Sea Limited: The Astute Investor Buys When The Average Investor Sells_老虎社区_美港股上老虎

Sea Limited: The Astute Investor Buys When The Average Investor Sells

seekingalpha2022-05-06

Benjamin Graham, the father of value investing, is famous for saying that the market is like a voting machine in the short run and in the long run, the market is like a weighing machine.I think that ...

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生肉麵加豬油渣
·2022-05-06
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However, in the longer run, as sentiment changes, if the average investor continues to let price determine the stock's narrative, this can cause the average investor to panic sell their shares in Sea Limited as the stock has dropped more than 70% from its all-time highs. As such, in the long run, the stock market is like a weighing machine that evaluates and measures the fundamentals of the company.I would argue that this is the time to be buying Sea Limited rather than let the fear or the price action determine your investment decisions.Investment ThesisI have written elaborate articles on Sea both as an initiation article as well as follow up articles (here and here) as the market moves. With everything that is happening at Sea, my initial investment thesis for Sea still stands, as shown below:1. Garena, will continue to be a market leader and serve as a cash cow for Sea, along with solid growth from not just Free Fire but also other budding new developments from its many gaming studios.2. Undoubtedly, Sea's Shopee has the leadership position in Southeast Asia e-commerce. It is currently still in the early days in Southeast Asia for Shopee and it is likely to see strong growth in the future from increasing penetration in the region brought about by multiple tailwinds.3. Sea's market expansion strategy has shown very strong discipline, with a focus on Latin America (LatAm) e-commerce market, which brings exposure to an underpenetrated, fast-growing market. It is also newer and testing waters in some newer geographies in Europe for example.4. Sea's new emerging fintech business, SeaMoney, will bring additional high growth areas with strong digital payments tailwinds.Laser-Focused On Free Cash Flows And Capital PreservationShopee, which is Sea's e-commerce arm, Shopee, made 2 announcements barely a month apart about its decision to exit from France and India. The 2 exits in 1 month clearly sank sentiment on the stock as it reduces the potential total addressable market for Sea and these 2 markets are not insignificant.However, I am of the view that Sea's Shopee needs to pick the right battles and show investors that they are prudent with capital and making the right management decisions. As such, I think that the exit from France, and then India, is a blessing in disguise for Shopee as it saves the company and its shareholders the trouble of significant cash burn in highly competitive e-commerce markets in India and France, while being able to reallocate these precious financial resources and time to other markets in which Shopee is able to execute well, gain dominance and ultimately, generate free cash flows and profits.Given that the combined GMV of these 2 markets are minimal at 0.3% of total GMV for the Sea Group, this early withdrawal from these 2 markets barely has an impact on current financials of the company due to the early stage trials that Shopee was doing in these markets.For the exit from India, this comes at a time of heightened regulatory scrutiny for Sea given Sea's Free Fire ban in India. As such, given the highly competitive e-commerce market in India and the huge size of the India e-commerce market which implies needing much more capital spending for GMV growth, it is wise for management to exit India to focus on conserving capital for where it would make more sense. For the exit from France, this came as Shopee management found that customer acquisition costs were too high and Shopee could not compete meaningfully in the market, resulting in a prompt decision from management to exit France.With the 2 decisions made to exit France and India, I am not expecting Sea to be entering any new markets this year or in the near term, as it will be focusing on its core ASEAN and Taiwan markets and its new focus, Brazil and Latin America markets.Encouraging Trends In Brazil And Latin America For ShopeeWe are starting to see the results from Shopee's foray into Brazil and Latin America. As can be seen below, when looking at monthly active users, Shopee has outperformed in this metric compared to all other peers since March of 2021. I attribute this to Shopee gamifying the e-commerce experience, luring customers to return to the Shopee app, thus creating top mind share and, possible market share as well, in Brazil in such a span of slightly more than 2 years.Brazil e-commerce: Monthly active users (million) (Sensor Tower)In Colombia, Shopee is already doing in-line or better than the international e-commerce players in the country by relative search index sources.Relative search interest in Colombia (Google Trends)While Chile remains in the relatively early stages of development, the relative search index shows that momentum is growing in the country only after almost less than a year of Shopee operating in the country.Relative Search Index for Chile (Google Trends)With improving metrics for Shopee in these LatAm regions, it would make more sense for Shopee to be redirecting its capital preserved from the India and France exit to focus on the opportunities in LatAm given the easier competitive and regulatory environment in the LatAm region.In my view, the strategy Shopee takes in Brazil will be similar to its playbook in ASEAN and Taiwan, where it initially strives to gain mindshare and later, market share in the region, and emerge as a leader in the market based on its volumes and scale, which will then bring about the visibility of turning profitable in the region as it looks to reduce logistics costs over the large scale it has amassed.Furthermore, Sea recently launched in Brazil the Shopee Live feature, which is basically the live-streaming feature. Live e-commerce is one of the key e-commerce trends in the near term and I am of the opinion that Shopee can create an early advantage over its peers in the live e-commerce segment in LatAm. One key competitor that is currently having a similar live shopping feature is Magazine Luiza, where it offers exclusive discounts during live streaming. Specifically for the live-streaming feature on Shopee Live, this includes live broadcasts during which exclusive coupons are given, or use of guest stars and influencers as live presenters for Shopee Live to drive traffic.The Shopee Live feature in Brazil can add a new dimension to the Shopee platform that complements the current e-commerce shopping experience and it also helps Shopee to engage its customers more directly through live-streaming and at the same time provide customers with a value add which is to have a