If you are an avid user of the online shopping app Shopee, an avid gamer (who love playing the Call of Duty, Arena of Valor, or Free Fire), or you support the Singapore Premier League Club Lion City Sailors FC – then you probably are familiar with the name Forrest Li (who is currently the richest person in Singapore – you can read the article on Mothership in full here), and the company he co-founded – SEA Limited.

The company was listed on the New York Stock Exchange since 20 Oct 2017, at an IPO price of just US$15.00 per share. Had you invested in the company since day one, your initial investment would have grown by a whooping 22.4 times!!! (Based on its share price of US$336.26 on 27 September 2021)

Just like all the other company write-ups I have posted in the past, in this post about SEA Limited, you’ll read about its businesses, financial results and debt profile between FY2018 and FY2020 (the company has a financial year end every 31 December), along with its performance for the first half of the current financial year 2021 (ended 30 June 2021), and finally, my thoughts about the company moving forward.

Let’s begin…

SEA Limited’s Businesses & Revenue Contribution

Business Segments:

1. Garena

This name should be familiar to you if you are an avid online gamer. Established since 2009, Garena is a leading online games developer and publisher with a global footprint across more than 130 markets (and counting.)

Some of its games include the ‘League of Legends’ (which is the most-played gamer with more than 100 million active users globally), ‘Call of Duty’, ‘Arena of Valor’, ‘Free Fire’ (which was the most downloaded mobile game globally in 2019 and 2020, as well as being the highest grossing mobile game in Latin America, Southeast Asia, and in India in the year 2020), and ‘Speed Drifters.’

2. Shopee

Even if you don’t use the online shopping app, you should have heard about it on TV through their advertisements (where they engaged international celebrities including Cristiano Ronaldo, and most recently, Jackie Chan in their advertisements, along with local celebrities like Mark Lee and Gurmit Singh.)

Launched since 2015, Shopee is currently one of the leading online shopping platforms in Southeast Asia, as well as in Taiwan. It is also consistently ranked as the #1 app in the Shopping category in Southeast Asia in terms of monthly active users, total time in app on Android devices, as well as download.

3. SeaMoney

Established in 2014, it is a leading digital payments and financial services provider in Southeast Asia.

Its offerings include mobile wallet services, payment processing, credit, and related digital financial services and products which are offered under ShopeePay, SPayLater, and other brands in the region.

Revenue Contribution:

In terms of revenue contribution for the financial year 2020 ended 31 December 2020, 46% came from digital entertainment (through the selling of in-game items to their game players), 40.6% came from e-commerce and other services (which encompasses revenue generated from their e-commerce marketplace services, including offering sellers paid advertisement services, charging transaction-based fees, and also other value-added services rendered, as well as from their digital financial services – where most of its revenue comes from interest and fees from loans granted to commercial and consumer customers, and commissions charged to third-party merchants), and the remaining 13.3% came from the sales of goods (where the company purchase products directly from manufacturers or third-parties and sell on their Shopee platform under their official store to meet buyers’ demands for such products.)

As for the company’s 2020 total revenue by geographical location, 63.8% came from Southeast Asia, 15.0% came from the rest of Asia, 18.1% came from Latin America, and the remaining 3.1% came from the rest of the world.

Historical Financial Performance and Debt Profile (between FY2018 and FY2020)

In this section, let us take a look at some of the company’s key financial statistics, as well as debt profile:

Total Revenue & Net Profit (USD’mil):

	FY2018	FY2019	FY2020
Total Revenue (USD’mil)	$827m	$2,175m	$4,376m
Net Profit (USD’mil)	-$961m	-$1,463m	-$1,618m

In a span of 3 years, its total revenue grew at a compound annual growth rate (or CAGR) of 74.3% – contributed by huge growth in all of its business segments – in the latest full-year 2020 results, revenue from its digital entertainment segment leaped by 77.5% compared to the previous year (from US$1,136.0m in FY2019 to US$2,016.0 in FY2020) due to increased active user base, as well as the deeper paying user penetration (particularly from its self-developed game ‘Free Fire’), revenue from its e-commerce and other services segment skyrocketed 116.0% compared to last year (from US$822.7m in FY2019 to US$1,777.3m in FY2020) driven by the growth of the company’s e-commerce marketplace, and positive developments in each of their marketplace revenue streams – transaction-based fees, value-added services, and advertising, and revenue from its sales of goods also jumped by 168.7% (from US$216.7m in FY2019 to US$582.4m in FY2020) primarily due to the increase in their product offerings.

