Recent Sohn Hong Kong Conference, Asian hedge fund managers presented new ideas to investors. Among the presenters was Rashmi Kwatra, Founder and CIO, Capital of Sixteenth Street, who presented his thesis for Sea Limited, a conglomerate in Southeast Asia.
Sixteenth Street first invested in Sea at the end of 2018, when it was trading at $ 13 per share, but it is now trading over $ 200 per share. Kwatra sees a path to over $ 600 per share in the next few years. Rashmi describes Sea as a “phenomenal company with access to the leaders in consumer digital spaces in Southeast Asia.”
It is a conglomerate with three main companies and several new companies. For Sixteenth Street, Sea Limited is buying three “Phenomenal Technology Companies in Fast Growing Southeast Asia” for one price.
The first division is Garena, short for “gaming arena”. It is the largest in ASEAN Game company with revenues of over $ 3.2 billion Garena grows 30-40% per year and has cash margins of 60% and free cash flow of over $ 2 billion per year. Management would use this cash flow to reinvest in other businesses.
Garena now achieves $ 2 billion in EBITDA and could reach $ 10 billion in EBITDA in five years. A multiple of 15 times that translates to a per share value of $ 300 for Garena alone.
Southeast Asia has a young population that is growing rapidly and increasing its spending. Gambling is considered a leisure activity, so Kwatra believes the tailwinds that propelled Garena up are here to stay.
Rear winds for Garena
The company has increased its EBITDA 23 times over the past four years, mainly thanks to its in-house developed mobile-first game. Free fire, which has over 500 million downloads. Garena could localize the game for regional consumers, creating promotions that are only relevant to Southeast Asia. The company can add local content or celebrities as characters in the game. It can also engage the community through esports and provide localization unmatched by other publishers.
Sixteenth Street has spoken to many editors, and their comments are that they don’t understand mobile first and Asian publishing as much as Garena does. It is difficult to settle in the region without partnering with Garena. The company acts as a gateway to Emerging Markets and has a strong gaming pipeline. Free fire continues to generate sustainable cash flow.
Kwatra expects Garena to continue to grow 30-40% over the next several years through increased penetration, monetization, and new game revenue.
The second division is Shopee, ASEAN’s dominant e-commerce platform with a gross merchandise volume of over $ 35 billion and a 50% share of the online retail market. The company is expected to grow five times over the next five years to reach a total addressable market of $ 350 billion.
In five years, Rashmi expects Shopee to increase its gross merchandise volume five-fold, bringing it to $ 180 billion. Using a multiple of once the gross volume of commodities would give the online retailer a price per share of almost $ 350. However, most ecommerce companies trade at much higher multiples.
Shopee owns e-commerce in ASEAN and has many favorable winds to support growth. The region has 600 million inhabitants and most regions have a low penetration rate of 3-20%, which means a large room for growth.
Rear Winds for Shopee
Kwatra expects Shopee to maintain its dominance due to its constant focus on user experience and customers. The company had created a flywheel effect which results in enormous scale. Additionally, Kwatra says Shopee and Sea management are investing for the long term. The company has longer investment horizons and longer planning cycles than its competitors, which allows it to deny scalability to its competitors.
Shopee is Southeast Asia’s largest e-commerce marketplace after overtaking Tokopedia, which had the first-mover advantage. However, Shopee’s relentless focus on users has allowed it to become dominant.
This dynamic is not unique to Indonesia, as it extends to all the markets in which Shopee operates. Over the past three years, the company has taken a stake in the next closest competitor. Shopee has seen gradual growth in non-metropolitan areas. Its overall market share is 50%, but in non-metropolitan areas it may be higher.
Many non-metropolitan markets have digital consumption rates that are one-sixth the size of metropolitan areas, but they are six times as populated, which is why it is so important to dominate in non-metropolitan areas. Sixteenth Street expects Shopee to turn profitable as it is not currently generating cash, but it clearly sees a path to profitability due to its market leadership.
The conglomerate’s third company is SeaMoney, a fintech firm with $ 11 billion in transactions and investing in regional food and e-commerce in Latin America. Sixteenth Street expects the fintech company to grow 17 times over the next five years, which would make it worth nearly $ 34 per share.
SeaMoney was just launched last year and already had a gross transaction value of $ 3.4 billion in the last quarter alone. The company increased revenue 111% quarter over quarter due to users of the Shopee platform. An additional option comes from the food delivery market in Vietnam and expanding into other geographies, including Brazil, where SeaMoney has 50 million app downloads, compared to market leader Mercado Libre, which has a much longer trail.
Why invest in Sea Limited?
Using the values of the three companies, Rashmi gets a per share value of $ 626, which is three times today’s price. Sixteenth Street believes the business of Sea Limited is underestimated and Garena is enjoying secular consumption.
She loves Sea because of her access to “phenomenal companies with long avenues for growth and aligned management teams.” Tencent is a strategic shareholder, and the company has a strong balance sheet with a cash position of over $ 6 billion.
In addition, Kwatra said there is an alignment between a strong balance sheet and leadership, which acts long term for all stakeholders. She sees a long-term opportunity in the recent withdrawal from Sea Limited shares. Sixteenth Street believes that long-term shareholders can hold Sea for many years and that it will be a mixer, even at a value that only takes into account these three trades.