Sea Group has a further downside to $30+ unless....

For the past 2 weeks, Sea Group has made headlines by retrenching and closing down operations. The press release/letters by the CEO is the goal of "self sufficiency".

Weirdly, based on information, it seems Sea is not cutting or downsizing at the right places to be self sufficient. In fact, without doing this, it is likely shareholders will face a further 50% losses.

The Main Problem to Self Sufficiency

Shopee Brazil is the problem. Without it, Sea Group will be self sufficient. This is derived from CIMB's report

                                                                 Shopee Results

To clarify the terminology of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation), EBITDA is one of the closest guage of cashflow generation. A positive EBITDA means a company is generating cash and self sufficient. An important point is that a positive EBITDA may mean the company is reporting accounting losses. So a positive EBITDA is a bare minimum to being self suffiicient and what Sea Group CEO, Forrest Li, is alluding to.

For year 2021 and 2022, the biggest cash burner (excluding HQ) is Shopee Brazil at about US$1 billion per year. Without Shopee Brazil, it is definite Sea Group on a whole can be self suffiicent by 2023, generating positive cash. 

The 2025 Time Bomb

Sea Group has US$7.8 billion in cash and short term investments currently. By 2025, it has about US$2-3 billion in maturing covnertible bonds, without a share price of US$90, it is definite bond holders will ask for cash instead of shares.

With about a cash needs of US$1-2 billion to sustain its main 3 segments, the continous burning of cash by Shopee Brazil from there to now of US$3 billion is putting Sea Group on a whole in danger of having to raise cash in 2025 to save itself. 

Conclusion

Without closing Shopee Brazil, Sea Group is going to find it difficult to achieve self sufficiency by 2025 and investors will be in a world of pain. I expect a collapse of share price until $30+ as long as Shopee Brazil remains in operations.

The closure of Shopee Brazil will save at least $1 billion in cash each year and enable Sea Group's survivial from 2023 onwards.