Will Sea Group Completely Turnaround a Profit?

This is a pre-post to Sea Group's Financial Results next week.

The question in a few people's mind will be if Sea Group is able to continue its turnaround and probably maintain a 400 million quarterly profit.

In my view, it is a yes. Here is my explanation:

E commerce platforms are like Tolls in Highways

E-commerce platforms are durable and profitable entities when scaled to a large enough size with traffic. The business model of e commerce platforms is that they take a cut for every sales transaction. They also earn from marketers/shops who try to advertise in it (Termed as Customer Management Segment). 

Alibaba is the best example where it is competing in a market of 1.4 billion chinese people. Despite having about 7 well known e-commerce platforms (of which alibaba owns 3 of these 7), there is sufficient scale for Alibaba to turn around a large amount of profit due to the homogeneity of the Chinese markets (US$20 billion per year).

Sea Group is also turning around now. As the largest of the 3 e-commerce platforms in South East Asia (home to a population of 687 million), Sea's Shopee seems to have turn around a positive margin and is now earning US$100 million per quarter via "tolls" on merchants who sell on their platform and advertising. That is a lot of money to be made.

With the growing scale and population size of South East Asia, I do feel Sea will be able to rake in about US$400 million per quarter, in proportion to how much Alibaba earns in China based on its reach and earning powers of the different regions factored in.

Downside- Free Fire Falls

In the start up stages of Shopee, Sea Group was able to capitalise on Free Fire's profit generation to shield the losses. However, this is starting to change with Free Fire (Garena) earning US$275 million vs Shopee's US$115 million based on the latest quarter.

I expect it to change where shopee will become the No 1 generator within this year and Garena becomes only a small time generator of US$50-US$100 million due to declining popularity.

Long Run- Definitely Profitable and a Cash Cow

In the long term, Sea Group (on its e commerce and gaming arm) is able to generate a billion in annual profits. Its a definite that Sea has grown into a group capable of delivering $1 billion in cash flow due to its success in branding; which I truly did not expect when asked about it 4 years ago. The company has proven me wrong and delivered. 

In terms of debt profile, with its cash cow of US$1 billion per year, Sea Group can comfortably pay off all its outstanding convertible bonds even if its share prices do not go above $100. Relying on its moat in being an e commerce toll machine which has become a durable branding with jingles most in South East Asia knows. 

The next step which I will not be surprised is the announcement of dividends which i believe would happen in 2024.

The digital services arm is a mixed bag and its next frontier. If Sea does well, it will create a digital bank that is the size of US$30 billion market cap. This is similar to the next step Alibaba took when it grew Ant Group by onboarding its merchants from Alibaba, knowing their sale profile and offering them financial services in factoring against their sales receivables; however with Grab/Singtel and Trust Bank being strong, I doubt reaching this goal is easy. However (again), Sea has proven me wrong once and therefore, they might indeed beat Grab and Trust Bank to be another no 1.

<Not Vested in Sea Group as the margin of Safety is still far>