To The Moon

$Sea Ltd(SE)$ shares jumped more than 22% in intra-day trading after reporting fourth-quarter results, and under the pressure of Powell's hawkish speech.

Sea achieved profit ahead of schedule in this financial report (the three major sectors of games, e-commerce and finance each turned losses into profits, and the operating cash flow returned to positive), which is favored by investors in such an risk-off duration.

Performance review

• Company's total revenue US$3.45B, +7% YoY, falling to single digit for the first time since IPO, but still 14% higher than the market consensus US$3.03B.
• Gross profit US $1.70B, +49% YoY, higher than the market consensus of US $1.17B;
• Marketing expenses are 474 million US dollars,-60% year-on-year, which is the main reduced project, and research and development expenses are 244 million US dollars,-15% year-on-year;
• The adjusted profit before interest, tax and amortization (EBITDA) was 496 million US dollars, turning losses into profits, which was-492 million US dollars in the same period last year, and the market unanimously expected a loss of 250 million US dollars;
• The adjusted EPS is 0.98 US dollars, which is higher than the market expectation of-0. 55 US dollars;
• Operating cash flow was USD 320 million, which was the first positive since 2021 and higher than the market expectation of-180 million USD.

By Segment,

• GMV of Shopee, an e-commerce business, declined (-1%) to US $18 billion, which was also lower than the market expectation of US $19.3 billion, but the revenue side reached US $2.10 billion, which was higher than the market expectation of US $2.03 billion. The adjusted EBITDA was US $196 million, turning losses into profits, while the market expectation was-349 million US dollars.
• Revenue from Garena, the game business, fell to US $948 million,-33% year-on-year, but higher than the market expectation of US $667 million. The adjusted EBITDA was $258 million, which was higher than the market expectation of $222 million.
• Financial business Sea Money's revenue was US $380 million, up 92% year-on-year, which was higher than the market expectation of US $350 million. After adjustment, EBITDA was USD 62 million, which also turned losses into profits.

Investment Highlights

Sea took the initiative to reduce costs and increase efficiency when its performance growth slowed down, and achieved great success. Last quarter's financial report also cause a surge since it reduced losses much better than market expectations.

The company began to reduce from the COGS, together with all three major operating expenses, the marketing expense was especially reduced (down 60% YoY), which helped the three major businesses to make profits at the same time. Although there is still an upward trend in management expenses, it is mainly a one-time expense brought by layoffs, which will not have a continuous impact on subsequent statements.

Game business in recession and weak prospects.The game flow of Q4 decreased by 51% year-on-year, leaving only 540 million yuan. Paying users and active users both decreased year-on-year, and individual paying users of games decreased by 12% year-on-year. This is also a good interpretation of the "Free Fire" game life cycle. At present, the launch of the new game is still not as high as before, and Garena has lost the agent of League of Legends in Taiwan since January 6th, and the whole game has been rapidly refined from the flowing water. In addition, the deferred revenue fell to 1.5 billion US dollars again in this quarter, and the deferred revenue of 400 million US dollars was confirmed in a single quarter, which means that the game revenue will continue to decline in the next few quarters.

E-commerce business entered the harvest period ahead of schedule. Shopee's early earnings were the biggest surprise of the season. Due to the continuous withdrawal from business in non-dominant countries, Shopee's GMV and order volume have declined, but at the same time, the unit price and realization rate of customers have also increased.

At present, Shopee is only the main battlefield of e-commerce in Southeast Asia and Brazil, while Brazil will mainly use cross-border e-commerce as its operation mode to reduce localized operation costs. Q4 Company actively reduced subsidies and marketing activities, and improved the realization rate, gross profit margin and operating profit margin of e-commerce business.

Financial business began to be self-reliant,but should be careful.Sea Money achieved revenue of 380 million yuan in Q4, which was 9% higher than the market expectation. At the same time, it also reduced marketing expenses to a great extent and turned losses into profits, which was largely due to the company's entry from financial business related to e-commerce to lending business.

Sea started the business because the current high interest rate and its abundant in cash, but everything has two sides, and the rate of default ratio for 90 days has increased from 4% in the previous quarter to 5%. Some e-commerce companies also have operational difficulties under the background of weakening international trade, and these risks should be continuously observed.

In general, Sea has quickly moved from a triple-digit growth company to a mature period that focuses on profitability and cash flow. Whether it is due to the situation or not, the current effect is very obvious, which further increases investors' goodwill towards them in the current investment environment.

Estimate and valuation

If 2023 should be the year to start generating profits and accumulating cash in an all-round way. With the improvement of profit index, the company's game (Garena) and e-commerce (Shopee) businesses can be valued by EV/EBITDA. Financial businesses that are just beginning to generate profits continue to be valued at EV/Sales.

If the game business is in 5xEV/EBITDA, it is expected that the adjusted EBITDA will be 900 million US dollars and the game business EV will be 4.5 billion US dollars in 2023;

If the e-commerce business is in 15x EV/EBITDA (same with Amazon and JD) and the expected $1.8 billion in 2023, the EV of the e-commerce business is $27 billion;

If the financial business is given 6x EV/Sales, the expected revenue in 2023 is 1.7 billion US dollars, and the EV of the financial business is 10 billion US dollars. Total $41.5 billion.

The company currently has liabilities of $3.4 billion and cash and equivalents of $6.9 billion, so the expected market value is $45 billion, that is, per ADR $81