SEA Group — Primed for growth or road to the bottom?

Nathaniel Theodore Ling
Geek Culture
Published in
23 min readDec 8, 2021

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SEA Group (NYSE:SE)

This story initiates a deep dive report on SEA Group, one of Southeast’s Asia fastest growing conglomerate in gaming, e-commerce, and financial services. In this report, I seek to cover:

  1. FY21 Q3 Earnings Overview
  2. Business Overview
  3. Industry Overview
  4. Highlights/Lowlights of the Company
  5. Financial Analysis
  6. Valuation
  7. Financial Model

1. FY21 Q3 Earnings Overview

SEA Group announced its financial results for FY21 Q3 including the following:

(1) US$2.7B in revenue for Q3 FY21 (122% increase y-o-y)

(2) 9 consecutive increments on Shopee’s GMV and revenue

(3) Raising guidance on Shopee’s E-commerce revenue (US$4.8B to US$5.2B)

Further, CEO Forrest Li emphasised on growing Free Fire’s user base, onboarding MSMEs on Shopee across various countries (Indonesia, Malaysia, and Brazil), and operating SEA Group on a conservative basis to turn the entire business into a profitable company.

However, due to increased volatility in the markets over the past 1–2 trading weeks, equities especially growth-related stocks have plummeted, and SEA Group has retraced by over 30% in its share price. With such correction in play but little to no change in SEA Group’s growth story, it will be wise to conduct a deep dive on the company and ultimately decipher if it is worthy of an investment.

In this report, we look to cover the gaming and e-commerce industries helmed by SEA Group, project growth drivers on the company’s financials, and seek to attain a rough valuation of the company with sensitivity analysis to determine if the company is attractive for an investment.

2. Business Overview

Founded in 2009, SEA Group (NYSE:SE) is a holdings company (Fig 1) that operates three key businesses:

Garena — A global game developer and publisher that provides users to popular and engaging mobile/PC online games, specifically curated and personalised for the target markets of focus. Garena also licenses and publishes games developed by third parties (Fig 2).Game monetisation is primarily generated via a “freemium” model; Users will top up in-game currencies to purchase in-game virtual items and season passes. Garena tracks its growth in revenue from the Quarterly Paying Users (QPU), who generally spend a set amount of money on a monthly basis in order to enjoy a more personalised game playing experience (Fig 3). User acquisition and retention is promoted via e-sports competitions — each tournament is estimated to bring about 300K viewers and 2M hours viewed on average.

Fig 1: SEA Group’s History
Fig 2 : Garena’s Portfolio
Fig 3: Digital Entertainment Breakdown

Shopee — A marketplace platform fronting e-commerce (deeper focus on high margin categories such as fashion, health and beauty, home and living, and baby products) between buyers and sellers across Southeast Asia, with subsequent expansion into other demoraphic regions such as Latin America. Shopee is supported by integrated payment, logistics, fulfilment, and other value-added services (affiliate marketing, live-steaming, gamification elements, etc) (Fig 4). Occasionally, Shopee has mentioned that it conducts outright sales on specifc goods to meet buyers’ demands, enabling the company to offer better product assortment. Shopee charges a take rate off the GMV via

(a) Transaction fees — A charge to all Shopee sellers on successful orders

(b) Service fees — A charge to sellers who are participating in Coins Cashback and Free Shipping Programme

(c) Commission fees — A charge to sellers using ShopeeMall.

Shopee has extra revenue streams via marketing and campaigns, SEO optimisation, etc. Due to the lack of granular data, we’ll approximate Shopee’s revenue as a blended take rate off the GMV transaction on the platform (Fig 5).

Fig 4 : Example of Value Added Services
Fig 5 : E-commerce Breakdown

SeaMoney — SEA Group’s digital financial services business that was launched less than 2 years ago. SeaMoney currently offers mobile wallet services, payment processing, credit related digital financial offerings, and other finanical services. Revenue is primarily generated via commissions to third-party merchants and interest from borrowers with respect to the consumer credit business (loans and potentially BNPL — Buy Now Pay Later). SeaMoney is naturally a strategic play and a necessary product launch as Sea Group continues to create a sticky platform around Garena and Shopee — as an internal wallet helps to offer methods to purchase goods/in-game items and retain monetary value within the eco-system (Fig 6).

