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2023-04-24

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Sea Limited: Ample Room For Growth, But Competition Is Here To Stay

SummarySea successfully cut its costs, improving its unit economics, and turning its EBIT positive.

Sea Limited: Ample Room For Growth, But Competition Is Here To Stay

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","content":"<html><head></head><body><h2 style=\"text-align: left;\">Summary</h2><ul><li><p>Sea successfully cut its costs, improving its unit economics, and turning its EBIT positive. However, this comes at the expense of GMV growth, which has been a concern for investors.</p></li><li><p>However, we believe that low e-commerce penetration, take rate expansion, large unbanked population offering large potential for digital financial services, and a more rational industry will help drive top-line growth.</p></li><li><p>Still, the competition is here to stay, as social commerce is gaining traction. New players could be aggressive, thus forcing existing players to do more promotions and discounts.</p></li><li><p>We estimate Sea&#39;s fair value at $88 per share derived from 10-year DCF (9% WACC, 4% long-term growth). An aggressive 30% margin of safety suggests that an attractive entry price is $62 per share.</p></li></ul><h2 style=\"text-align: left;\">Investment Thesis</h2><p style=\"text-align: left;\">We believe that the Southeast Asia and Latin America e-commerce markets remain under-penetrated, and the unbanked population provides opportunities for digital financial services. Cost-cutting efforts slowed GMV growth, but as the industry is heading toward profitability, thus fewer discounts, customers will be looking for a better customer experience, in our view. However, competition is here to stay as social commerce is gaining traction. The stock is attractive at $62 per share (30% margin of safety). $66 per share (25% margin of safety) is also a good entry point.</p><h2 style=\"text-align: left;\">A New Kid On The Block, But Soon Become A Tech Giant</h2><p style=\"text-align: left;\">Originally started as a digital entertainment company in 2009, Sea Limited (NYSE:SE) is a Singapore-based tech company with a $45 billion market capitalization. The company’s operations span across countries, including Southeast Asia, Taiwan, and Brazil. The market in Southeast Asia, which more specifically includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam, contributes more than 60% of Sea’s revenue.</p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/b468d98f9cff8351e96ccb675990ae06\" alt=\"Sea&#39;s revenue contributors by geographical area (Vektor Research)\" title=\"Sea&#39;s revenue contributors by geographical area (Vektor Research)\" tg-width=\"569\" tg-height=\"420\"/><span>Sea&#39;s revenue contributors by geographical area (Vektor Research)</span></p><p style=\"text-align: left;\">In general, Sea has three business segments: Garena, a digital entertainment business; Shopee, an e-commerce platform; and a digital financial services provider under SeaMoney. As of 2022, Shopee contributed almost 60% of Sea’s revenue.</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/bff722fc1c13e0cbaf23d1e39f2e51d6\" alt=\"Segments contribution to revenue (%) (Vektor Research)\" title=\"Segments contribution to revenue (%) (Vektor Research)\" tg-width=\"569\" tg-height=\"420\"/><span>Segments contribution to revenue (%) (Vektor Research)</span></p><h2 style=\"text-align: left;\">How Does Sea Make Money?</h2><p style=\"text-align: left;\">First, Sea launches and operates third-party games and helps its partners with marketing, distribution, and monetization. Free Fire is the company’s first in-house developed game, and together with four third-party games, contributed 98% of Sea’s digital entertainment revenue. Those games are free to play, but players can purchase in-game items, from which Sea monetizes its gaming platform under the so-called “freemium” model.</p><p style=\"text-align: left;\">Second, Shopee is an e-commerce platform where individuals, small-medium enterprises, and large retailers under Shopee Mall sell their products by paying transaction fees. Sellers can upgrade their status to Star or Star+ after completing a few milestones but will be charged a higher transaction fee, hoping that buyers will consider them more “trusted” sellers than non-Star ones. Alternatively, sellers will gain more clicks by topping up the “coin” balance and using those coins for Shopee’s advertising services. Additionally, Shopee also engages in the food delivery business under Shopee Food.</p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/31e8e836b706ce207fbad6d6e8cc1ec0\" alt=\"Shopee&#39;s transaction fees (Shopee)\" title=\"Shopee&#39;s transaction fees (Shopee)\" tg-width=\"640\" tg-height=\"253\"/><span>Shopee&#39;s transaction fees (Shopee)</span></p><p style=\"text-align: left;\">Lastly, Sea provides digital financial services, including mobile wallet (ShopeePay), buy now pay later service (SPayLater), and digital banking services. Further, Sea acquired a local Indonesian bank in 2020 and launched SeaBank Indonesia a year later, and SeaBank Philippines was opened in 2022. Sea charges fees and interests and receives premiums (insurance business) for its services.