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Sea is in troubled waters

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam10/9/2020 07:00 AM GMT+08  • 4 min read
Sea is in troubled waters
With a stock price that is 30x FY2019 revenue, is Sea, the creator of Free Fire mobile game, nothing but a one-trick pony?
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In 1883, there was a circus pony called Dicky in Chicago. Dicky won the affection of the audience. He was skilful in jumping over a stack of books. The circus goers marvelled at his flexibility. Children laughed and clapped.

Dicky performed the same trick in the same circus for many years. The audience began to tire of this old trick. They soon realised that the pony could only perform one trick. The poor beast was eventually put to death.

Investors are raving at a one-trick pony today: Sea, a US-listed e-commerce and gaming company in this region. It has now become the best-performing stock in the world.

Sea has not got the attention of Tesla or the FAANGs. But, it has vastly outperformed those names. It has risen 750% in the last 18 months, including 416% in 2020 alone.

The loss-making company is not only the world’s top performer, but now also the largest in Southeast Asia. At US$81 billion ($110 billion), its market capitalisation is more than those of Singaporean giants such as DBS Group Holdings and CapitaLand. It is even more than BCA, the Indonesian mega bank. At 30 times FY2019 revenue, it is more than eight times the average for its peers. Even a pony won’t be able to scale its valuation.

Sea has two main lines of business — e-commerce and gaming. The e-commerce business is Shopee, a platform that Singaporeans have flocked to in Covid-19. Shopee commands a market share of 25% in the Asean e-commerce.

The problem is that Shopee is chronically cash-destructive. Sea’s overall cash burn is dangerous. The Shopee losses could deplete its cash by FY2023.

Shopee received a spike in revenue due to Covid-19, which has forced people to buy even basic goods like groceries online. However, Shopee’s Covid-19 spike is well below its peers in emerging markets. Even the spike has not halted the cash burn.

Sea’s gaming business is called Garena. It is cash-flow positive and profitable. It could generate US$2 billion in revenue, which is a four-fold increase from three years ago.

However, it has an eerie similarity with Dicky, the pony that had only one trick. Garena is the only part of Sea’s business that is operationally profitable. This is just an agency business. Most of the games are developed by others.

Also, the core of its gaming revenue comes from a single game — Free Fire, which is Sea’s first self-made mobile game. It is in the Battle Royale category of games — games that simulate survival contests, like in the movie Hunger Games, where participants engage in a fight to the death.

Like Dicky’s jump in the circus, Free Fire is now a phenomenally popular trick. It was the world’s most downloaded game in 2019. Free Fire attracted more than 80 million daily active users in more than 130 markets.

But loyalty in gaming is fickle. Like fashions, adulation can turn to boredom. Investors in Sea are betting on a single game.

The man at the heart of this pony show is a soft-spoken engineer — Forrest Li. The 42- year-old Li was born in Tianjin, China. His rise has been stunning even by the standards of this era’s tech billionaires.

He worked for the Chinese arms of US multinationals — Motorola and Corning. The turning point was when he got into Stanford MBA’s program, the nursery of tech titans.

Li then followed his wife to Singapore, where she had a job, in 2006. He founded Garena (as Sea was then known) in 2009.

His big break was an early investment by the Kuok family. Sea was listed in 2017 with the backing of Tencent.

Li’s immediate priority would be to generate cash. He should not rest on his skyrocketing stock price. Like circus-goers and gamers, investors are fickle. They may abandon the stock once the Covid-19 boost ends.

Sea’s vast valuation cannot last indefinitely. As Forrest Gump, whose name Li adopted, said: “Life is like a box of chocolates. You never know what you’re gonna get.” That is a lesson that Dicky learnt and Li should heed.

Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer (Exotix Capital)

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