Sea Group Share Price Collapse: Is it Worth it Now?

Sea Group's business did not grow as what investors had expected and took a beating. It share price collapsed 28% in a single day. So the question now is with the beat down, is the company now undervalued fundamentally. Below is my valuation:

Shopee

The centrepiece of Sea is its fast growing E commerce segment, Shopee. Overall revenue growth was strong at 24.4%, while market transactions grew at 37.6%. However, its value added services in customer relation and advertising grew only 11.3% which shows advertisiers are now not so keen in marketting due to the weakening strength of the South East Asia market. For example in Singapore, due to Singaporeans struggling with the country's cost of living where inflation has remained record high, business are not optimisitc of Singapore's demand

Looking at profitability,  Shopee is impressive logging in another profitable quarter at US$330 million. It is now similar to Taobao and follows the trend in South East Asia of online shopping. I expect the e commerce segment to be profitable forever now, logging in US$1 billion this year. Further growth is expected as a US$2 billion proftable segment. Hence the e commerce segment can be abscribed a 25 times P/E on its current profits- US$25 billion

Garena

Nothing much, game has plateaued with not much growth. I expect a US$1 billion profit and the segment is worth US$10 billion due to declining growth.

Digital Financial Services

This is a segment which surprised me, however, what pushed it up was that its net non operating income recognised was US$100 million due to the rising interest rate environment which benefits bank. Strip it out, I do not think the Digital Financial Services is still immensely profitable. My expectation is that it will be a digital wholesale bank like which will earn US$80 million per year. However, it is growing exponentially due to the large amount of underbanked and being able to rely on Shopeepay and Shopee Network.

My value of this segment is US$10 billion

Final Thoughts

Using a sum of parts, my value of Sea Group is a US$45 billion valuation conglomerate.

At its current market cap of US$23 billion (US$40.50 share price), it is indeed undervalued. However we must also factor in that Sea Group has been giving a tremendous amount of share based compensation to its employees (approx 5% annual increase in shares). This has greatly eroded the value of the group. Until Sea Group stops paying its employees with large amount of shares, I will not value it at the share price of US$79 (US$45 billion market cap). 

To factor in dilution, i will take a 30% discount, this puts my expected price range at US$56 share price. Hence, the upside from here is only about 40%. Hence while the upside is decent, there is nothing much to shout about as compared to other companies.