To The Moon

Sea Limited (SE) reported mixed results for the first quarter of 2023. The company's adjusted EBITDA of US$507 million was in line with expectations, but its GAAP net profit of US$88 million was below expectations. Post-market, SE share price was punished for falling Wall Street’s expectation and drop 18% at close.

Analysts are divided on whether SE's mixed results are a sign of things to come. Some analysts believe that the company's strong operational performance is a sign that it is well-positioned for continued growth in the future. Others believe that the company's GAAP net profit miss is a sign that it is facing some challenges.

Personally, I do not think that SE had delivered a bad report card for 1Q23 at all. The impressive performance of Shopee and SeaMoney stands as concrete evidence of the robustness of these two businesses and the resilience of the Southeast Asian economy. Shopee, as the foremost e-commerce platform in Southeast Asia, and SeaMoney, as the leading digital financial services platform in the region, are both well-positioned for sustained growth in the foreseeable future.

Healthy momentum for Shopee and SeaMoney

SE's operational strength continued in 1Q23, with both Shopee and SeaMoney delivering strong revenue and adjusted EBITDA growth.

Shopee's revenue grew by 36% year-over-year (YoY) to US$2.5 billion, while SeaMoney's revenue grew by 75% YoY to US$0.7 billion. Both businesses also saw sequential improvements in adjusted EBITDA, with Shopee's adjusted EBITDA increasing by 6% and SeaMoney's adjusted EBITDA increasing by 31%.

Shopee was a bit better than expected. This was a positive surprise to me as I thought discretionary spending would suffer in the current economic environment. SeaMoney was a star performer this quarter as well. However, real digital banking services have yet to take off.

In view of the current macro uncertainties, management shared that Shopee will be focused on nimble execution, making investments from a bottom-up perspective and considering specific market conditions, such as user behaviour, competitive landscape, and macro conditions. Meanwhile, SeaMoney will continue to grow its fintech offerings and enhance operational/risk capabilities. The company is also diversifying sources of funding to back loan book growth.

Garena: Still a drag but signs of recovery.

Garena continues to decline as expected after the reopening of borders. This is due to lower gamer engagement. Bookings fell by 15% QoQ and 44% (YoY. However, adjusted EBITDA margin improved by 2.3 percentage points QoQ due to better cost control.

Garena's gaming business remains a drag on the company's overall performance. However, there are some positive signs that the business is starting to turn around.

Quarterly active users (QAU) showed signs of improvement, growing by 1% QoQ after five consecutive quarters of decline. User trends were positive as of April 2023, with Free Fire achieving a new peak in monthly active users (MAU) for the last eight months. Garena's second-largest game by revenue contribution, Arena of Valor, also achieved a new peak in QAU and bookings during Lunar New Year since its launch more than six years ago.

Garena will roll out two new games via its publishing business in the first half of 2023, and SE is confident that these new games will help to drive growth in the gaming business in the coming quarters.

Impacted by impairment

SE’s GAAP net profit was below expectations due to a goodwill impairment and a smaller-than-expected change in deferred revenue. The goodwill impairment was related to the company's investment in Garena, while the smaller-than-expected change in deferred revenue was due to a delay in the launch of some new products and services. Excluding the goodwill impairment, it would have been a beat instead.

Conclusion: I’m still hopeful!

Overall, I believe that SE had a good first quarter of 2023. The company's revenue and adjusted EBITDA margin both grew, and both of its core businesses saw strong growth. The only area where SE saw a decline was in its gaming business, but even there, adjusted EBITDA margin improved.

Looking ahead, I have confidence that SE will sustain its growth trajectory in the coming years, given its strong fundamentals and the favourable opportunities in the Southeast Asian market. As the leading platform in this rapidly expanding region, SE is well-positioned to capitalize on the vast opportunities presented by the world's fastest-growing digital economy, which is anticipated to soar to an astonishing $300 billion by 2025.

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