flow in 2018).
Conclusion
If you believe that the digital entertainment, E-commerce and payments sector are set to grow in the coming years, especially in Southeast Asia, then consider this 3 -in-1 hypergrowth company.
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Disclaimer: None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy. This article is a reflection of my opinion, and is not to be taken as investment advice.