</p><h2 style=\"text-align: left;\">What&#39;s Up With The Stock?</h2><p style=\"text-align: left;\">Sea’s stock bottomed up from $40 per share and now trades at $79 per share. The company pivoted from being growth-driven to a profit-minded one, with its operating income turning positive to $343 million. Why the pivot? The Motley Fool noted Sea’s CEO’s memo to employees suggesting the inability to “raise funds in the market” due to “investors fleeing for ‘safe haven’ investments.” Additionally, Tencent had shed its stake from 21.3% to 18.7% early last year before its COO left Sea’s board of directors.</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/016819409b67a9550445878277934a61\" alt=\"Data by YCharts\" title=\"Data by YCharts\" tg-width=\"635\" tg-height=\"417\"/><span>Data by YCharts</span></p><p style=\"text-align: left;\">As a result, the company cut costs left and right by “reviewing” its headcount, being selective in “high potential projects,” and better targeting its marketing spend. For example, Sea reportedly laid off around 10% of its workforce at some point last year and effectively reduced its sales and marketing expenses as a percentage of revenue to 14% in 4Q22 from ~25%-40%.</p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/8a931f85a5c4aa3509a23be65e28c317\" alt=\"Sea&#39;s sales and marketing expenses as a % of revenue (Vektor Research)\" title=\"Sea&#39;s sales and marketing expenses as a % of revenue (Vektor Research)\" tg-width=\"569\" tg-height=\"415\"/><span>Sea&#39;s sales and marketing expenses as a % of revenue (Vektor Research)</span></p><p style=\"text-align: left;\">This helps improve Shopee’s unit economics, as seen in Figure 6. Sales incentive that exceeds the revenue expected by the company will be recorded in sales and marketing expenses. According to the annual report, excess incentive was about 12% of revenue in 2022 and less than 5% in 4Q22, suggesting that Sea has aggressively reduced discounts and promotions.</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/7eef2b8a809c5a22515d4c431a01b3fe\" alt=\"Shopee&#39;s unit economics (Vektor Research)\" title=\"Shopee&#39;s unit economics (Vektor Research)\" tg-width=\"640\" tg-height=\"350\"/><span>Shopee&#39;s unit economics (Vektor Research)</span></p><p style=\"text-align: left;\">Nevertheless, gross orders declined 15% (Y/Y), and GMV growth slowed to 8% (Y/Y) in 4Q22 from 21% (Y/Y) in 3Q22 on a constant currency basis. Reported GMV declined 1.1% (Y/Y). Moreover, Sea reported $7.3 billion in e-commerce revenue last year–lower than its then-full-year guidance of $8.8 billion (mid-point), later scrapped due to a shift to “focus on efficiency and optimization for the long-term strength and profitability of the e-commerce business.&#34; In turn, take rate increases supported Sea&#39;s e-commerce top-line growth. Operating cash flow was a negative $1.1 billion last year (-$1.8 billion minus share-based compensation).</p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/61b99842606897676083b252be90ace4\" alt=\"GMV and e-commerce revenue growth (Vektor Research)\" title=\"GMV and e-commerce revenue growth (Vektor Research)\" tg-width=\"564\" tg-height=\"406\"/><span>GMV and e-commerce revenue growth (Vektor Research)</span></p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/649409dc1f9d2077c49d3e996a229db7\" alt=\"Data by YCharts\" title=\"Data by YCharts\" tg-width=\"635\" tg-height=\"417\"/><span>Data by YCharts</span></p><p style=\"text-align: left;\">But this did not stop the stock price from rising, as investors and analysts have been eyeing Sea&#39;s cost-cutting efforts, which turned its EBIT positive. Still, concerns remain about whether such efforts will come at the expense of top-line growth. Lastly, is Sea providing an attractive buying opportunity?</p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/7924a5ab9c99a0e186899709186d8f39\" alt=\"Sea&#39;s consensus revenue revision trend (Seeking Alpha)\" title=\"Sea&#39;s consensus revenue revision trend (Seeking Alpha)\" tg-width=\"640\" tg-height=\"223\"/><span>Sea&#39;s consensus revenue revision trend (Seeking Alpha)</span></p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/4f415315da88912e696ab00caf08a197\" alt=\"Sea&#39;s consensus EPS revision trend (Seeking Alpha)\" title=\"Sea&#39;s consensus EPS revision trend (Seeking Alpha)\" tg-width=\"640\" tg-height=\"224\"/><span>Sea&#39;s consensus EPS revision trend (Seeking Alpha)</span></p><h2 style=\"text-align: left;\">1. The Industry&#39;s Potential Remains Largely Untapped</h2><h4 style=\"text-align: left;\">Southeast Asia and Latin America e-commerce markets remain under-penetrated...</h4><p style=\"text-align: left;\">We believe that Sea’s growth story is still in play. While the e-commerce market in Southeast Asia has grown five times larger, it remains under-penetrated. According to McKinsey, Indonesia and Singapore had a ~30% penetration rate, while the Philippines, Thailand, and Vietnam trailed at ~15%. Looking forward, the consultancy expects the market to grow 22% annually until 2026.