For the analysis of Sea Ltd, you can refer to the description of my other blog article “Sea, the parent company of Shopee, the most valuable company in Southeast Asia“.
Growth stocks tumbled across the board
Since late October of last year, all growth stocks have started to fall, and almost all of the famous growth stocks have lost at least 50% to 90%. Of course, Sea Ltd. couldn’t stay out of it. Sea Ltd. was the one who suffered the most damage. At the peak, it fell by 70%!
Gaming BU lost growth driver
In the fourth quarter 2021 earnings report released last month, the gaming division grew by only 7%, and in the third quarter of 2021, it grew by 93.2%. In contrast, in the fourth quarter of 2021, the e-commerce sector grew by 89%, and the fintech business grew by 711%.
The problem is that Sea Ltd. has long relied on the money earned by the game department, and transfused blood to the two departments of e-commerce and fintech, which have lost a lot of money. Well now, there is no lockdown any longer, the pandemic has slowed down, and people will no longer stay at home and play electric games, making it difficult for the game BU to grow. Therefore, Sea Ltd. must find a new operational model in order to cope with future growth and investors’ expectations.
Because of the Western world led by the United States, in order to fear that China will surpass the United States, since the Trump era, it has openly united the Western world and its allies, and has tried every means to start blocking China. When Sea Ltd. was in its early years before listed, Tencent had more than 30% of the equity, which indeed played a very important role in the early stage of Sea Ltd’s growth and control the board of directors.
But now, because of the U.S. resistance to China, the fact that Tencent is a major shareholder has also caused Sea Ltd. to be inherently guilty (please see the description of Sea Ltd’s plight in Taiwan and India below).
For this reason, Tencent began to sell Sea Ltd’s stock in the first quarter of this year, which made Sea Ltd’s stock price continue to bottom out; Tencent is a major shareholder holding more than 30% of the shares, and selling shares will cause the stock price to drop sharply for a period of time. The shareholding ratio was reduced to 18.7%; the two reached an agreement, which increased the voting control of founder Forest Li to more than 60%.
Taiwan block Chinese Capital
Because of anti-China reasons, Taiwan has legislated to prohibit most Chinese companies from operating in Taiwan, and it is still tightening. Last year, there was poor communication among the Taiwan government departments, and the third-party payment license originally agreed to be issued to Sea Ltd’s Shopee e-commerce company a few days ago, went back and retracted finally. But Sea Ltd. is a Singaporean manufacturer.
The problem is that the Taiwan government believes that Tencent is the main shareholder of Sea Ltd., and it vetoes the third-party payment license of Shopee E-commerce. Although Shopee explained that Tencent’s equity only accounted for about 22% at the time, which was far lower than Taiwan’s 30% regulatory standard, the Taiwan government still did not accept Shopee’s explanation.
By the way, Taiwanese people have a narrow vision and pay little attention to how far other people in foreign countries have progressed. They always think of themselves as great and think themselves first in everything. It seems that the world revolves around Taiwan. Others rarely examine themselves. Take Shopee entered Taiwan only in less than five years, and hit Taiwan’s largest e-commerce company to publicly announce that it will be delisted.
From this case, we know how weakness Taiwanese local companies are. And everyone should know that Taiwanese Shopee only account for a small percentage of Sea Ltd’s revenue. Brazil, Latin America and Southeast Asia are Sea Ltd’s focus and most sources of revenue.
India’s blocking due to anti-chinese
On the Indian side, when it banned a bunch of programs and companies in China not long ago, it also banned Sea Ltd.’s Free Fire game by the way. The impact of this incident is significant, as India is the largest market for Sea Ltd.’s Free Fire mobile game, accounting for about a quarter.
Because of this, the Singaporean government also issued a diplomatic protest to India, hoping that the Indian government would reconsider and lift the unreasonable ban. Don’t underestimate Free Fire mobile game. According to Sensor Tower’s statistics, Free Fire mobile game was the most downloaded mobile game in the world last year, with a total of 24 million downloads.
Not only that, but Sea Ltd. himself announced yesterday that it will withdraw from India’s e-commerce business because India’s business environment is unclear. It is worth noting that Shopee e-commerce has entered India’s e-commerce business since launched in August last year, and there were 100,000 orders just in the first month. Consumers welcome and whether there is a way to operate are two different things.
Sea Ltd.’s operation in Brazil is very successful, it has threatened the local leader in Latin America’s e-commerce MercadoLibre. With India and Brazilas the most famous representatives, for the following reasons, began to focus on non-domestic enterprises. Start to set lots of trad barriers or restrictions for e-commerce operators to conduct business through legislation, taxation and other means:
- In order to protect the domestic retail industry, a series of trade barriers have been taken to protect the domestic retail industry.
- Especially since the scale and competitiveness cannot compete with multinational companies, domestic manufacturers have jointly protested strongly to the local government, affecting the government’s regulations.
Of course, these trade barriers will have an impact on all manufacturers, especially multinational e-commerce companies such as Amazon, Walmart, Alibaba, JD.com, Sea Ltd, and MercadoLibre, all of which will suffer a great impact.
Will Sea Ltd’s money burns out?
In March, Sea Ltd. completed the largest financing case of US$7 billion in the history of Southeast Asia. Coupled with the high stock price in the past, new shares issued, and several convertible corporate bonds, it now has $10.2 billion in cash on hand (I’m not mistaken, this is an astronomical amount). People who suspect that it will go bankrupt because of e-commerce burning money, really think too much.
Is Sea Ltd. running out of growth drivers?
Facts speak: Results for the fourth quarter of 2021: the gaming sector grew by only 7%, the e-commerce sector grew by 89%, and the fintech grew by 711%; this is still a very amazing performance! Forest Li is a very good and extremely smart person. He knows what Wall Street expects from Sea Ltd. now, so he announced that before 2025, the goal of break-even of the e-commerce sector and the fintech sector will be achieved. If this declaration can be achieved, Sea Ltd. can truly become a world-class multinational enterprise.
Singapore goverment as the backup
Don’t forget, Sea Ltd. is the largest company in Southeast Asia, and it has fully support from the Singapore government. There are only two digital banks licenses issued in Sigapore, one of which was issued to Sea Ltd. You have rarely seen a note that the government will send a diplomatic protest to another country for a business, right? The Singapore government has done this to India just for it.
To put it bluntly, Forest Li was a Chinese before high school and is now the richest man in Singapore. The Singapore government needs Sea Ltd. as a model company. The key point is that the three major departments operated by Sea Ltd. are all future trends and meet the goals of the Singapore government to support or attract investment.
A company worth studying
In Chapter 3, Sections 3-6 of my book “The Rules of Super Growth Stocks Investing”, taking Shopee from Sea Ltd (ticker: SE) as an example to illustrate how I decide a startup worth investing in. And in Chapter 5, Section 5-1, take it as an example to illustrate the valuation of a startup. There is no other reason, this is an enterprise worth studying.
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