Sea testing new low?

Update for 1Q2024

Quick summary. Doing well on all 3 fronts. Again mgmt thinking is long term to make Shopee number 1 - building the best channel, tools & service for merchants with best economics for consumers and logistics. Key points.

1) free fire is back to 10+% bookings growth. They think can be evergreen franchise.

2) Shopee live is doing well esp in indo.  Regionally it’s record revenue and gmv. Bank npl stay at 1.4% and 40% loans inside Shopee ecosystem. This is real synergy.

3) financially, small net loss but operating wise is big rebound on operating profit to +71m from -56m last Q and also 20+% growth on revenue YonY. Revenue is above expectations.

4) all in, a good quarter and guidance is to continue. I will hold as I am fully allocated to sea already since last year. Trading at undemanding 2.5x  to forward sales and have 8.6b usd in cash.

Update for 4Q2023. Solid rebound in revenue growth for Shopee. Overall much more positive 2024 guidance from sea. Main point is TikTok and lazada aren’t taking market share from them. Garena stabilizing and I see much opportunity to grow MariBank further profitability. Glad I did not sell anything and in fact bought call options at 45 since last earnings. Blended breakeven now 76. Sold a put at 48 to express mild bullishness but recognizing already big position so won’t add more. Let’s see the quarters ahead. If they pull off 2024 with improved profit and revenues in 15-25% growth, back to 80 -100 won’t be a problem. 

Update for 3Q2023 earnings where SE reported flat DE, 18% growth in ecommerce and 36% growth in financial services. Revenue at 3.3b beat expectations but unfortunately they fell into a 140m loss when expectations were for small or no profit. To me this is telling of competition they are facing on Shopee side and is a big issue. My thesis for sea is that they will be top winner in the e-commerce marketplace battle in ASEAN. If TikTok or Lazada can overtake them then sea is not a no brainer long term multibagger bet anymore.

Reading the transcript, what Forrest identifies as the 3 main levers and metrics makes sense. And he is saying sea wants to entrench themselves deep for the long term and since cash flow allows for it, he would focus on that rather than focus on delivering more profits. What market did not expect is that 330m profits would turn into 140m of losses.

Personally, we had a full sized SEA position accumulated since 2022 to now at average price of about 88. It’s now 60% down again revisiting the low formed after 2Q results where Forrest also spoke about being in investing mode again. For readers, so you get right context, our full size for single stocks is at most just 4-5% of total equity positions. Bulk of our positions are in ETFs always. So this year is still up mid teens due to indexes rebounding.

So what’s our plan? Can sell, add or hold as always. Sell is out for now. I don’t think mgmt has lost the plot. They are certainly facing strong competition. Otherwise how can grow revenue 18% and still move into losses? Must be spending more on marketing, vouchers, incentives etc.

Hold is my answer for now just like after 2Q. Can trade some options to play the volatility but not adding more cash to main holding. It’s ok to be underallocated from max. We need 2-3 more quarters at least to see if they are indeed holding and growing against competitors.

We will only want to add if it hits ridiculously cheap values. Right now at 20b valuation less 2b net cash, sea is trading at 1.4-1.6 times annualized sales. If it ever falls to 1 time or between 25-30, I think risk reward is excellent and will double down in large amount. Amzn is trading at 3 times, meli at 5 times, baba at 1.6 times. So SE at 1 will be hard to ignore.

In terms of what it means for startups, using sea and grab as apex startups from ASEAN, the picture is not too good actually. Our 2 biggest asean tech players are worth $32b usd combined. Smaller than any of SG 3 local banks.  What does that say of the value created last 10 years? 

Sea and grab impact on consumers is clear and large. Between the extremes of current pessimism and past bullishness for these tech companies, I think the final fair valuation answer is probably in-between and it all depends on their execution, growth and profits next few years.

 

Tech in Asia exit - new norm lens

Nice ending to an entrepreneurial journey. Kudos to team for working at this business for 13 years and securing what looks to be an ok outcome for early investors and founder.  We need many more such exits for our ecosystem to be considered successful!

TIA last raised 6.6m usd in 2017 led by Hanwah on a post money of about $25m usd if I remember right. In total, raised about 17.7m sgd and founder end up about 16+%

TIA did about 7.6m sgd in 2022 and reverted to loss making of about 600k. Profitable in 2021 with 900k profit on 7m. 2022 subscription weakened and they grew poorer margin production business. 

It’s also important to note that revenue growth from 2017 to 2022 is barely 6-7% per annum from 5.5 to 7.6m.  So it has plateau and is not a growth company any more. So selling is probably a good move. Remember my last post about growth being worth something only if profits are good too? TIA got the memo.. slow down growth but move from very loss making on 5.5m to nearer profits on 7.6m. 

I do think SPH media won’t overpay as a non profit funded by taxpayers but TIA shareholders also won’t sell unless in distress (I don’t think so). The number will come out in due time but my guess is between 30ish-50ish million sgd. Revenue multiple between 4-8 seems fair. Probably no meaningful PE to use. 

If use midpoint of estimate at 40m sgd, then everyone ok and it’s a decent story in terms of capital efficiency vs outcome. Management team I would expect them to be incentivized further via some form of earn out.

The interesting thing to see is post deal, whether the new SPH will be better at integrating acquired assets. It’s mostly new management so should give them benefit of the doubt. And it’s a good acquisition of production and media talent for the new entity. Also give them a regional subscriber base. The big question is how to integrate and how to resume the revenue growth using existing team  if that is the goal.

Valuation outlook for asean startups - what’s the public market saying?

It looks like the worst case scenario of a bad recession coupled with high inflation won't happen. Instead, the scenario playing out last year is one of decent wage growth underpinning consumption and so ensuring any resultant recession will be very mild. In the meantime, the fed has indicated it is quite happy with overnight rate at 5+% and will keep it here while waiting for core inflation to weaken further. This situation may take another 6-18mths to play out.