Fig 6: SeaMoney Breakdown

Further, provision of financial services allows further launches of various financial services into loans, financing, and payments, due to the nature of the business and access to customer data to create profiling, etc (Fig 7). However, due to the lack of granular data in Sea Group’s financial statements, we’ll lump the take rate of SeaMoney’s transactions into the e-commerce revenue segment.

Fig 7 : Mobile Wallet Marketing Strategy

Further analysis on each revenue stream will be conducted on Sea Group’s competitive positioning since this segment of the report establishes a high-level overview on what the company does and specific metrics that are tracked over time.

Corporate Governance

First, SEA Group possesses a strong and diverse pool of key management staff and directors within the board — notably in gaming, technology, venture building, and operations. Further, certain individuals sitting on the Board of Directors (Ren Yu Xin, Chris Zhi Min) come from significant competitors such as Tencent and Lazada/Alibaba, thus they are able to provide a wealth of expertise to navigate SEA Group through its unchartered terrain in the near to long run (Annex A).

Next, SEA Group enjoys a diversified base of institutional shareholders (T. Rowe Price, J.P Morgan, Tiger Global Management, Capital Research and Management) with less than 10% equity concentration, preventing a possibility of price crashes via sudden selloffs (Fig 8).

Fig 8 : Significant Shareholders

Lastly, Forrest Li (CEO) possesses close to 9% of the Company despite the current trajectory and state of the company. Such high weightage and “skin-in-the-game” shows more promise on his intrinsic motivation to scale the company into the elusive US$1T valuation mark.

3. Industry Overview

On a macro-overview, the e-commerce and gaming industries are expected to grow at a 14.3%/12.6% CAGR of up to US$234/314B in 2026 respectively (Fig 9). To determine the industry drivers, we factor SEA Group’s position in its operating landscape (predominantly Southeast Asia) and unique dynamics applicable only to SEA Group that will chart the growth of the industries of focus in the long run.

Fig 9 : Southeast Asia Industry (US$B) (Source: Mordor, Bain, Temasek)

(1) Rising mobile penetration rates

Mobile penetration rates in Southeast Asian countries exceed 50%, with some slightly advanced countries peaking in the 70–80% regions (Fig 10). Further, most individuals in Southeast Asia have indicated preference to own mobile phones instead of laptops/computers due to convenience and affordability (most consumers across Southeast Asia have access to affordable Android phones such as Oppo, Huawei, Vivo, and OnePlus — a smartphone can start as low as $150-$300). Therefore, most platforms (B2C services) catered towards customers are built around the accessibility of a smartphone: e-commerce, online ordering, mobile payments, digital banking, mobile gaming, and more.

Additionally, countries in Southeast Asia are ranked amongst the top 10 in mobile hours used on a global scale — Thailand (5.13 hours/day), Philippines (4.58hours/day), Indonesia (4.35hours/day), Malaysia(4.02hours/day), Vietnam (3.12hours/day), and Singapore (2.58hours/day). Extended duration spent using mobile phones is crucial and beneficial to transition consumers into adapting the usage of e-commerce, receiving marketing materials from mobile sources (live mobile streaming, social media marketing), and exploring mobile versions of computer games (for example, the Multiplayer Online Battle Arena (MOBA) transitioned from PC games such as H1Z1 to a proliferation of mobile games such as COD Mobile, Free Fire, PUBG, etc).

Fig 10 : Mobile Penetration Rate (Source: Statista)

Therefore, increasing mobile penetration rates in Southeast Asia creates growth opportunities for SEA Group to tap into e-commerce, gaming, and financial services.

(2) Progressive venture funding in logistics and infrastructure within SEA

Capital and infrastructure spending are required to support the growth of e-commerce and distribution in Southeast Asia. For example, fulfilment across archipelagos for Indonesia and Philippines remain to be challenging without the proper development of logistics infrastructure. The venture market has picked up on these apparent trends on the infrastructure side of things and funding has been deployed to strategic industry segments — logistics and e-commerce have received over US$5B in funding across various sub segments, and subsequent funding remains robust in the long run (Fig 11).

