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Analysts at Sea over valuing Singapore’s new bank

Analysts ask if Sea Limited’s digital-banking license makes its valuation more than the sum of its parts.



At the close of 2020, the Monetary Authority of Singapore awarded one of its coveted full digital-banking licenses to Sea Limited, a NYSE-listed company operating out of Singapore.

Independent analysts on Smartkarma’s platform disagree on whether Sea’s share price is attractive, or poised for a big fall. The stock had rocket-ship performance in 2020. Do its growth prospects as one of Asia’s hottest digital players represent a bargain – or a disaster in the making?

While the outcome won’t affect Sea’s bid for the banking license, which it now has, it could impact its ability to sustain that business, although there’s no question that for the time being it has the cash it needs to launch its bank.

Sea is on a roll. In 2020 its stock price surged by 385 percent, a performance that no doubt helped it clinch the MAS license. The MAS has put a priority on digital banks that are – or soon will be – profitable and operating at big scale.

In just five years since inception, Sea has become one of Southeast Asia’s biggest digital companies, with leading market share in e-commerce, gaming, and most recently, fintech. Tencent, China’s own gaming-plus-fintech behemoth, owns about 25 percent of the company, and it has partnered with Sea to extend its mobile gaming operations across the region.

This support has elevated Sea to the top of Southeast Asia’s digital economy. Sea is duking it out with the likes of Alibaba-backed Lazada and Indonesia’s Tokopedia for dominance. Sea has a market cap of $100 billion and raised another $2 billion in ADR shares in December, on top of an existing $3.5 billion in cash and cash equivalents, giving it a huge war chest.

Riding the waves

Several analysts like the overall combination of the company’s divisions, seeing something greater than the sum of its parts.

“This will continue to be a stock to own in 2021,” said Angus Mackintosh of CrossASEAN Research, in a December 10 report on Smartkarma. He is bullish on the company’s MAS license as an avenue to expand into financial services beyond digital payments.

SeaMoney, the company’s digital wallet, is already big in Indonesia. Its regional payment volumes exceeded $2 billion during Q3 last year, with nearly 18 million paying users. The prospect of selling loans and other financial services to SeaMoney users, as well as consumers in Sea’s e-commerce platform, Shopee, is attractive, Mackintosh says.

SeaMoney offers e-wallet services, payments, digital credit cards, and other products, via different brands across Southeast Asia, including ShopeePay in Indonesia. ShopeePay is now the largest e-commerce payments app in Indonesia, with 29 percent of transactional market share, ahead of GoPay, OVO and others.

Sea “keeps delivering on growth and is already forging a path to profitability,” Mackintosh said, with fintech taking over as the most important driver.

Reasonable valuations?

Rickin Thakrar of Global Equity Research is another fan. The company’s amazing stock performance is due to its almost triple-digit sales growth, and although it still burns cash, it has kept this to a minimum.

Thakrar also notes that growth is now starting to come through payments, versus gaming or e-commerce, which he believes will support revenues through 2021.

Because of the company’s unique trifecta of gaming, e-commerce, and fintech, as well as its size, its fast growth, its cash holdings, and now the MAS license, Thakrar says Sea share’s high valuation is reasonable.

The stock is trading at 23x FY2020 price-to-sales (net cash business) and 13x FY2021 estimates. It is expensive relative to peers, but is growing revenue fast, at 7.5x over the past five years.

Thakar says the company is poised to remain one of the fastest-growing businesses this year, thanks to its ability to translate e-commerce into payments and finance. “We believe such businesses are rare and are tougher to disrupt over time,” Thakrar wrote in a December 10 report on Smartkarma. “Sea remains a one-of-a-kind business with truly unique growth prospects.”

Drowning under losses?

Not everyone agrees, however: if none of the parts of the business are profitable, the sum of the parts isn’t profitability, but sustained losses.

Oshadhi Kumarasiri of LightStream Research argues the stock is overvalued by a whopping . He picks apart Sea’s various arms and finds it has benefited a lot from the COVID-19 pandemic, and doubts the performance will be repeated.

Like the other analysts, Kumarasiri notes that Sea’s growth prospects are shifting to fintech. Its gaming business, Garena, enjoyed huge growth because one of its biggest games in India benefited from regulators shutting down a Chinese competitor – a lucky one-off.

He believes that Digital Entertainment is way overvalued compared to peers such as Tencent, which is otherwise the most expensively valued gaming company in Asia. But Sea has probably maxed out its growth opportunities and isn’t investing in new games, he argues.

He also thinks Shopee needs to process far more orders to break even than is likely, if Q32020 COVID-inspired orders are not sustainable. Kumarasiri does note that Shopee is growing faster than peers such as Alibaba or Pinduoduo. But he doubts its valuation will remain too high if rival Tokopedia goes IPO as it has announced, as its rumored valuation range is modest in comparison.

That leaves SeaMoney. Kumarasiri estimates that Sea’s current enterprise value of $100 billion implies 54 percent of that is tied to the fintech business. Its two-year forecast EV/sales now at 47x is multiples higher than what Ant Group would have secured, had its IPO proceeded, and four to 10 times higher than the likes of Paypal or Lufax.

Kumasarisi thinks this adds up to a 40 percent downside risk to the stock. He argues despite the company’s growth and fund-raising prowess, all three business lines still lose money. Instead of trying to reinvigorate the gaming side, Sea Limited is now turning its attention to e-commerce and fintech. But its digital financial services will require huge spending, and will deepen operating losses, especially as it builds out its bank in Singapore.

“We believe it is a risky strategy” to let its gaming cash cow run dry, Kumarasiri wrote on January 4, 2021.

MSCI’s lifeline

He does not yet recommend investors short the stock, however, because there is a final variable at play: MSCI is likely to include Sea’s ADRs in its MSCI Singapore index in May 2021.

Analyst Brian Freitas of Pan-Asia Delta One noted on November 11 that inclusion will lead to passive investors buying up a significant amount of Sea Limited’s free float, which will support the price.

MSCI has changed its rules to allow Singaporean companies with overseas listings to join its local index, of which Sea Limited is by far the largest.

Freitas estimates Sea’s free float is 67.4% of the total market cap, and he reckons passive buyers will snap up about $2.5 billion worth of shares.

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