So while the broader economy is looking ok, the pain is being felt more and more clearly in the startup and growth space as the high IR environment drives major reallocation and behavioral change by investors.

I have multiple post Series B startups telling me investors are bearish and investors are very slow in cutting new cheques. This is a consequence of the above environment.

Bottom line is valuation metrics and multiples have changed. Some recent datapoints to share: 

1) Listed tech giants have held up pretty well. Latest quarter, they have still managed to show 10-13% top line growth and solid profits. So it’s not surprise QQQ is up 30% YTD still while the broader based SPY is up almost 10%. This attests to the FAANG pricing power in face of inflation and their ability to squeeze out more profit. QQQ is trading at 28 times profit while SPY is trading at 24.5.

On the much smaller market cap and loss making side, the picture is not good still and many usa listed tech are flat to small gain for the year. A good proxy is ARKK etf less Tesla gains which is 11% of portfolio. My estimate is ARKK barely gained 3-4% this year after a disastrous 2022 once we strip out Tesla rebound this year.

2) China tech giants have fallen a lot due to a combination of actual slowing growth/profits/weak Chinese economy and western/developed world sentiment on China. Baba and tencent are trading in their teens. A good 30%-50% cheaper than USA tech giants. 

3) from ASEAN perspective, our listed tech companies are not doing well. SEA, Grab, Buka, Goto, PGRU are all down YTD anything from 10-50%! in spite of their USA counterparts staying flattish. The main reasons are partly rerating for asean tech stocks along with China stocks and partly due to unimpressive financials and outlook.

4) More specifically,  here are some listed valuations which have many unlisted startup counterparts in asean.

a)  Financial comparison space. There is a giant in uk called moneysupermart trading at 3.5x sales and 19 times profit. Our asean moneyhero just ipo via spac and even after 60-70% plunge in stock price is trading at <1 times revenue or barely 50m usd because it’s grossly loss making. But even if they turn profitable, at most they do a 5-10m profit. That’s a valuation of $200m at best. Moneyhero reached unicorn status last private round so later round investors should be quite concerned. Likewise moneysmart which is Singapore’s best player would need to get solidly profitable if it wants to ipo and be valued well like moneysupermart instead of like moneyhero.

b) Coworking. Wework is about to go bankrupt. But even a profitable IWC - Regus which should benefit from wework closure is trading at just 0.4 times revenue. So all the coworking space players should assume much weaker valuations until they prove out solid profits.

Closer to home, there is a rollup trying to spac and I suspect wework bankruptcy is going to give big problem.

c) Car disruption space. Carvana is trading at 0.4 times revenue and is loss making still. This is just 10% of peak in 2021. Perhaps a better comparison is carsales.com.au trading at 18-19 times profit or about 10.9b market cap! Now that’s a solid business. If you are loss making car player, you want Carsales type of steadier financial metrics rather than be valued at 0.4 of gmv which again will be huge downrounds for later round investors of carro or carsome.

d) Property tech space. The benchmark here is propguru locally and rea group in Australia. PGRU Ipo via spac and stock price has been rerated to 1/3 of ipo price. Now valuation is an undemanding 5-6 times revenue. To get a better valuation need to be profitable and dominant in good size market. The benchmark here is Rea group is worth 20b aud and is valued at 17 times ttm sales. 

The above explains why ohmyhome stock has difficulty rising. Market cap of 50m usd on 4-5m sgd revenue and loss making points to it being overvalued even now. Why buy ohmyhome when Pgru is cheaper and much better. Now what does this bode for still private startups? Perhaps be a profitable property agent that is tech enabled is better. 

e) Logistics. This space is more advanced and more positive with J&T, lalamove, cainiao all ipo or ready to IPO on Hk exchange. Valuations are significantly below last round highs but at least public markets validating their ipo and J&T has managed to ipo at 3x revenue. This bodes well for ninja van actually.

List goes on. It seems like among loss making ipo or listco, only saas businesses have held up decently with valuations cut by 30-50% only. 

My advice to founders of larger startups who are nearer trade sale or ipo stage?

Nothing overcomes a bearish climate and sentiment better than clear net profits, strong positive cash flow and some growth. If you used to put a 20% emphasis on profit and 80% on growth, perhaps flipping it would be wiser in the near to medium term unless your area is very special and blue ocean like openAI and you are growing 2-3x or more annually.

For the rest of the more normal tech/growth companies - I remember before 2012, later stage valuations were never about just multiple on sales or future potential. It was always more weighted towards multiple on net profit. Not operating profit, not adjusted level profit but GAAP standard net profit. 

So if you can, build out both profit and growth where profit is now more important than growth. It is very disturbing to scan our series c, d companies and see them very loss making even on 50m or 100m revenues. Makes one doubt the quality of their gross profits and margins.

I cannot stress how much freedom and options you have once you make your own profit. You can use it to further invest, buy out impatient shareholders, pay yourself better etc. Don’t  forget many many successful entrepreneurs have not taken Vc money. And outcome can still be great. There are 2800 gcb in sg, I believe Vc funded tech founder owners account for less than 1% of them.

How about founders running early stage startups and early investors? Actually this space hasn’t been affected that much. Valuations have gone down somewhat but because it’s very far from exit, investors are still cutting cheques but maybe 20-30% less. To me, founders in seed and series A should still do the same thing of building great product, proving product market fit and then scaling it further. Early investors are also fine. If you invest below $6-7m post round, an exit at 30-50m is still not bad. For example, the early investors of a recent exit techinasia or affable are still fine. But I think their last stage investors esp for TIA will not have done so well.