Fig 11 : Venture Funding (US$M) (Source: Vertex Ventures)

Peering deeper into the landscape, we’re able to identify various sub-segments within e-commerce/logistics that will play a huge role towards e-commerce’s continued growth (Fig 12):

(a) 3PL deliveries (Lalamove, Ninjavan, J&T Express) — Tech-enabled start-ups that provide deliveries across a myriad of goods upon demand, also adjusting for delivery volume. MSEs can ride on this tech enabled logistics wave to sell goods with deliveries that they had no prior access to (since incumbent B2B logistics couriers cater only for a minimal fixed volume of parcels to be delivered)

(b) 4PL deliveries (Locad, Kargo) — Asset-light business model that emulates a “cloud” logistics delivery service. These start-ups partner with fleets, warehouse operators, and facility managers to maximise supply chain movement and turnover time. Users can scale up/down their delivery volume accordingly and will only pay for the exact service they require. This concept is highly relevant to Southeast Asia since the ten countries have proximity to one another yet these countries or even neighbouring cities have differing seasonal trends (this is opposed to Europe for example, where countries across the region are shut for Christmas and New Year’s, thus allowing for a predictable change in demand/supply of goods).

*Further improvement via investment into the logistics space is necessary for e-commerce to grow further due to difficulty in (1) shipping goods to rural archipelagos, (2) managing return policies on dilapidated routes, and (3) supporting dynamic and rapid changes in tastes and preferences.*

(c) E-commerce enablers (SellinAll, iStoreiSend) — Plays a function of an intermediary that helps brick-and-mortar natives transition into online sales. E-commerce enablers have expedited their traction/top-line growth with Covid-19 acting as a catalyst, physical store owners have been recognising the need to diversify their revenue streams. Further, a seller will be able to manage multiple marketplaces from a centralised platform.

(d)Cross-border trade and fulfilment agencies (1Exports) — Start-ups operating in this domain help to facilitate export compliance and facilitation, as cross-border trade around Southeast Asia seem overlooked — each country has its own rules and regulations to follow (general export controls, documentation).

Fig 12 : Venture Funding Landscape

(3) Rising middle income population

According to USASEAN Business Councill and Asian Development Bank, ASEAN’s economy is projected to grow at a consistently rate of 5.5% over the next 20–30 years and become the 4th largest economy by 2050 (Fig 13). Substantiated by progressive stability in the political climate, growth opportunities, investments towards SEA countries, and remittances back to home countries from abroad, the middle class is expected to triple from 91M to 334M in 2030. As such, we can expect quality of life to increase as consumers increase their average order value when consuming various goods and services, translating to further growth in the e-commerce/gaming industries. Assuming the basket size each e-commerce purchase across countries will eventually catch up to Singapore’s value, we can expect Gross Merchandise Value (GMV) of e-commerce to quadruple.

Fig 13 : GDP vs Urbanization Growth

Competitive Positioning

I believe that Shopee’s competitive position can be potentially anchored on:

(1) A mobile-first marketing strategy — providing an end-to-end online shopping experience directly on the mobile application. Further, most promotional campaigns are distributed through social media applications or even within the application itself (Fig 14).

Fig 14 : Shopee’s Selling Formulae

(2) Hyper-local approach — Shopee understands that each country within Southeast Asia possesses distinct characteristics and challenges, thus piquing consumers’ attention will differ accordingly (Fig 15). The company has partnered with local banks and logistics operations for each country to cater to local demands. Further, advertisements often include local influencers and celebrity ambassadors to promote upcoming sale events. This strategy has propelled Shopee’s growth as 60% of respondents in Ecomeye’s survey affirmed that they trust celebrity endorsers for their purchasing decisions.

Fig 15 : Hyper Local Marketing Strategy

(3) Unique target markets and client profile — Shopee has conducted expansion towards onboarding MSMEs. Although these clients may not bring about a large amount of GMV transactions on the platform and thus may not bring about decent unit economics, I opine it to be the right client profile for Shopee to target. MSMEs contribute to 60% of a country’s labour face and 40% of a country’s GDP on average. Supporting the growth of MSMEs will allow Shopee to cement its position as a dominant marketplace platform in SEA. Moreover, due to the company’s relative success in SEA, Shopee has continued its expansion in LATAM — its geographical profile is largely similar to SEA (requiring hyper-localised marketing distribution, diverse cultures, and characteristics amongst countries, MSMEs contribute a large amount of the country’s GDP, etc). Other marketplace platform incumbents such as Lazada, Pinduoduo, JD.com, and Amazon do not have a large footprint in LATAM, presenting an excellent opportunity for SEA to cement its position as a market leader.

