CFA Society Singapore
(Feb 27): Sea, operator of Southeast Asia’s biggest gaming platform, has had a rough start as a public company.
The much-heralded Singapore-based company raised about US$1 billion ($1.3 billion) in an October initial public offering led by Goldman Sachs Group Inc., Morgan Stanley and Credit Suisse Group AG. The shares have tumbled almost 20 percent since then and losses are widening. When the company reports results Wednesday, it’s projected to lose US$201 million in the three months ended in December, more than double the net loss a year earlier, according to data compiled by Bloomberg. Revenue probably increased 75% to US$154.5 million.
Analysts are unperturbed. Every single one of the seven who cover the company recommend buying its shares, according to Bloomberg’s data, with an average target price about 50% higher than Friday’s close of US$12.16. That sets up a looming confrontation with short sellers, who are betting the stock will fall. The short position hit a record 6.3 million shares at the end of January.
Analysts view Sea as Southeast Asia’s leading growth company with backing from Chinese colossus Tencent Holdings that should help it capitalise on the region’s adoption of games, e-commerce and digital payments. Skeptics see little evidence that Sea is developing anything resembling a business model: Indeed, the company is estimated to have lost US$527 million in the last year -- almost as much as its total revenue of US$550 million.
“Sea must demonstrate a path to profitability in its e-commerce business and show that new games can fuel an acceleration in digital-entertainment growth to bolster investor confidence,’’ Bloomberg Intelligence analysts Matthew Kanterman and Andrew Eisenson wrote in a note.
Southeast Asia’s digital economy is projected to reach US$350 billion by 2026, a forecast that some analysts cite as underpinning Sea’s long-term potential. They also focus on Garena’s games pipeline and the company’s ability to continuously release new games in order to fund heavy investments on e-commerce division Shopee and payments service AirPay.
Sea is counting on growth at Garena to remain strong and fund investment in e-commerce and payments. The Garena games business accounts for about 90% of total revenue.
The Arena of Valor title continues to do well in Taiwan, Thailand and Vietnam, and Garena has also launched its self-developed survivor shooting game Free Fall -- Battleground, according to Nomura Securities Co. Onmyoji, a role-playing game, has become one of the five highest grossing titles in Thailand after its release in November, according to Nomura.
Johannes Salim, an analyst who writes for online research aggregator Smartkarma, said he’s monitoring Sea’s progress in Shopee and AirPay before deciding on a 12-month target price. Despite a rapid rise in Shopee’s gross merchandise value and heavy marketing spending, only about 2% of Sea’s sales came from Shopee in the first nine months of 2017.
“Execution risk for Sea, especially in terms of monetisation, remains high and there is no guarantee of rapid progress in monetisation,” he said.
The company is losing more money as it grows. In 2015, Sea lost 37 cents for each dollar of revenue and that rose to 65 cents in 2016. According to analyst estimates, the company lost 96 cents for every dollar of revenue last year.
But the analysts are betting on growth. They project revenue rose 59% last year, up from 18% growth the year before.