That said, its net profit for all the 3 financial years I’ve looked at were all net losses – and this is due to a steady rise in terms of its sales and marketing expenses (mainly from e-commerce due to the ramping up of marketing incentives and brand marketing efforts, and digital financial services businesses due to their efforts to drive adoption of their mobile wallet services), general and administrative expenses (mainly due to the company’s expansion in their staff force), as well as in its research and development expenses (due to an increase in its research and development staff force.)

Gross Profit Margin (%):

	FY2018	FY2019	FY2020
Gross Profit Margin (%)	1.8%	27.8%	30.8%

As a result of the company’s cost of sales recording a smaller scale of increase compared to its total revenue, its gross profit margin recorded growths over the 3 financial years I have looked at.

Debt Profile:

	FY2018	FY2019	FY2020
Cash & Cash Equivalent (USD’mil)	$1,259m	$3,571m	$7,053m
Total Borrowings (USD’mil)	$1m	$1m	$0m
Net Cash/Debt (USD’mil)	+$1,258m	+$3,570m	+$7,053m
Free Cash Flow Per Share (USD/share)	-$1.96	-$0.37	+$0.43

With a steady rise in terms of its cash and cash equivalents (which grew from US$1,259m in FY2018 to US$7,053m in FY2020), coupled with minimal borrowings, the company is in a net cash position in all of the 3 financial years I have looked at – which is something I like.

Another thing I find desirable about its debt profile is that, SEA Limited’s free cash flow per share have also reversed into a positive figure in the latest financial year 2020.

1H FY2020 vs. 1H FY2021 Performance

Sometime in mid-August, SEA Limited released its financial results for the second quarter, as well as for the first half of the financial year 2021 (ended 30 June 2021.)

Let us take a look at some of the key statistics the company have reported in the table below (compared against the same time period last year – i.e. 1H FY2020 ended 30 June 2020):

	1H FY2020	1H FY2021	% Variance
Total Revenue (USD’mil)	$1,597m	$4,045m	> 100.0%
Net Profit (USD’mil)	-$674m	-$856m	N.M.
Gross Profit Margin (%)	25.5%	39.0%	+13.5pp
Cash & Cash Equivalent (USD’mil)	$4,130m	$6,003m	+45.4%
Total Borrowings (USD’mil)	$0m	$0m	–
Net Cash/Debt (USD’mil)	+$4,130m	+$6,003m	+45.4%

Personally, I felt that the company’s results on the whole was a positive one – in terms of its total revenue, all its 3 business segments saw growth – revenue from the digital entertainment segment grew due to the increase in their active user base, as well as deepened paying user penetration; revenue from the e-commerce and other services segment saw improvements due to the scale of their e-commerce marketplace, and increase in each of its revenue streams, including transaction-based fees, value-added services, as well as advertising; and finally, the revenue growth in its sales of goods can be attributed to an increase in its product offerings.

Also, as the increase in its cost of goods went up at a slower rate compared to growth in its total revenue, its gross profit margin also recorded a 13.5pp improvement compared to the same time period last year.

Finally, it’s also encouraging to note that the company’s net cash position have also strengthened compared to last year, and that it has no borrowings.

Closing Thoughts

Personally, I feel that the future is bright for the company – some of the future catalysts which will further drive up its revenue include contributions coming in from their digital bank in Singapore (the company have been awarded the full digital bank license in the country – you can read the Press Release in full here), and as well as from the expansion of its Shopee e-commerce marketplace (in early-September 2021, it was reported that Shopee will be launching in Poland – you can read the news article on The Straits Times in full here.)

With that, I have come to the end of my company writeup on SEA Limited. As always, everything you have just read above is purely for educational purposes only, and they do not represent any buy or sell calls to buy the company’s shares. Please do your own due diligence before you make any investment decisions.

Disclaimer: At the time of writing, I am not a shareholder of SEA Limited.

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