</p><p style=\"text-align: left;\">For example, Alpha JWC Ventures and Kearney published a study on the untapped potential of Indonesia&#39;s tier 2 and tier 3 cities. The study noted that those cities lagged three to five years in the digital adoption of tier-1 cities and that “familiarization” is likely the key driver to adoption. How big is the market? The e-commerce market size for tier 2 and 3 cities is expected to grow to ~$45 billion GMV in 2025 from ~$9 billion GMV in 2020. Additionally, the buy now, pay later service also helps spur e-commerce growth, given that the credit card penetration is only 6% in the country, as noted by BCG.</p><p style=\"text-align: left;\">Further, Shopee has gained traction in Brazil since its inception in 2019. Revenue grew over 225% (Y/Y) in 3Q22, and unit economics gradually improved. It had recorded &#34;below $2&#34; adjusted EBITDA loss per order before HQ expenses (contribution margin) in 4Q21 before improving to a $0.47 loss in a year later.</p><p style=\"text-align: left;\">Latitud noted that Latin America’s e-commerce market remained fast-growing, and its penetration rate was estimated to be less than 12% in 2022. Statista noted that retail online sales in Latin America were around $168 billion in 2022, which only accounted for 11% of total retail sales. The figure is estimated to increase to ~20% by 2026. Additionally, the International Trade Administration said that Shopee was number two in market share in Brazil, preceded by Argentina-based MercadoLibre (MELI).</p><p style=\"text-align: left;\">Sea&#39;s growth story comes from not only a low penetration rate but also a take rate expansion. While Sea is improving monetization in its core marketplace business, its take rate is also supported by Shopee Brazil. In general, the take rate in Brazil was &#34;materially higher than many other market,&#34; the management said. For example, MELI&#39;s commerce take rate stood at ~17%, which expanded thanks to &#34;advertising revenues and the incremental monetization on shipping and logistics.&#34;</p><p style=\"text-align: left;\">We acknowledge that it is tough to quantify how much Shopee Brazil will impact the overall take rate since Sea does not (or rarely) disclose the e-commerce revenue per region. In 4Q21, Shopee Brazil recorded more than $70 million in revenue, which accounts for over 4% of total e-commerce revenue. If we are making an educated guess, assuming that the revenue growth was about 200% (Y/Y) in the 4Q22 (actual growth was 270% in 2Q22 and 225% in 3Q22), it would make up about 10% of Sea&#39;s e-commerce revenue. Our assumption for Sea&#39;s e-commerce take rate stands at 12-13% by 2025.</p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/cf9113184a4cba66038966bb3baf12ca\" alt=\"MELI&#39;s take rate (Company)\" title=\"MELI&#39;s take rate (Company)\" tg-width=\"576\" tg-height=\"408\"/><span>MELI&#39;s take rate (Company)</span></p><h3 style=\"text-align: left;\">...giving chances for digital payment services providers</h3><p style=\"text-align: left;\">Opportunities are also wide open for Sea’s digital financial services. Visa (NYSE: V) found that mobile wallets and contactless cards drove digital payment in Southeast Asia and that respondents prefer mobile wallets over cards. Why? 56% of respondents in the region cited “the ability to earn rewards and receive promotional discounts and cash back” as one of the key reasons to use e-wallets, BCG noted. Yet, customers appear to have stickiness as some people said they would still use e-wallets without promotions and discounts.</p><p style=\"text-align: left;\">As more people use e-wallets, this is where SeaBank comes into play. For example, in Indonesia, ShopeePay users typically top up their wallet through bank transfers or cash payment in local convenience stores. However, they are required to pay Rp1,000 (~$0.07) or Rp1,500 (~$0.1) per top up depending on the payment method they use. While such figures appear minuscule, what if users top up their e-wallets per transaction? Having a SeaBank account allows depositors to top up ShopeePay and transfer their money to another bank up to 100 transactions for free.</p><p style=\"text-align: left;\">Digital banks are gaining traction. SeaBank Indonesia reported satisfying earnings results, as net income stood at ~$18 million in 2022 from a loss of ~$21 million in 2021, per Tech in Asia. Moreover, loan disbursements almost tripled to $1.1 billion from $409 million. Still, there is plenty of leeway for growth as Indonesia has the third-largest unbanked population in the world, according to the World Economic Forum.</p><h2 style=\"text-align: left;\">2. Players Are Heading Toward Profitability</h2><p style=\"text-align: left;\">While Sea successfully cut costs, GMV growth slowed, posing a question of whether the company could balance growth and profitability. When asked about the topic, the management said during the last earnings call:</p><blockquote>Now in terms of outlook and balancing growth and profitability. So as we shared also, our outlook for markets in the long run remains very strong. Because of its demographic features, the young rolling population, deepened digital penetration vis-à-vis offline retail and also the economic growth potential of our region.</blockquote><p style=\"text-align: left;\">We agree that the long-term outlook remains strong, as we pointed out previously. However, while e-commerce companies ramp up their sales incentive to gain market share, they have been unable to create stickiness. Otherwise, why would e-commerce companies still resort to aggressive promotions for years? SurveySensum’s findings also confirm our belief as “value for money” is the second biggest reason why e-commerce users switch to online stores.