Tuesday 3 October 2023

Shopee is becoming a Profit Generator and Cash Cow for Sea Group

Shopee, the e commerce arm of Sea Group has proven to be a cash cow. This too bears similarlty to many e commerce giants (Taobao/Tmall, Amazon) where post its growth stage, these companies turn out to be cash cows which generates billions in cash and profit for their parent company. 

Shopee has proven to be the same; with the continuous improvement in Shopee’s results and South East Asia explosive growth in South East Asia, my view is that Sea Group at its current share price of US$44 (Market cap of US$25 billion) is cheap and a lot of upside can be captured now.

E Commerce: Profitable as it Grows Larger 

Currently Southeast Asia’s e commerce size is at US$100 billion GMV with a last year growth of 18%. In the near future, one can expect this region’s market to be US$150 billion GMV with an end state of US$250-$300 billion GMV. 

Shopee has a market share of 47.9% in the whole region. This translates to an approximate US$47.9 billion GMV. I estimate Shopee could have about a 40% market share, with US$100 billion GMV. 

To understand how profitable the e-commerce model is, one has to look at the profit performance of Alibaba. At US$1.4 trillion GMV, Alibaba generates approximately US$23.5 billion in profits. This means 1.6% margin from its GMV, despite the intense competition Alibaba faced from JD and PDD and the need to offer discounts to Chinese consumers.

In the latest financial quarter, Shopee had turned in a profitable financial result of US$65 million on an estimated $11 billion GMV (0.6% margin). It is possible with scale, Shopee will be able to maintain a 1% margin from its GMV. In terms of competition, Tiktok shop is the rising fast capturing market share from Lazada/Shopee/Go-to with its model of using short form videos to draw traffic into is e-commerce. However, this model is banned due to its supposedly harmful effect. Therefore, my prediction is that Shopee can maintain a 45% market share. This means in near future, Shopee manages USS$67.5 billion GMV or end state of about US$120 billion GMV.

Ascribing a 30 times P/E for the near term, Shopee is valued as a US$20.25 billion entity.

Sea Money

In Southeast Asia, Grab and go-to is now challenging Seamoney in the digital banking space. In Singapore, Trust Bank has fought remarkably well taking the no 1 spot from Grab and Sea Group.

The presence of so many companies make it hard to evaluate the worth of any of these name’s digital payment arm. However, one can evaluate what is the total addressable value of the market and my view is that the number 1 would be able to generate US$1-2 billion in profits, which will allow it to command a US$60 billion valuation.

 Splitting it 4-way, Sea Money should be worth about US$15 billion.

Digital Entertainment

While it has still commanded a profit of slightly above US$1 billion per quarter, I do not think Free Fire can maintain its dominance. Add to that, the loss of Riot Game’s license, I have a bear case for its Digital Entertainment and predict it will earn a constant US$500 million per year. At 10-time P/E, it will only be worth about US$5 billion

Sum of Parts Value

In total, Sea Group is worth US$40.75 billion. Factoring a future share dilution of 15% due to its generous employee options, my evaluation is a US$61 share price is the fair value of Sea Group.


What has surprised me is how efficient Sea is in ekeing out a margin from its e-commerce arm, while struggling to be the leader in Digital Payment. With digital entertainment in decline, Sea Group has Shopee to step into its shoes to become the cash cow. China has shown how lucrative the e-commerce model is with JD and Alibaba turning in profits.

Right now at its current beaten down share price, Sea Group does offer value and my view is that anything below a share price of US$50 is a good time to purchase Sea. 

The publication of my posts is solely for informational purposes and is not to be construed as a solicitation or financial advice as I am not a certified financial adviser. My analysis on companies covered are not an offer to buy or sell any stocks and I encourage readers to do your own "due diligence" before investing.

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