However, SEA Group has strong competitors targeting similar industry segments. We shall take a deeper dive into the categories and attempt to sieve out any highlights/lowlights SEA Group may have.

  1. Gaming

Notable companies include Tencent and Valve (more on developing PC games) Even though Tencent is a strategic investor of Garena, there can be a cannibalisation of revenue as other game developer companies such as Riot Games, Supercell and Epic Games compete directly with Garena on its suite of products — first person/third person/hero shooter MOBAs. For simplicity purposes and due to the extend of Tencent’s investments on a huge number of the game developer companies, I’ll consolidate all these competitors under Tencent. From Fig 16, we can identify the relative saturation in the MOBA segment of gaming, despite MOBA being one of the most popular game genres amongst casual gamers.

Fig 16 : Gaming Competitive Landscape

Further, MOBAs have been gravitating out of first-person/third-person shooter player setting and moving into an “action-role” type of game play. A notable example is Pokémon Unite, a new action role MOBA that was released by Timi Studios (Tencent subsidiary) at Sep 2021. (Fig 17) The mobile game has amounted to over 30 million downloads, awarded “Best Game on Google Play”, and amassed 2,600 streamers broadcasting over 300,000 hours of view time (ranked 122 currently). A benchmark comparison will be that its figures have surpassed Maplestory’s, a popular MMORPG game with a 15-year history. As consumers’ taste and preference are evolving with time, one should not ignore upcoming genres in game production, thus dictating the success/failure of Garena’s current pipeline of games.

Fig 17 : Pokemon Unite Gameplay

2. E-commerce

Notable companies operating in the same market segment and geographical regions include Amazon, Lazada, Tokopedia, Bukalapak, and BliBli.com. Despite relative stiff competition, Shopee stands as the market leader for e-commerce within SEA, being able to knock off Lazada from its reigns not too long ago (Fig 18). In summary, we compare the three bigwigs in their services amongst differing segments, identifying Shopee to lead in product differentiation apart from minor shortfalls such as lack of advanced parcel tracking and product return timeline (Fig 19).

Fig 19 : E-commerce Traffic Breakdown (Source: ASEAN Council)
Fig 19 : Bigwig Competitive Landscape

Another key thing to note (not established in the table below) is the lack of trustworthy electronic sellers in Shopee. For Singapore at least, Lazada has been associated as the go-to when purchasing higher end consumer products, whereas Shopee is more popular with ad-hoc purchases on perishables. This is largely due to the quality of sellers onboarded, with more sellers on Shopee selling knock-off goods from prominent brands.

4. Highlights/Lowlights

Highlights

(1) Reaping the benefits from low-hanging fruits

Breaking out of the norm which corporates tend to pursue for high average order value (AOV) and high margin segments, SEA Group has benefitted from pursuing the lower hanging fruits due to the unique economic situation of SEA and LATAM. Despite earning revenue from lower margin businesses, SEA Group compensates the downside with an even higher sales volume — eventually netting higher revenue gain than to try and expand its revenue pursuits in developed economies. We can identify great examples of these low-hanging fruits via:

(a) Extended focus into MSMEs across geographical regions

Shopee has emphasized a huge amount of focus in supporting MSMEs across various countries. For example, Shopee has offered to digitize over 100,000 MSMEs in Malaysia, providing up to RM3,000 per business — this is not including similar offerings in other countries such as Brazil and Indonesia (Fig 20). I opine this to be a smart move by the company, since MSMEs contribute roughly 8–10% of the country’s GDP. Additionally, local consumers are fiercely loyal towards MSMES due to strong cultural roots and affordable pricing that most MNCs are unable to compete with. We can refer these outcomes to most international companies attempting to penetrate Southeast Asia — Subway/KFC/Starbucks in Vietnam and Walmart/7–11 in Indonesia — and failing terribly. Navigating sales in Southeast Asia is tricky as one must account for the economic situation, cross religious and cultural beliefs, location tradition, and lifestyle. Fortunately, Shopee has figured out the willing formulae and will be attempting to replicate the same success in LATAM, which encompass the same dynamics as SEA.

