The latest results shows that the growth story has disintegrated. Profits earned from Garena is declining, losses from Shopee grew and GMV has slowed. In a sentence, Sea Group's share prices looks set to go down further.
Sea Money is unlikely to be the Winner in South East Asia Space
No doubt, South East Asia has a large population of unbanked individuals where Sea could tap on. However, it has two major competitors in Grab and Go-to.
Furthermore, it seems Grab has keeping itself toe to toe with Sea despite the latter having a larger warchest. Grab's latest financial results shows it has slowed its cash burning rate and is able to survive 10 more quarters on its current cash balance. This means shopee has to balance burning 8 billion in cash over the next 10 quarters to keep its battle with Grab.
The emergence of Go-To with a large war chest post IPO signifies that that digital payment battle is far from over and I do not think we are going to have a clear winner. This means a continuous battle in South East Asia. Hence, I am ascribing a 0% chance we will have a clear winner among the 3 which would have been a winner with a US$65 billion valuation like DBS.
Based on my previous post in determining the value of Sea Group, I have since modified it that Sea has a zero chance of domination in the digital space. A truce is more likely with Sea being the largest of the 3 in South East Asia (excluding Indonesia). Sea should be worth US$15 billion. This is much lower than my initial valuation of US$40.5 billion where I thought Sea Group had a good chance of winning.
On a sum of parts valuation, Sea Group is worth US$40 billion in market capitalization (US$72 share price).
Potential Dilution of Shares
Sea Group has about US$2 billion in convertible bonds due in 2025-2026 where bondholders can convert shares at US$90-300+ per piece or get back in cash. Given that it is unlikely Sea Group share prices will return to its hey days, existing shareholders face a medium term equity exercise raising by Sea Group to repay its debts.
In addition, the group has about 54 million in share options granted to employees and majority shareholders that have not been exercised. This means a potential dilution of 9.6% based on unvested options.
One can reasonably expect an enlarged share base of 15% from now to 2026 factoring more share based compensation to be given; maintaining a US$40 billion valuation, the future share price in 2026 is US$62. Expecting a 60% total return for owning a stake for 4 years. A worthwhile price to enter Sea Group is US$38.
Only if Grab or Go-To declares bankruptcy, will a positive re-rating happen for Sea.