</p><p style=\"text-align: left;\">Fortunately, e-commerce companies “mutually agree” that sacrificing the bottom line for aggressive promotions and discounts is not sustainable. For example, GoTo, Shopee’s biggest competitor in Indonesia’s e-commerce landscape with 35% GMV market share in 2020 vs. Shopee’s 37% (Momentum Works data), expects its adjusted EBITDA to turn positive in 4Q23. Yet, the company said it would “try to react” when facing competition, albeit in a “sustainable manner.” Interestingly, GoTo is suspending its GTV and gross revenue guidance to “focus on efficiency and profitability.” Other Indonesia-based players, such as Blibli and Bukalapak, are also making their way to profitability.</p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/0cd283006bcc37ae062ba8347dc3b912\" alt=\"GoTo Adjusted EBITDA as a % of GTV (Company)\" title=\"GoTo Adjusted EBITDA as a % of GTV (Company)\" tg-width=\"569\" tg-height=\"408\"/><span>GoTo Adjusted EBITDA as a % of GTV (Company)</span></p><p style=\"text-align: left;\">We believe the industry is becoming more rational, with profitability becoming the number one priority. This also triggers customers to increasingly look beyond price and prefer a better customer experience, in our view. For example, GoTo is increasing intra-city selection availability outside Greater Jakarta, so that customers can order same-day delivery using its first-party logistic services, thus improving economies of scale. Investment in logistics remains a priority for Sea, as said by Sea’s management:</p><blockquote>And another thing is, as we shared before, the reason we are very focused on cost structure, in particular, logistics, is because we are trying to expand the profitable TAM for the market as a whole by addressing sellers and buyers who are underserved or unaddressed by existing players and having a better structure, having more target focus on the mass market allow us to be a differentiated player in the market, capturing a significant share of the pie in our view.</blockquote><h2 style=\"text-align: left;\">Counterpoint: The Industry Has Low Barriers To Entry</h2><p style=\"text-align: left;\">But it is not all fun and games, as competition is here to stay. We think the industry’s low barriers to entry make it easier for new players to enter the competitive landscape. For example, social commerce, such as TikTok Shop and Instagram Shop, proliferates. According to a survey by Populix, 86% of respondents in Indonesia have tried shopping on social media, with 46% of them having shopped for goods in TikTok Shop. Further, The Information reported that TikTok’s GMV in Southeast Asia quadrupled to $4.4 billion in 2022 according to sources familiar with internal data, as cited in Tech in Asia.</p><p style=\"text-align: left;\">While we can argue that TikTok has already had sizable users in the first place, it demonstrates how quickly companies can enter the competitive landscape and gain traction. As we are writing, TikTok is giving discount coupons to new customers. Our view is that while the industry is more rational, things could change quickly as new players enter the market with aggressive promotions and discounts. Existing players are likely to walk the same path to protect market share at the expense of possibly margin erosions, in our view.</p><h2 style=\"text-align: left;\">Valuation</h2><p style=\"text-align: left;\">Our fair value estimate for Sea Limited is $88 per share (12% upside), derived from a 10-year DCF valuation (9% WACC, 4% long-term growth), implying a forward P/E of 51x. We made three scenarios suggesting that Sea’s fair value is between $61 per share and $124 per share. An aggressive 30% margin of safety to our base case scenario suggests an acceptable buying price of $62 per share (35x forward P/E). If you think 30% is too aggressive, $66 per share (25% margin of safety) is also a good entry point, in our view.</p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/28df3879868874a2116131ae828749fc\" alt=\"Sea&#39;s 10-year DCF valuation (Vektor Research)\" title=\"Sea&#39;s 10-year DCF valuation (Vektor Research)\" tg-width=\"640\" tg-height=\"383\"/><span>Sea&#39;s 10-year DCF valuation (Vektor Research)</span></p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/a249cd72a618a5b6e6233659fe0ddd79\" alt=\"Sea&#39;s valuation summary per cases (Vektor Research)\" title=\"Sea&#39;s valuation summary per cases (Vektor Research)\" tg-width=\"640\" tg-height=\"234\"/><span>Sea&#39;s valuation summary per cases (Vektor Research)</span></p><h2 style=\"text-align: left;\">Where We Are Different From The Market</h2><p style=\"text-align: left;\">Consensus expects revenue to grow 12% annually until 2025, while our base case estimate suggests a 16% top-line annual growth. We believe that low e-commerce penetration, take rate expansion, and large untapped markets for e-commerce and digital financial services will help drive Sea’s revenue growth despite further cost-efficiency efforts that will impact GMV growth. Further, the industry is heading toward profitability.