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.