Fig 20 : E-commerce Campaign, Malaysia

(b) Entry-level games to cater for a target audience

On the gaming side, Garena’s launch of Free Fire as a “low-quality” MOBA caters towards developing economies with entry level smart phones — sufficient to run Free Fire and enjoy the MOBA aspects of gaming. The game’s popularity has skyrocket in the developing countries of Garena’s focus, and the trend is highly like to remain. This goes to show us how important product market fit is and being able to understand your customer profile and constraints. Should Garena have remained its stand to push COD Mobile to other countries, receptiveness wouldn’t be that high due to the high specific requirements to run the game; Apple and Samsung phones would be the only devices able to run COD Mobile.

(2) Building services around an eco-system

To wrap up the whole eco-system, the launch of SeaMoney aims to onboard the unbanked and underbanked population across developing countries. By entrenching a larger population within the eco-system (a prime example will be Grab, Fig 21), the turnover of money increases and this will drive up the revenue of Sea Group. Adding on, the use of an internal wallet will also reduce costs paid to other payment processors, since most transactions are conducted internally. Lastly, Shopee has been quick to onboard key payment providers on its platform unique to each country — Gcash and Coins.ph in Philippines, Maybank2u in Malaysia, etc. By creating a suite of services adjusted to consumers’ preference and convenience, traction and volume on SEA Group’s platforms will intuitively increase with time.

Fig 21 : Building an Eco-system (Source: Grab)

(3) Improving operating structure and stock-based compensation as a % of revenue

SEA Group has managed to control its operating structure from blowing out of proportion, and as such we are able to see improving margins over the past few FYs (Fig 22). Should management be able to control their expenditures effectively, there is huge promise that the company is on the right track to read profitability by FY26/27 as projected by the financial model (will be discussed further into the report).

Fig 22: OPEX as % of Revenue

(4) Shopee taking over as a market leader in SEA

As a Singaporean, Lazada was the go-to marketplace platform over the past few years when I wanted to make a purchase on various item categories. Shopee on the other hand was a very haphazard C2C platform which I wasn’t comfortable using, as the next substitute that will instantly strike out to consumers was switching to Carousell instead. However, Shopee was able to overcome various doubts and has become a flagship product of SEA Group. Catalysts stand aplenty here, such as excessive cult-like marketing with catchy songs/dances, which ironically ingrained its brand into us consumers, access to MSME type of products which can’t be purchased elsewhere, a myriad of group buy options, and to a certain extent, the ability to purchase knock-off products to fulfil our needs for “consumerism”. Ultimately, Shopee’s marketing fully takes the cake here, helping the company propel its status as the leading e-commerce provider in SEA (Evident as Shopee took over Lazada as a market leader in e-commerce at end 2019).

Lowlights

(1) Relatively messy UI and unpleasant UX (Shopee)

Albeit a subjective opinion, I personally am not a fan of Shopee’s UI as it feels like an information dump on the consumer. First, Shopee has added a form of advertising when browsing through products, which can typically come off as abrasive for a consumer like myself, who wants to do a “get-in-get-out” kind of transaction ASAP (since I already know what I’m intending to purchase). Second, the product information segments are well segmented by Lazada as you scroll down the product (Fig 23), whereas Shopee lacks this feature and thus the information presentation feels very unstructured. Typically for those reasons, when I’m purchasing an expensive product (which I will want to acquire more information specifics prior to making a purchase), I’m always more compelled to visit Lazada first. Shopee on the other hand, feels more of a platform to make one-time rash purchases that are often low in price.

Fig 23 : Lazada’s Information Layout

(2) Potential D2C Competition (Shopee)

With the rise in venture funding to build e-commerce infrastructure, payment mechanisms, underpriced social medial platforms for advertising, and gradual attitudes toward brand loyalty — D2C provides an alternate avenue for consumers to purchase their products, with the possibility to even experience cost savings since the sales process skips the middleman (marketplace platform connecting buyer to seller). Various VCs have been covering the concerns of D2C being a possible competitor to e-commerce marketplaces (PlugandPlay APAC, Insignia Ventures — you can check out their white papers by googling them), so this is a threat that should not be overlooked.