</p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/672994444b45c3c387d001de604e786f\" alt=\"Consensus revenue estimates (Seeking Alpha)\" title=\"Consensus revenue estimates (Seeking Alpha)\" tg-width=\"640\" tg-height=\"201\"/><span>Consensus revenue estimates (Seeking Alpha)</span></p><p style=\"text-align: left;\">On the other hand, while Sea believes that the take rate still has room for growth, competition is here to stay, as social commerce could force e-commerce companies to do more promotions and discounts, thus possibly hurting margins. Hence, investors should take Sea’s margin expansion story with a grain of salt.</p><p style=\"text-align: left;\">Indeed, there is a discrepancy between the market value and our fair value estimate. However, even a good business should be bought at the right price, thus applying an aggressive margin of safety makes a lot of sense.</p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/a2881c171bbdd7a2d23881f09bb12be8\" alt=\"Consensus EPS estimates (Seeking Alpha)\" title=\"Consensus EPS estimates (Seeking Alpha)\" tg-width=\"640\" tg-height=\"201\"/><span>Consensus EPS estimates (Seeking Alpha)</span></p><p style=\"text-align: left;\"></p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/f08611e34cc55159e0e5937bc0ceab4c\" alt=\"Analysts&#39; target price (Seeking Alpha)\" title=\"Analysts&#39; target price (Seeking Alpha)\" tg-width=\"640\" tg-height=\"209\"/><span>Analysts&#39; target price (Seeking Alpha)</span></p><h2 style=\"text-align: left;\">Conclusion</h2><p style=\"text-align: left;\">Sea Limited is a great option to get exposure to emerging markets. While cost-efficiency efforts slowed GMV growth, Sea still has a long runway for growth, driven by a low e-commerce penetration rate, large unbanked population, and take rate expansion. The industry is also heading toward profitability, but it has low barriers to entry, with social commerce joining the bandwagon. Aggressive promotions and discounts by new players as a means of gaining market share are likely to force established players to provide discounts once again to defend their market share. Hence, investors should take the margin expansion story with a grain of salt.</p><p style=\"text-align: left;\">Our base case estimates suggest Sea’s fair value to be $88 per share, implying 51x forward P/E. A 30% margin of safety suggests that an attractive buying opportunity is $62 per share (35x forward P/E). At least $66 per share (25% margin of safety) is also a good entry point. Investment risk stems from social commerce that could intensify the competitive landscape, which could force existing players to do promotions and discounting.</p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Sea Limited: Ample Room For Growth, But Competition Is Here To Stay</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSea Limited: Ample Room For Growth, But Competition Is Here To Stay\n</h2>\n\n<h4 class=\"meta\">\n\n\n2023-04-24 23:21 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4595779-sea-limited-se-ample-room-for-growth-but-competition-to-stay><strong>Seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SummarySea successfully cut its costs, improving its unit economics, and turning its EBIT positive. However, this comes at the expense of GMV growth, which has been a concern for investors.However, we...</p>\n\n<a href=\"https://seekingalpha.com/article/4595779-sea-limited-se-ample-room-for-growth-but-competition-to-stay\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"SE":"Sea Ltd"},"source_url":"https://seekingalpha.com/article/4595779-sea-limited-se-ample-room-for-growth-but-competition-to-stay","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1116198962","content_text":"SummarySea successfully cut its costs, improving its unit economics, and turning its EBIT positive. However, this comes at the expense of GMV growth, which has been a concern for investors.However, we believe that low e-commerce penetration, take rate expansion, large unbanked population offering large potential for digital financial services, and a more rational industry will help drive top-line growth.Still, the competition is here to stay, as social commerce is gaining traction. New players could be aggressive, thus forcing existing players to do more promotions and discounts.We estimate Sea's fair value at $88 per share derived from 10-year DCF (9% WACC, 4% long-term growth). An aggressive 30% margin of safety suggests that an attractive entry price is $62 per share.Investment ThesisWe believe that the Southeast Asia and Latin America e-commerce markets remain under-penetrated, and the unbanked population provides opportunities for digital financial services. Cost-cutting efforts slowed GMV growth, but as the industry is heading toward profitability, thus fewer discounts, customers will be looking for a better customer experience, in our view. However, competition is here to stay as social commerce is gaining traction. The stock is attractive at $62 per share (30% margin of safety). $66 per share (25% margin of safety) is also a good entry point.A New Kid On The Block, But Soon Become A Tech GiantOriginally started as a digital entertainment company in 2009, Sea Limited (NYSE:SE) is a Singapore-based tech company with a $45 billion market capitalization. The company’s operations span across countries, including