SEA (formerly known as Garena)

[CY09]

https://www.channelnewsasia.com/singapor...li-2948736

It didnt take long for shopee to be the target again. Based on Dreamybear's linked report, there is a simple way for Sea to be cashflow positive. End its shopee Brazil operations which will save $1.1 billion in cash burn annually. However, this will mean GMV will decelerate this year by a lot (at least 10%).

Simple solution to improve cash flow

[snowballwisdom]

As of Jun 2022, SEA have no bank borrowings, but US$4b of convertible notes outstanding.

So far only the 2023 and 2024 the conversion price is in the money. (2024 being borderline)

The 2023 and 2024 conversion price is US$19.80 and US$50.13
The 2025 and 2026 conversion price is US$90.46 and US$477.

Does it means if the next few years, SEA share price goes down, there is a risk that the notes holder will not convert and demand principal back, which could trigger some concerns if SEA unable to raise funds elsewhere?

But if the share price goes up, then the conversion will lead to dilution.

Either way, seems like convertible notes are not advantageous to shareholders.

Is my understanding correct?

Thanks

[CY09]

Hi snowball,

You are absolutlely right. This is how convertible bonds work. When up, dilution to shareholders as bondholders will want to convert for they are in the green; share prices are lower than exercise price means bondholders will want a cash redemption.

I have been keeping track of Sea Group and knew they had 2025 and 2026 convertible bonds, but not the earlier tranches. Do you have the 2023 and 2024 convertible principal amount? Because i am trying to calculate the potential dilution and cash burn redemption amount they may have to set aside

[snowballwisdom]

Hi snowball,

You are absolutlely right. This is how convertible bonds work. When up, dilution to shareholders as bondholders will want to convert for they are in the green; share prices are lower than exercise price means bondholders will want a cash redemption.

I have been keeping track of Sea Group and knew they had 2025 and 2026 convertible bonds, but not the earlier tranches. Do you have the 2023 and 2024 convertible principal amount? Because i am trying to calculate the potential dilution and cash burn redemption amount they may have to set aside

Thanks for your advise.

I am not very sure how to read.
As of Dec 2021, the convertible notes on BS is stated as US$3,475,708.
This ballons to US$4b+ as per Jun 2022.


The shares being converted in 2019 is 45,645,884,
2020 is 27,406,818, 2021 is 20,039,849

This seems significant amount for a company with 557m shares? (Dec2021)

The principal amount i saw on note 14 is
2023 Convertible Notes (CN): US$575M
2024 CN: US$1,150M
2025 CN: US$1,150M
2026 CN: US$2,87M

With the balance sheet Dec 2021, it state the amount
2023 CN: US$28M (vs US$41M Dec 2020)
2024 CN: US$131M (vs US$916M Dec 2020)
2025 CN: US$928M (vs US$882M Dec 2020)
2026 CN: US$2,387M (vs US$0 Dec 2020)
Total: US$3,475M as earlier mention and this amount increases to US$4b in latest 2Q reportinig.

I not sure how to read this.
It seems like after converting, how much is the principal amount left?
But how come for 2025 CN, the amount on Dec 2021 is higher than Dec 2020?

For the 2Q reporting, I did not see breakdown of the US$4b figures?


Another question is for 2026CN which carries strike price US$477.01, why is there only US$2,387M? (vs principal amount US$2,875M)
SE price never go above US$400, how come there is a reduction of US$500M? 

Another possibility is they value it to market or something, because not likely to be converted so they assign a lower value?

In any case, it seems like cannot tell how much of the notes, the principal amount is outstanding.

So we can see the amount they have to redemn in the coming years, which will affect cash flow.

The 2025 and 2026 tranche principal amounts adds up to US$4B, so it seems significant. (and their strike price US$90.46 and US$477)




I not sure how Shopee can generate cash in the coming years. South East Asia is a big market, true enought, but is different culture, law, language etc in all the 10 different countries, unlike a big market in US (Amazon), Europe (Ebay), China (Taobao), where those ecommerce companies are profitable.

The biggest market in SEA is Indonesia, but it seems to be facing a big fight with an Indonesia player with better business networks through their family.

[CY09]

Sea Group Financial results is out. Due to its CEO's call where he intends to fight Lazada and Tiktok to retain market share, share prices have tanked by 28%. All in all, slightly undervalued now in my view.

https://cdn.sea.com/webmain/static/resou...esults.pdf

My views: https://investmoolah.blogspot.com/2023/0...is-it.html

[Big Toe]

A classic case of completely bonkers market for valuing SEA Ltd. At its peak share price of USD300+, it also suffered its peak cash burn and it was evident all the while irrational competition is going to continue into the foreseeable future.

Fast forward 2023 Q2 results. they executed their strategic pirorities well to have made some profit on shopee thus far this year. However, the "growth" that was enabled by rappid cash burning no longer can be seen. At the same time it is highly likely SEA will go back to cash burning mode again to defend market share.