sense of security as the product is reviewed by live streamers.Shopee ASEAN + Taiwan Turning Profitable With ScaleInflation is working in favour of Shopee, in my view. While inflation is affecting major e-commerce players in the form of higher logistics costs from rising cost of labour and fuel, Shopee's marketplace business model enables it to feel less of the inflation effect. This is in contrast to the 1P competitors that have to actually take on inventory. In addition, I think we will see Shopee have an advantage in the current environment given their focus on mass market and average order value categories, as it is in a good position when customers decide to trade down. In contrast, Sea's competitor in the region, Alibaba-owned (BABA) Lazada has a focus on higher order value items and premium items, which will be in a tougher position in the current environment.Despite challenges from inflation and also potential increasing competition, I still expect that for the core region of ASEAN + Taiwan, we will see Shopee achieving its breakeven target in 2022. While Shopee is focusing on achieving this breakeven target, my channel checks have found that Shopee has managed to outgrow its competitors and maintain the market share it needs, while spending less on a per order basis. In my view, market share is key in e-commerce to ensure favourable unit economics to make the business model work. Further channel checks that have been done shows that Shopee is currently about 5x to 6x larger and 2x to 3x larger than competitors in terms of volumes in Taiwan and ASEAN respectively. As can be seen below, even with reduced spend per user, the monthly active users in the core ASEAN + Taiwan region is not just steady but continuing to grow.Shopee (ASEAN + Taiwan) monthly active users (million) (Sensor Tower)Gaming Fears Has Been Priced InI have discussed the Free Fire ban in India several times in my previous articles on Sea (Found here and here). Although the Singapore government has taken efforts to talk with the Indian government about the ban of Free Fire in India, there is uncertainty about the potential return of the game in India.However, I am of the opinion that the Free Fire ban has long been priced in given that the 2022F gaming guidance implies a 35% year over year drop in bookings and this guidance has already excluded all contributions from India.There are also concerns about the impact of reopening of economies on Garena as the world economies reopen and normalise. While normalised user behaviour needs to be observed in the near term for any further weakness, management continues to improve the user experience and refresh contentSeaMoneyFor Sea's financial services arm, SeaMoney, I think we will see the company continue to ramp up on verticals in non-payments like credit, insurance tech, and wealth management. Currently, SeaMoney is most comprehensive in Indonesia and could be rolled out to the Philippines in 2022.Shopee Malaysia recently got the digital banking license in Malaysia, along with 4 other consortiums, opening up new opportunities for SeaMoney Malaysia. Furthermore, Shopee Brazil recently received approval as a payment institution in Brazil, paving the way for SeaMoney in the crucial LatAm market.ValuationMy worst case SOTP valuation is updated with the latest information on the company, which includes:The impact of lower revenue guidance on gaming resulting in some downward revisions in gaming,I assume the reallocation of Shopee's resources and capital expenditures from India and France to LatAm and ASEA and Taiwan, resulting in largely in-line e-commerce projectionsWith the new opportunities in Malaysia and Brazil for SeaMoney, I have made upward revisions on SeaMoney.With that the updated target price for Sea Limited is $188.25, implying 109% upside from current levels.SOTP valuation for Sea Limited (Author generated)RisksCompetitionAlthough Sea has exited the highly competitive market of India, e-commerce is still a competitive business with many competitors with deep pockets. As such Shopee could face fierce competition from global peers as international expansion in the industry continues. For example, Shopee has done well in Southeast Asia but the threat of Tokopedia in Indonesia is still there. Furthermore, Alibaba's Lazada is ramping up and focusing on international expansion as China's domestic e-commerce market slows. If competition intensifies, this could be a significant drag to profitability of the e-commerce segment.Execution In New MarketsThe operating and competitive environment in LatAm, and Europe has its challenges. Although Shopee has had a good run in Southeast Asia, there are still execution risks in these new markets especially with large domestic e-commerce players already present. That said, Shopee has shown strong execution and capital discipline thus far, and will only commit capital to a market it deems core.Synergies In All 3 Business SegmentsThe flywheel effect could prove to be Sea's competitive advantage if it is able to build its gaming, e-commerce and fintech ecosystem well. However, if synergies between the 3 are not reaped, the company is not maximising the benefit of its entire ecosystem and should each segment operate increasingly in silos, this could result in deterioration of competitive advantage of Sea.ConclusionTo bring back the Benjamin Graham quote from earlier, in the short term, the stock market is like a voting machine, highly driven by sentiment and emotions. This is what is driving Sea Limited's stock price right now with the more than 70% decline from all-time highs. However, as highlighted, the business fundamentals are actually solid and improving. Sea's Shopee is soon to achieve its breakeven target in ASEAN + Taiwan as it continues to maintain and gain market share, while Shopee is growing rapidly and becoming dominant in LatAm, specifically in Brazil. While uncertainties remain on the gaming front, as I mentioned, I believe that this has already been priced in. Lastly, SeaMoney is seeing multiple opportunities open up in Sea's core markets and will likely gain greater traction this year.As such, with the improving fundamentals, the astute investor would take the chance to invest in a company that is a winner in the fast-growing gaming, e-commerce and digital financial services in Asia and LatAm. With that, my SOTP target price for Sea is $188.25, implying 109% upside from current levels.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[{"id":616247919,"gmtCreate":1651806159131,"gmtModify":1651806160359,"author":{"id":"3559357742503712","authorId":"3559357742503712","name":"生肉麵加豬油渣","avatar":"https://static.tigerbbs.com/797772e5857b1091ed85d4b17fe6201b","vip":1,"crmLevel":6,"crmLevelSwitch":1},"htmlText":"kudos","listText":"kudos","text":"kudos","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/616247919","repostId":2233184399,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":2,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}