Southeast Asia, Taiwan, and Brazil. The market in Southeast Asia, which more specifically includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam, contributes more than 60% of Sea’s revenue.Sea's revenue contributors by geographical area (Vektor Research)In general, Sea has three business segments: Garena, a digital entertainment business; Shopee, an e-commerce platform; and a digital financial services provider under SeaMoney. As of 2022, Shopee contributed almost 60% of Sea’s revenue.Segments contribution to revenue (%) (Vektor Research)How Does Sea Make Money?First, Sea launches and operates third-party games and helps its partners with marketing, distribution, and monetization. Free Fire is the company’s first in-house developed game, and together with four third-party games, contributed 98% of Sea’s digital entertainment revenue. Those games are free to play, but players can purchase in-game items, from which Sea monetizes its gaming platform under the so-called “freemium” model.Second, Shopee is an e-commerce platform where individuals, small-medium enterprises, and large retailers under Shopee Mall sell their products by paying transaction fees. Sellers can upgrade their status to Star or Star+ after completing a few milestones but will be charged a higher transaction fee, hoping that buyers will consider them more “trusted” sellers than non-Star ones. Alternatively, sellers will gain more clicks by topping up the “coin” balance and using those coins for Shopee’s advertising services. Additionally, Shopee also engages in the food delivery business under Shopee Food.Shopee's transaction fees (Shopee)Lastly, Sea provides digital financial services, including mobile wallet (ShopeePay), buy now pay later service (SPayLater), and digital banking services. Further, Sea acquired a local Indonesian bank in 2020 and launched SeaBank Indonesia a year later, and SeaBank Philippines was opened in 2022. Sea charges fees and interests and receives premiums (insurance business) for its services.What's Up With The Stock?Sea’s stock bottomed up from $40 per share and now trades at $79 per share. The company pivoted from being growth-driven to a profit-minded one, with its operating income turning positive to $343 million. Why the pivot? The Motley Fool noted Sea’s CEO’s memo to employees suggesting the inability to “raise funds in the market” due to “investors fleeing for ‘safe haven’ investments.” Additionally, Tencent had shed its stake from 21.3% to 18.7% early last year before its COO left Sea’s board of directors.Data by YChartsAs a result, the company cut costs left and right by “reviewing” its headcount, being selective in “high potential projects,” and better targeting its marketing spend. For example, Sea reportedly laid off around 10% of its workforce at some point last year and effectively reduced its sales and marketing expenses as a percentage of revenue to 14% in 4Q22 from ~25%-40%.Sea's sales and marketing expenses as a % of revenue (Vektor Research)This helps improve Shopee’s unit economics, as seen in Figure 6. Sales incentive that exceeds the revenue expected by the company will be recorded in sales and marketing expenses. According to the annual report, excess incentive was about 12% of revenue in 2022 and less than 5% in 4Q22, suggesting that Sea has aggressively reduced discounts and promotions.Shopee's unit economics (Vektor Research)Nevertheless, gross orders declined 15% (Y/Y), and GMV growth slowed to 8% (Y/Y) in 4Q22 from 21% (Y/Y) in 3Q22 on a constant currency basis. Reported GMV declined 1.1% (Y/Y). Moreover, Sea reported $7.3 billion in e-commerce revenue last year–lower than its then-full-year guidance of $8.8 billion (mid-point), later scrapped due to a shift to “focus on efficiency and optimization for the long-term strength and profitability of the e-commerce business.\" In turn, take rate increases supported Sea's e-commerce top-line growth. Operating cash flow was a negative $1.1 billion last year (-$1.8 billion minus share-based compensation).GMV and e-commerce revenue growth (Vektor Research)Data by YChartsBut this did not stop the stock price from rising, as investors and analysts have been eyeing Sea's cost-cutting efforts, which turned its EBIT positive. Still, concerns remain about whether such efforts will come at the expense of top-line growth. Lastly, is Sea providing an attractive buying opportunity?Sea's consensus revenue revision trend (Seeking Alpha)Sea's consensus EPS revision trend (Seeking Alpha)1. The Industry's Potential Remains Largely UntappedSoutheast Asia and Latin America e-commerce markets remain under-penetrated...We believe that Sea’s growth story is still in play. While the e-commerce market in Southeast Asia has grown five times larger, it remains under-penetrated. According to McKinsey, Indonesia and Singapore had a ~30% penetration rate, while the Philippines, Thailand, and Vietnam trailed at ~15%. Looking forward, the consultancy expects the market to grow 22% annually until 2026.For example, Alpha JWC Ventures and Kearney published a study on the untapped potential of Indonesia's tier 2 and tier 3 cities. The study noted that those cities lagged three to five years in the digital adoption of tier-1 cities and that “familiarization” is likely the key driver to adoption. How big is the market? The