There is absolutely no logical way to value SEA Ltd. Lazada isnt going away and tik tok looks to be coming on board fast and furious. While the ecommerce pie sets to grow further, it comes with large hungry wolves willing to lose an arm and leg for it, it begs the question is it worth the while to take on competition head on? Can shopee differentiate itself to be so far ahead of competition that margins can be healthy? The obvious answer is no.

With layers upon layers of uncertainty, how does one start to value this company? You cant. Is it undervalued or overvalued now? I dont know.
While their cash flow improved somewhat, it is reasonable to think that the prospects are getting a whole lot dimmer.

Consider this. Cheap money no longer available, issuing more bonds isnt a good option. They have to pay back the bond holders OR suffer massive dilution when their convertible bonds are due. Their gaming division has clearly passed their peak earnings and in decline. there is no indication they will have another hit game to fuel its growth. Competition is only going to get worse. And their banking division relies on shopee, it cant stand on its own 2 feet.

[CY09]

Looking at China, it shows how the e commerce pie can be profitble despite the presence of 6 platforms for a market of 1.3 billion population. Given South Easy Asia's population of 687 million, it should be able to fit 3 e commerce players.

In the process, China's mall lost its market share. The same too is happening in Singapore where mall's footfall is not growing fast anymore. It will be the same for South East Asia space. What can shopee do to ensure it is still number 1? --> ensure its last mile delivery is good. Unlike Lazada which has Cainiao and Singpost to support it, Shopee does not have a strong partner but building a logisitcs partner will be important as differentitation. Delivery for Lazada goods have been professional but they are a bit more expensive in pricing as compared to Shopee. Shopee on the other hand depends on a rug rat of companies, it may be a good time for it to build up a dedicated fleet to ply its delivery trade

Bytedance has the same problem

[specuvestor]

Cost cutting had happened. Now market is afraid of attrition war. Alibaba just pumped $845m into Lazada.

Happy consumers

Just to say that nothing has changed in business model in past 12 months yet SEA moved from larger market cap than top 10 STI stocks to 2/3 of DBS. Lesson on fundamentals vs timeline here.

The main thing that has changed is the cost of money and hence how much to finance those losses.

As per dot com, the Tech employees are highly sought after with boom in new start-ups from cheap PE funding. This will reverse in the next 12 months which supply doesn't really change that much. Nothing new under the sun

The issue is how Shopee is executing its growth. It operates at a total negative margin where as it scales up it makes more losses.

Recently i bought a 3 in 1 USB cable which allows me to charge various USB phones at a price of $0 (retails at $5). There is no way shopee is making money on this and is paying for its delivery to me and 7 cents for me to put a nonsensical review (which I intend to). This is the business model which enables them to report $75 billion GMV. Lazada does not engage in such extreme negative pricing and hence is stuck at a $20 billion GMV.

Sea Money/Shopee pay is in this extreme problem. I have been using their 50 cents off at no min spend to purchase small value groceries at sheng shiong at either 100% discount or down to 20% discount. Sea is engaging in predatory pricing in its attempt to oust grabpay.

In three quarters since its equity raising, Sea has been burning 1 billion each quarter. Previously in 3Q 2021, I had estimated it will run into problem in 2025. However, the cash burn run has grown to 1 billion per quarter. With 7.8 billion in cash left + short term investments, it has accelerated to 2024 where Sea will run out of cash and need to do equity raising. Forrest Li is doing a pretty bad job in running the company, similar to Palantir's CEO.

The main problem for these 2 companies is that their admin and general expenses (where wages are classified) ballooned in their fight to hire more tech employees. It was evident in Sea Group where share based compensation grew by 65%. Paying your workers so high rate while your product is selling at negative margin is an implausible business proposal

[CY09]

If Lazada and Shopee collaborate and not cut at each other throats while Tiktok does its money burning ways, I suspect Lazada and Shopee would win.

For context, Tiktok is on a cash burning assualt and has lost billions in its e commerce ways. Its parent too is on its cash burning ways. Lazada while negative in operating loss has been optimising and its growth has lowered per unit cost. I sincerely hope Lazada and Shopee can ignore Tiktok and continue its ways. This is because Tiktok's foray is on an unprofitable/cash burning way and once bytedance and them burn through their capital, we are back to where we are today.

For info, the above 2 i mentioned has been removed by shopee since March 2023

[CY09]

Sea group has fired its salvo on shopee.

From what used to be a difficult 3 cents daily earn rate, this has now gone to 20 cents daily earn rate. The coins can be used to offset shopee purchase or scanning of SGQR hawker food via shopeepay.

While shopee tends to be cheaper than Lazada, it is now even cheaper. 20 cents may seem little but if one continues to dilligently log in to shopee everyday, this means a "$6 discount voucher" which can be offset a once in a while purchase.

Margins are going to fall while GMV (volume) will continue to rise. The competition is heating up but Im grateful that now I can resume eating my favourite Western food (which has risen by 80 cents) and purchase my new redmi phone as replacement to my ageing 3yrs + mobile