Sea Limited Is A Stock To Watch: High Risk, High Return

seekingalpha2021-03-18

Summary Sea Ltd is a potentially high-rewarding long-term investment. The company is involved in three key areas of digital businesses (digital gaming, e-commerce and fintech), which have benefited ...

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J5385
2021-03-22
J5385
good price now.
FuJie1010
2021-03-19
FuJie1010
Good Stock, hold long long
xuanlin
2021-03-18
xuanlin
Comment please :)
俊三木
2021-03-18
俊三木
DAY BUY DAY
BevG
2021-03-18
BevG
[得意]
JoyceChew
2021-03-18
JoyceChew
Good stock. Buy some and average down if there is opportunity
- JoyceChew:
  Pls Comment and like

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Its share price has had a spectacular growth in 2020 (rising by about 400%), primarily because of the pandemic, which has benefited from the surge in demand for all its digital businesses. This accelerated growth is unlikely to be repeated in 2021. However, 2021 will continue to usher in strong growth because of increasing online demand in the region.\nSea is a promising company and has the potential to become one of the largest companies in ASEAN because of its strong appetite for growth and expansion. It is already three times the size of Singapore Telecommunication corporation and twice that of PTT (Thai Petroleum) by enterprise value.\nSea’s future share price movement would depend on further increases in revenue growth and new revenue streams. However, it has significant risks and challenges from competition. At the current share price, Sea is 34% over valued (see annex 1) and is trading at 27 times of sales (2.5 times the average of its competitors, see annex 2). However, Sea’s good growth prospects within the next 2 years justify its price.\nSea’s three core businesses (gaming, e-commerce and financial services) have been growing rapidly (160% year-on-year by revenue). The revenue stream to watch in 2021 is its fintech arm (i.e. SeaMoney), which is currently contributing only one percent to Sea’s overall revenue. It has been awarded a banking licence by the Monetary Authority of Singapore in 2020 (1 of 2 awardees) and acquired Bank Kesejahteraan Ekonomi (in Indonesia) in January 2021. Its financial services business is well positioned for a prospective growth towards the end of 2021 and into 2022. SeaMoney on its own could potentially add an additional $15 per share to Sea’s overall share price by end of 2021 (based on fundamental discounted cash flow (DCF) valuation with ADYEN’s historical data as a comparator).\nOverview\nThe bulk of Sea’s business is in Southeast Asia. It operates in three key busines segments, through Garena (digital gaming), Shopee (e-commerce), and SeaMoney (digital financial services). Despite its rapid regional expansion, it has not yet generated profit. This situation is normal for businesses such as Sea, which has been focusing on building market position and expansion. Sea benefited from the COVID-19 pandemic, which accelerated its growth due to the surge in demand for its digital businesses.\nValuation of Sea Ltd\nDetermining a value for Sea is difficult at this point in time as the future potential of SeaMoney has yet to take shape. However, a ten-year DCF projection based on the company’s past performance can be used to determine a minimum intrinsic share price value without the growth contribution of SeaMoney (see figure 1 and table 1). Based on the DCF valuation, a $155.99 share price can be considered a low estimate for Sea. It is unlikely that the share price will drop below this point, barring external shocks and significant regulatory changes to the business sectors that it serves.\nFigure 1: Sea Ltd: Revenues, net income and free cash flows (Millions of Dollars)\nSource: Author’s calculation, with data from Sea Ltd.\nTable 1: Rates used in DCF valuation model\nSource: Author’s calculation, with data from Sea Ltd.\nGrowth drivers\nSea operates in a large agreeable market (Southeast Asia). It is one of the largest and fastest growing regions in the world (4.9% per year in the four next years) with a population of 670 million people and a GDP of $4.7 trillion by 2025 (more than that of India). The region’s internet economy has more than tripled over the past four years, reaching $100 billion in 2019 and is expected to grow to $300 billion by 2025 (a 20% CAGR) according to the Google, Temasek and Bain, e-Conomy SEA 2020 annual report. Digital financial services are another promising market for the region as it is expected to grow to $1 trillion by 2025, accounting for half the money transactions conducted in Southeast Asia.\nSea has multiple revenue streams, and the company has ample opportunities to explore new revenue streams and enhance synergistic advantages. Garena is already profitable and is an exclusive distributor of Tencent Games in Southeast Asia. It has been expanding in game development. This business segment is bank rolling Shopee and SeaMoney. The latter has the potential to contribute to Sea’s future growth. It is currently contributing only 1 percent of Sea’s revenue (see figure 1). It is not unreasonable to assume SeaMoney’s revenue could witness an exponential growth, if compared against the historical growth of Dutch fintech company, Adyen (also with a banking licence) (see figure 2).\nFigure 1: Sea Ltd revenue breakdown\nSource: Author’s calculation, with data from Sea Ltd.\nFigure 2: SeaMoney vs. Adyen revenue\nSource: Author’s calculation, with data from Sea Ltd and Adyen.\nRisks\nThere are some risks to consider. They include the following:\n\nExisting competition (high impact):Given the attractiveness of the markets that Sea participates in, there is fierce competition (especially in e-commerce and fintech) from other players such as Lazada, Grab, Gojek, Tokopedia and Bukalapak. This competitive pressure put into question Sea’s future growth and profits.\nNew competition Gojek/Tokopedia merger (high impact):In January 2021, Gojek and Grab merger talks fell apart. Currently, Gojek and Tokopedia are in the process to merge to form a $40 billion powerhouse and Grab is seeking IPO. The anticipated new entity (Gojek & Tokopedia) will be a formidable competitor to Sea in Indonesia, given Gojek’s and Tokopedia’s extensive business networks in the region.