(3) Uptake of “action” MOBAs (Garena)

With Timi Studio’s recent release of Pokemon Unite, Garena may have trouble competing with gaming bigwigs as each company seeks to provide the best gaming experience for consumers. Supercell is also intending to roll out a line of games (Clash Quest, Clash Mini, and Clash Heroes) that can draw back gamers into the Supercell array of games.

(4) High EV/Revenue valuation premium

Compared with other companies operating e-commerce services, SEA Group is currently placed at a high 30.4x EV/LTM Revenue premium, almost 4 times larger than the mean (7.9x) (Fig 24). The valuation difference is even more stark when we peer into the competitor’s operating statistics — JD.com and Pinduoduo for example have been reporting way higher revenue growth for their current valuation — thus from a valuation perspective, SEA Group may not look like an attractive investment on a grander scheme of things.

Fig 24 : Comparable Companies

(3) Difficulty in penetrating into LATAM (primarily Shopee)

Albeit of a rational and strategic move to continue expansion into LATAM, SEA Group may be vastly underestimating the concerns on penetrating into the LATAM market, such as:

(a) Limited payment methods

Fedex reported in its 2020 report that 80% of households use cash as the primary form for monetary transactions, although the figure of alternate payment methods have been increasing. However, adoption rates will continue to stay low for a prolonged period and eventual uptake will require a significant amount of vested time.

(b) Lack of proper logistics infrastructure

Unreliable customs clearance, last mile, and reverse logistics remain a huge obstacle to the eventual growth of LATAM’s e-commerce industry. Slapped with high insurance premiums on safe delivery of products, most local consumers would rather not use e-commerce and instead maintain their purchases with local retailers

(c) Inefficient custom clearance

In a private study conducted by Americas Market Intelligence in 2016, trial packages shipped across various Latin American countries often resulted in lost or damaged packages. Further, another study conducted by the World Bank also revealed that a parcel requires 110 hours on average to comply with customs documentation and border compliance — this is hardly a supportive factor for cross border e-commerce (Fig 25).

Fig 25 : Trade Indicators (Source: Market Intelligence)

More cross border challenges need to be addressed via improvements in infrastructure or consolidations in cross-border trade regulations, but the current climate presents these factors as hindrances to the potential of e-commerce in LATAM.

5. Financial Analysis

Due to the current unprofitability of the company, past valuation metrics such as ROA, ROE, ROIC are not applicable to analyze the company We’ll look to project the overall revenue growth and operating structure to determine if the company is able to find the “trigger” — flipping the business model to profitability.

Historical revenue grew at a 14.9% CAGR of up to US$4.4B in FY20 and will grow at a 10.7% CAGR of up to US$150B in FY27 (Fig 26).

Fig 26 : Financials (US$M)

Revenue is primarily segmented into (a) Digital Entertainment, (b) E-commerce and other services, and (c) outright sales of goods where Shopee holds inventory and marks up an array of products for sale. To reiterate from the business overview segment (Fig 27),

Fig 27 : Revenue Segments (US$M)

(a) Digital entertainment revenue is generated from the total amount of monthly paying users of Garena’s suite of games, who are set a percentage profitability on consuming in-game items.

(b) E-commerce revenue is generated from a blended percentage take rate off the total Gross Merchandise Value (GMV) generated across all products/services on Shopee.

(c) Sales of goods is a mark up of the inventory cost of various products that Shopee chooses to sell.

It is to note that Shopee’s e-commerce revenue segment will comprise of >50% of SEA Group’s total revenue by FY27, presenting the sole catalyst that will drive up the stock’s price and valuation. I estimate GMV to grow at around 11–15% y-o-y (hitting US$1.2T in GMV by FY27) and blended take rate to be at a range of 6–7% (inclusive of SeaMoney transactions). Garena on the other hand will be SEA Group’s cash cow and a source of funding to aggressively expand Shopee into other countries and continents. The company is projected to be EBITDA positive by FY26 and will look to hit stability in margins by FY30. Additionally, the company’s operating structure (both COGS and OPEX) are projected as a % of revenue for each line item (Fig 28 & 29). These projections will be in line with the operating structures of other e-commerce platforms.