e-commerce market size for tier 2 and 3 cities is expected to grow to ~$45 billion GMV in 2025 from ~$9 billion GMV in 2020. Additionally, the buy now, pay later service also helps spur e-commerce growth, given that the credit card penetration is only 6% in the country, as noted by BCG.Further, Shopee has gained traction in Brazil since its inception in 2019. Revenue grew over 225% (Y/Y) in 3Q22, and unit economics gradually improved. It had recorded \"below $2\" adjusted EBITDA loss per order before HQ expenses (contribution margin) in 4Q21 before improving to a $0.47 loss in a year later.Latitud noted that Latin America’s e-commerce market remained fast-growing, and its penetration rate was estimated to be less than 12% in 2022. Statista noted that retail online sales in Latin America were around $168 billion in 2022, which only accounted for 11% of total retail sales. The figure is estimated to increase to ~20% by 2026. Additionally, the International Trade Administration said that Shopee was number two in market share in Brazil, preceded by Argentina-based MercadoLibre (MELI).Sea's growth story comes from not only a low penetration rate but also a take rate expansion. While Sea is improving monetization in its core marketplace business, its take rate is also supported by Shopee Brazil. In general, the take rate in Brazil was \"materially higher than many other market,\" the management said. For example, MELI's commerce take rate stood at ~17%, which expanded thanks to \"advertising revenues and the incremental monetization on shipping and logistics.\"We acknowledge that it is tough to quantify how much Shopee Brazil will impact the overall take rate since Sea does not (or rarely) disclose the e-commerce revenue per region. In 4Q21, Shopee Brazil recorded more than $70 million in revenue, which accounts for over 4% of total e-commerce revenue. If we are making an educated guess, assuming that the revenue growth was about 200% (Y/Y) in the 4Q22 (actual growth was 270% in 2Q22 and 225% in 3Q22), it would make up about 10% of Sea's e-commerce revenue. Our assumption for Sea's e-commerce take rate stands at 12-13% by 2025.MELI's take rate (Company)...giving chances for digital payment services providersOpportunities are also wide open for Sea’s digital financial services. Visa (NYSE: V) found that mobile wallets and contactless cards drove digital payment in Southeast Asia and that respondents prefer mobile wallets over cards. Why? 56% of respondents in the region cited “the ability to earn rewards and receive promotional discounts and cash back” as one of the key reasons to use e-wallets, BCG noted. Yet, customers appear to have stickiness as some people said they would still use e-wallets without promotions and discounts.As more people use e-wallets, this is where SeaBank comes into play. For example, in Indonesia, ShopeePay users typically top up their wallet through bank transfers or cash payment in local convenience stores. However, they are required to pay Rp1,000 (~$0.07) or Rp1,500 (~$0.1) per top up depending on the payment method they use. While such figures appear minuscule, what if users top up their e-wallets per transaction? Having a SeaBank account allows depositors to top up ShopeePay and transfer their money to another bank up to 100 transactions for free.Digital banks are gaining traction. SeaBank Indonesia reported satisfying earnings results, as net income stood at ~$18 million in 2022 from a loss of ~$21 million in 2021, per Tech in Asia. Moreover, loan disbursements almost tripled to $1.1 billion from $409 million. Still, there is plenty of leeway for growth as Indonesia has the third-largest unbanked population in the world, according to the World Economic Forum.2. Players Are Heading Toward ProfitabilityWhile Sea successfully cut costs, GMV growth slowed, posing a question of whether the company could balance growth and profitability. When asked about the topic, the management said during the last earnings call:Now in terms of outlook and balancing growth and profitability. So as we shared also, our outlook for markets in the long run remains very strong. Because of its demographic features, the young rolling population, deepened digital penetration vis-à-vis offline retail and also the economic growth potential of our region.We agree that the long-term outlook remains strong, as we pointed out previously. However, while e-commerce companies ramp up their sales incentive to gain market share, they have been unable to create stickiness. Otherwise, why would e-commerce companies still resort to aggressive promotions for years? SurveySensum’s findings also confirm our belief as “value for money” is the second biggest reason why e-commerce users switch to online stores.Fortunately, e-commerce companies “mutually agree” that sacrificing the bottom line for aggressive promotions and discounts is not sustainable. For example, GoTo, Shopee’s biggest competitor in Indonesia’s e-commerce landscape with 35% GMV market share in 2020 vs. Shopee’s 37% (Momentum Works data), expects its adjusted EBITDA to turn positive in 4Q23. Yet, the company said it would “try to react” when facing competition, albeit in a “sustainable manner.” Interestingly, GoTo is suspending its GTV and gross revenue guidance to “focus on efficiency and profitability.” Other