\nFinancial risk (moderate impact):Sea has been increasing its debt leverage, at US$1.92 billion (September 2020) – an increase of US$470.6 million in a year. However, it also has US$3.55 billion in cash, leading to a US$1.63 billion net cash position. While Sea is losing money, it has generated positive free cash flow of US$96 million (September 2020) and therefore has limited short-term balance sheet risk.\nSustainability (high impact):Sea has not been profitable in the past five years and will not be until 2022. It has been using the profits from Garena (its only profitable business segment) to finance the expansion of its e-commerce and Fintech businesses.\nOver-valuation (moderate impact):Sea is currently trading at a price-to-sales ratio of 27 times. This ratio is high as compared with Tencent Holdings at 11 times, Alibaba at 10 times and Meituan at 15 times. Although justifiable, this is a high premium to take on.\nRegulations (high impact):Sea is subject to government regulations. Its financial services business is especially susceptible to regulatory changes. This can be further complicated by the number of countries it operates in. However, this is unlikely to be an issue in Singapore, Sea’s home country.\nShare dilution (moderate impact):Sea has been constantly diluting its shares to support the financing of its various business expansions (see table 2).\n\nTable 2: Sea’s shares\n\nConclusion\nSea Ltd is a potentially high rewarding long-term investment but has a considerable amount of risk. However, the author believes that the company will overcome most of its challenge and strengthen its position as one of the dominant digital players in Southeast Asia. Investors should consider buying Sea as a long-term investment and with the strategy to buy the share when it dips in price and to slowly increase their position over time.\nSea is one of the most exciting stories to watch. Key issues to follow closely are the company’s growth, SeaMoney development and rising challenges for competitors. Sea is defiantly a worthy pick for investors who are looking to diversify their portfolio with a good Southeast Asian stock.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":359277578,"gmtCreate":1616408416494,"gmtModify":1704793639373,"author":{"id":"3573450191379774","authorId":"3573450191379774","authorIdStr":"3573450191379774","name":"J5385","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3573450191379774"},"htmlText":"good price now.&nbsp;","listText":"good price now.&nbsp;","text":"good price now.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/359277578","repostId":1114091354,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":350148395,"gmtCreate":1616169500217,"gmtModify":1704791883477,"author":{"id":"3569319160707763","authorId":"3569319160707763","authorIdStr":"3569319160707763","name":"FuJie1010","avatar":"https://static.tigerbbs.com/95099c51f8498b56c3973ded1570fc6b","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3569319160707763"},"htmlText":"Good Stock, hold long long","listText":"Good Stock, hold long long","text":"Good Stock, hold long long","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/350148395","repostId":1114091354,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":327632311,"gmtCreate":1616079377033,"gmtModify":1704790730480,"author":{"id":"3575152506937716","authorId":"3575152506937716","authorIdStr":"3575152506937716","name":"xuanlin","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":3,"crmLevelSwitch":0,"idStr":"3575152506937716"},"htmlText":"Comment please :)","listText":"Comment please :)","text":"Comment please :)","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/327632311","repostId":1114091354,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":327887408,"gmtCreate":1616076630904,"gmtModify":1704790624301,"author":{"id":"3547122408744848","authorId":"3547122408744848","authorIdStr":"3547122408744848","name":"俊三木","avatar":"https://static.tigerbbs.com/e17d7b3d292c763246c51b165629079f","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3547122408744848"},"htmlText":"DAY BUY DAY","listText":"DAY BUY DAY","text":"DAY BUY DAY","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/327887408","repostId":1114091354,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":327801119,"gmtCreate":1616074695431,"gmtModify":1704790562949,"author":{"id":"3568770848498679","authorId":"3568770848498679","authorIdStr":"3568770848498679","name":"BevG","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3568770848498679"},"htmlText":"[得意]&nbsp;","listText":"[得意]&nbsp;","text":"[得意]","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/327801119","repostId":1114091354,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":327964201,"gmtCreate":1616052112803,"gmtModify":1704790235458,"author":{"id":"3571889352436684","authorId":"3571889352436684","authorIdStr":"3571889352436684","name":"JoyceChew","avatar":"https://static.tigerbbs.com/bcd2a122cab87882e73eff3dc886ecec","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3571889352436684"},"htmlText":"Good stock.&nbsp;Buy some and average down if there is opportunity&nbsp;","listText":"Good stock.&nbsp;Buy some and average down if there is opportunity&nbsp;","text":"Good stock. Buy some and average down if there is opportunity","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/327964201","repostId":1114091354,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":3824139,"gmtCreate":1616052147713,"gmtModify":1680780824103,"authorId":3571889352436684,"author":{"id":3571889352436684,"authorId":3571889352436684,"name":"JoyceChew","avatar":"https://static.tigerbbs.com/bcd2a122cab87882e73eff3dc886ecec","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":327964201,"type":1,"supId":0,"prevId":0,"content":"Pls Comment and like  ","text":"Pls Comment and like  ","html":"Pls Comment and like  "}],"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":91,"commentSize":13,"repostSize":0,"favoriteSize":4,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.3","shortVersion":"4.28.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1114091354"}