Saturday 15 January 2022

How Much is Sea Group Worth?

Sea Group is definitely the most talked about (and largest market value) company Singapore has now. It holds valuable brands in Garena, Shopee and SeaMoney (which is fronted by Shopeepay). The growth prospects of this company has been talked a lot with South East Asia and Latin America being its stronghold (amounting to a population size of 1.2 billion)

Currently, the market has valued Sea at USD$97 million. I will be evaluating based on a sum of the parts valuation to determine if it is a worthwhile investment with probability scenarios. 

SeaMoney (Digital Payment)

This is probably the most valuable component of Sea Group. The company is poised to dominate South East Asia (a region with population of about 670 million, growing in numbers and affluence). In my view South East Asia is an upcoming market with better managed governments as opposed to South America and affluence will rise. 

However Sea Group faces a rival in Grab Holdings. Both are now engaged in a cash burning war, with Sea Group having a larger war chest. Sea Group has also been better in execution as compared to Grab with its transaction volume growing faster. It shows its superiority. 

I believe in the end state, the winner of the Fintech will morph to be as valuable as DBS bank (market cap of USD$65 billion). Using probability scenarios, I think there is a 30% probability Sea Group will dominate South East Asia; a 60% probability, it will seek truce with Grab but take a lion share of the digital payment segment here (Market value then will be about USD$30 billion) and 10% chance it will lose to Grab (Residual Value of USD $100 million for brand). The expected probability E(X) will be about USD $40.5 billion value.

E Commerce

Shopee is currently the leader in South East Asia. While it is no doubt leading, I am slightly biased and of the view that Lazada, Alibaba's subsidiary, is gaining grounds in the battlefield. Alibaba is backing Lazada and is using its superior logistics network to help it. To me, it is a 50-50 chance that either Lazada or Shopee will dominate. I will use a probability scenario. But if a tie results, the 2 will be of equal standing.

This is because while Sea Group has a war chest to support Shopee, Alibaba has sustainable cash generating subsidiaries to support Lazada in its bid to become a South East Asia e- commerce giant with 100 billion GMV. 

The battle for e commerce is much tougher than Digital Payments, hence Sea Group will not win easily. I am pricing a win scenario of 10%, draw scenario of 80% and loss scenario of 10%. Lazada wont back down that easily because Alibaba is now desperate to find a new segment given China has turned its back on them. A win scenario will mean Shopee carries a value of USD $12 billion (assuming a PE of 20 times (no visible standalone comparable in the stock market) on a NPM of 3% (based on Amazon commerce results) of USD$200 billion in gross merchandise value/ $20 billion revenue. In a draw game, it will be worth USD$6 billion and $100 million in a loss scenario.

The expected probability E(X) will be about USD$6 billion value.

Digital Entertainment/Games

Its subsidiary, Garena has cemented its position in SEA and South America. It is earning about USD$1 billion profits annually and will likely to double as time passes. Ascribing a 20 times PE because I think there will be some room for further growth, this segment is worth USD$20 billion.

Sea Group's Financial Strength

Sea's financial strength lies in two areas: firstly it has a huge War chest of USD$12.5 billion to fight in its Digital Payment and E commerce battlefronts. Secondly, it has Garena's profits to subsidize its losses. In current situation, despite Garena's immense profitability, Sea Group has been reporting billion in losses each year and burning that much in cash. They are fighting Grab and Lazada on both fronts and hoping their competitors eventually run out of cash. Unfortunately, this is going to be a tough fight as the other 2 are also well funded.

Valuation Of Sea

All in all, I think Sea has an eventual value of USD$66 billion. However, this value will fluctuate as the developments in each of its 3 segments progresses. Should it become clear that Sea is losing out either in the Digital Payment or E commerce segment, its US$66 billion valuation will fall a lot. Personally, I would prefer a 20% discount on the final value for uncertainties, that will put it at about US$55 billion.

Until we see Sea Group dominating in one of the above segments, an upside re rating is unlikely. I expect Sea Group to move lower to the $110 mark until it becomes a winner. Any hint of it being a loser in one of the segments will see the share price dropping below $100.

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