Indonesia-based players, such as Blibli and Bukalapak, are also making their way to profitability.GoTo Adjusted EBITDA as a % of GTV (Company)We believe the industry is becoming more rational, with profitability becoming the number one priority. This also triggers customers to increasingly look beyond price and prefer a better customer experience, in our view. For example, GoTo is increasing intra-city selection availability outside Greater Jakarta, so that customers can order same-day delivery using its first-party logistic services, thus improving economies of scale. Investment in logistics remains a priority for Sea, as said by Sea’s management:And another thing is, as we shared before, the reason we are very focused on cost structure, in particular, logistics, is because we are trying to expand the profitable TAM for the market as a whole by addressing sellers and buyers who are underserved or unaddressed by existing players and having a better structure, having more target focus on the mass market allow us to be a differentiated player in the market, capturing a significant share of the pie in our view.Counterpoint: The Industry Has Low Barriers To EntryBut it is not all fun and games, as competition is here to stay. We think the industry’s low barriers to entry make it easier for new players to enter the competitive landscape. For example, social commerce, such as TikTok Shop and Instagram Shop, proliferates. According to a survey by Populix, 86% of respondents in Indonesia have tried shopping on social media, with 46% of them having shopped for goods in TikTok Shop. Further, The Information reported that TikTok’s GMV in Southeast Asia quadrupled to $4.4 billion in 2022 according to sources familiar with internal data, as cited in Tech in Asia.While we can argue that TikTok has already had sizable users in the first place, it demonstrates how quickly companies can enter the competitive landscape and gain traction. As we are writing, TikTok is giving discount coupons to new customers. Our view is that while the industry is more rational, things could change quickly as new players enter the market with aggressive promotions and discounts. Existing players are likely to walk the same path to protect market share at the expense of possibly margin erosions, in our view.ValuationOur fair value estimate for Sea Limited is $88 per share (12% upside), derived from a 10-year DCF valuation (9% WACC, 4% long-term growth), implying a forward P/E of 51x. We made three scenarios suggesting that Sea’s fair value is between $61 per share and $124 per share. An aggressive 30% margin of safety to our base case scenario suggests an acceptable buying price of $62 per share (35x forward P/E). If you think 30% is too aggressive, $66 per share (25% margin of safety) is also a good entry point, in our view.Sea's 10-year DCF valuation (Vektor Research)Sea's valuation summary per cases (Vektor Research)Where We Are Different From The MarketConsensus expects revenue to grow 12% annually until 2025, while our base case estimate suggests a 16% top-line annual growth. We believe that low e-commerce penetration, take rate expansion, and large untapped markets for e-commerce and digital financial services will help drive Sea’s revenue growth despite further cost-efficiency efforts that will impact GMV growth. Further, the industry is heading toward profitability.Consensus revenue estimates (Seeking Alpha)On the other hand, while Sea believes that the take rate still has room for growth, competition is here to stay, as social commerce could force e-commerce companies to do more promotions and discounts, thus possibly hurting margins. Hence, investors should take Sea’s margin expansion story with a grain of salt.Indeed, there is a discrepancy between the market value and our fair value estimate. However, even a good business should be bought at the right price, thus applying an aggressive margin of safety makes a lot of sense.Consensus EPS estimates (Seeking Alpha)Analysts' target price (Seeking Alpha)ConclusionSea Limited is a great option to get exposure to emerging markets. While cost-efficiency efforts slowed GMV growth, Sea still has a long runway for growth, driven by a low e-commerce penetration rate, large unbanked population, and take rate expansion. The industry is also heading toward profitability, but it has low barriers to entry, with social commerce joining the bandwagon. Aggressive promotions and discounts by new players as a means of gaining market share are likely to force established players to provide discounts once again to defend their market share. Hence, investors should take the margin expansion story with a grain of salt.Our base case estimates suggest Sea’s fair value to be $88 per share, implying 51x forward P/E. A 30% margin of safety suggests that an attractive buying opportunity is $62 per share (35x forward P/E). At least $66 per share (25% margin of safety) is also a good entry point. Investment risk stems from social commerce that could intensify the competitive landscape, which could force existing players to do promotions and discounting.","news_type":1},"isVote":1,"tweetType":1,"viewCount":176,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"upFlag":false,"length":3,"xxTargetLangEnum":"ORIG"},"commentList":[],"hasMoreComment":false,"orderType":2}