Fig 28 : COGS Projection (% of revenue)
Fig 29 : OPEX Projections (% of revenue)

The company has been improving its margins and operating structure despite the aggressive expansion employed on Shopee and I posit that improvements on these line items will continue moving forward, thus reflecting them on the company’s projections.

6. Valuation

Weighted Average Cost of Capital (WACC)

WACC (Fig 30) is estimated at 10.5% for SEA Group. Cost of debt is calculated by taking the blended average of the convertible debt held by the company and adding the 10-year risk-free rate. Cost of equity is calculated with the CAPM formula, reflecting USA’s equity risk premium, risk-free rate, and SEA Group’s 5-year Beta.

Fig 30 : WACC Calculation

Fair Value/Share

Using the exit multiple and perpetuity growth method for exit valuation, we arrive at a fair value/share of $372.86 and $409 .58 for each respective method. EV/EBITDA is pegged to JD.com EV/NTM EBITDA multiple since the two companies are comparable in grabbing market share at an accelerated pace in their target markets and facing similar growth trajectories. The perpetuity growth is capped at 5% since e-commerce and fintech services are currently in its growth stages and revenue growth will not cap out anytime soon. As a result, the share prices seem to be priced a discount currently and SEA Group looks like an attractive investment for a high-growth company in a rapidly growing industry (Fig 31).

Fig 31 : Fair value/Share Calculation

Option Value Conversion

It is imperative to account for RSUs and value of options so that we can attain the true fair value/share of the company. The inputs are consolidated, and the Black-Scholes option pricing model is used (Fig 32) to determine the value of the outstanding options that will dilute the initial equity value of the company. Further, the new equity value will be divided across the unaccounted RSUs, representing the “true” fair value per share of the company (Fig 33).

Fig 32 : Option Value Calculation
Fig 33 : True Fair Value/Share

With the dilution effect accounted for (representing over US$6.7B in dilution across 10M RSUs), SEA Group’s true fair value per share will be priced at US$354.6 via EBITDA multiple method and US$390.8 via terminal growth method. This represents a further downside from both current share price and the initial fair value per share of the company.

Sensitivity Analysis

A sensitivity analysis is applied to SEA Group to weigh out different possibilities on where the share priced will be headed towards, depending on the scenario and the type of valuation methodology employed. A football field visualization (Fig 34) shows us that SEA Group is following more on the “market valuation” than the potential growth moving forward. Thus, the company has seen a depression in its share price from an all-time high of US$370 to a recent low of US$253. Should SEA Group start to regain confidence from investors in show that they are able to hit the growth rates that management has posited — a rebound back to its recent highs can be achieved.

Fig 31: Football Field Valuation

7. Personal Take

SEA Group’s share price has plummeted over the past 1–2 weeks over a retracement in growth stocks, a gradual recovery in interest rates, and an increase in market volatility (fear and volatility indices have been trending upwards). Due to a favorable position on how SEA Group can potentially push to US$100 billion in revenue and turn EBITDA positive within 5–6 years (assuming a conservative operating structure and healthy market conditions), an investment in the company can pose potential upside. The only concern lies on its relative pricey valuation, given how other e-commerce competitors are reporting similar growth percentages but have lower valuation multiples (EV/Revenue). However, most comparable companies are China technology firms that have faced further depression in their stock prices due to the China Communist Party clamping down on rules and regulations. Upon factoring other variables as mentioned, SEA Group looks to be a decent investment upon comparison — China e-commerce/gaming companies are facing huge scrutiny, relatively mature companies such as Amazon have a large market capitalization (US$1.8T as per early Dec 21) and most of its alpha is priced in. The next best investment covering e-commerce, gaming and financial services across strong developing economies is SEA Group — hence if an investor is comfortable with entering at a high valuation multiple, this investment decision is rather sound in the US$190-US230 for a first initial entry and dollar cost averaging upon lower prices.

Disclaimer — The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decision by a person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security.

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Nathaniel Theodore Ling
Geek Culture

I write about venture capital, equity research, and data analysis.