kokkai Investment Thesis I recommend buying shares of Sea Limited (NYSE:SE). The company operates in a gigantic market in the early stages of digitalization, but it proved to be competitive in markets with a high degree of competition, such as Brazil. Shopee, the retail division of Sea Limited, grew aggressively and in a short space of time in Brazil, a highly digitalized market. Additionally, trading at a PEG of 0.4x, I see an attractive valuation for a growing company. Introduction The company operates on a continent characterized by low penetration of digital technologies. Today, around 460 million users use the internet just to consume content from social networks, not in a more intelligent way. This creates opportunities for Sea Limited that corroborate my positive vision for the company. E-commerce in Southeast Asia is expected to grow from $194 billion to over $330 billion by 2025, and Indonesia is expected to lead the region. Finally, the adoption of digital financial services continues to grow, now representing more than 50% of the total value of transactions in Southeast Asia. Now, let’s talk about one of the big companies taking advantage of these market trends, Sea Limited. History And Business Model Sea Limited was founded in 2009 under the name Garena. The company launched League of Legends, which would become a global highlight in online games, and it didn’t stop there, in 2017, there was the launch of the also famous Free Fire. In 2015, Shopee was launched, an E-commerce platform with an excellent user experience, competitive prices and a strategic approach to social media. Last but not least, Sea Limited launched SeaMoney in 2014, its financial operations segment. Fintech grew quickly offering digital accounts, online payments and insurance solutions. Companies (IR Company) As a global retailer, Sea has similarities with peers Alibaba (BABA), MercadoLibre (MELI) and Amazon (AMZN). Below, I will perform a financial analysis of it against its competitors to find its strengths and weaknesses. History And Business Model Next, I will use Seeking Alpha and Koyfin to analyze some financial indicators for Sea Limited and its competitors. Ticker MELI AMZN SE BABA Country Argentina USA Singapore China Market Cap $81B $2T $40B $177B Revenue $15.6B $590.7B $13.7B $130.3B Revenue Growth 5 Years [CAGR] 58% 20% 68% 20% EBITDA Margin 18% 16% 19% 4.3% Net Income Margin 7.2% 6.4% 8.5% 0.3% ROE 41.6% 20.3% 6.4% 0.8% Click to enlarge As we can see, Sea Limited has many characteristics of a growing company, such as tight margins and a low return on invested capital compared to its competitors. However, I draw attention to the fact that the company already has revenue close to that of MercadoLibre. It is important to highlight that Sea was created in 2009, while MercadoLibre was created in the 90s. Another point is that Sea has had the highest revenue growth in the last 5 years, which corroborates my positive view of the shares. But does it make sense for the company to continue focusing on growth instead of prioritizing margins? I believe so, and I will prove it to you through a success story from the company. Brazil: A Success Story For Shopee Sea Limited, through its subsidiary Shopee, took five years to become the most searched e-commerce in Southeast Asia, even surpassing Lazada and Tokopedia. The company has a history of observing how customers solve their problems and then creating agile ways to solve them. However, the company decided to expand to Brazil, and it took just two years to become the most downloaded e-commerce application. In Brazil, the company faced competition from players such as MercadoLibre and regional player Magazine Luiza. Shopee stood out by offering free shipping to resellers as well as a commission of just 6%, well below MercadoLibre’s commission of 17%. However, Shopee recently increased its commission to 18%, indicating the profit potential it sees in South America. In my view, Shopee’s biggest challenge in overcoming MercadoLibre in Brazil is finding agile and reliable transportation, one of MercadoLibre’s biggest competitive advantages. If it manages to find one, whether through its own fleet or partnership, the company will have an excellent business model to scale its products throughout Latin America. It is worth noting that the company can still sell higher value-added goods in its e-commerce, given that currently the average price of items is less than $10. It is worth highlighting that Brazil has a high degree of digitalization and banking, and Shopee’s growth is entirely related to its app, which has an excellent customer experience and is very compatible with social networks. Given this scenario, I really believe in the company’s execution capacity, and I see that investment in growth can be very assertive, but is this taken into account in the valuation? Valuation Is Attractive For A Growth Company Sea Limited is a growth company, and it justifies this through its revenue growth over the last 5 years. Therefore, I believe it is appropriate to use the PEG, which will influence earnings metrics based on growth. PEG (Seeking Alpha) As we can see, the company has a PEG well below its peers. Considering that the company reaches at least the same multiple as Alibaba, which competes in the South Asian and Brazilian markets, we have an appreciation potential of 36% using conservative assumptions. Therefore, my recommendation is to buy Sea Limited shares. Let’s now check out the Quant Rating and Factor Grades tools. Sea Limited According To Quant Rating And Factor Grades The Quant Rating tool has a recommendation to hold the company’s shares, as we can see: Quant Rating And Factor Grades (IR Company) This is due to the poor valuation grade. Basically, the valuation grade considers several multiples, such as P/E and EV/EBITDA; therefore, there is no way to consider the company’s growth, and that is why I do not agree with the note. Now, let’s analyze a little of the company’s latest results before addressing the risks of the thesis. Latest Earning Results As we can see below, Sea released its 1Q24 results, beating market revenue estimates but not profit estimates. I will explain more below. Forecast (Investing) The company reported a nice 23% annual increase in revenue, due to the higher GMV at Shopee, the good performance of SeaMoney, and the resilience of the digital entertainment segment with Garena. However, the company reported a net loss for the quarter. Structurally, what happens is that the company has a cash-generating business (Garena) and is using this business to mainly boost the retail segment (Shopee). The company believes that it will lead its consumer markets where it operates through an excellent customer experience, and at a certain point, with the recognition of its brand it will be able to have lower marketing expenses, starting to make strong profits in the operation. As an analyst, I tend to believe in the company’s vision given its impeccable execution in Shopee’s operations in Southeast Asia, but especially in Brazil, where I, as an analyst and user, could witness it. But like any good investor, it is important to know the risks of the thesis. Potential Threats To The Bullish Thesis I see three major risks to my thesis about buying Sea Limited shares. The first comes from its cash-generating business, Garena, which has an online gaming operation, and there are doubts that the company will be able to repeat the success of the League of Legends and Free Fire games. The two other risks come from Shopee, the online retail division. The company operates in an extremely competitive market, whether in Southeast Asia or Latin America, in addition, its competitors have been operating for longer and are larger. This brings us to the third risk, which is the struggle to reach a level of profitability at Shopee. There is a clear difficulty in balancing revenue with investments in marketing and branding. The scenario is extremely complex, and investors should exercise caution if they choose to invest in Sea Limited shares. The Bottom Line Sea Limited operates in a market with many opportunities given its low penetration of digital technologies, whether e-commerce or payment solutions. Additionally, the company expanded its operations to the Americas and proved capable of dominating markets characterized by high competition. In Brazil, for example, Shopee dominated first place in the number of app downloads. This is due to the excellent user experience combined with a model focused on social media. This growth, which can be replicated in other geographies, is priced significantly below peers when we analyze the PEG. Based on this analysis, I recommend buying Sea Limited shares. Investors should stick to a growth company priced at cheap levels, in my view. In my opinion, the risk-return ratio is quite attractive.
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