SEA Ltd: Amazon of New China (Part 3)

Future Walmart of Southeast Asia: 700M Population by 2025 (50% of India)

Note: This is the 3rd part of last month’s paid article. This month’s paid article will be about a different company.

Table of Contents (Part 3)

SE Valuation:

1. My ‘Startup’ Valuation of SE in 2021

2. SE Valuation Methodology & Assumptions Used (Updated in 2024)

3a. Conclusion: Contribution margins matter more to earnings than Revenue Growth

4. SE’s Valuation: Earnings Yield Curve Methodology (EYCM)

Scroll to the end of report for:

5. AI-generated summary (460 words)

6. Download SE's 3-statement model (Excel with ready-made charts)

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This is the third entry of our three-part report analyzing SEA Ltd (SE), the parent company of regional e-commerce champion Shopee.

In Part 1, I described Shopee as “Pinduoduo ex-China” for sporting PDD’s growth without any of the China risk. In Part 2, we did a financial deep-dive into each of SE’s individual business segments in order to gain further insight into its levers of future growth.

This final Part 3 report aims to determine SE’s fair value by providing readers with ALL of the reasonably possible forecasts for SEA Ltd’s future earnings — so that readers may arrive at their own conclusion regarding which possible valuation might be most appropriate. In this way, we avoid the need to make pinpoint accurate assumptions about SE’s fair value — relying instead on our Earnings Yield Curve Methodology (EYCM) to identify the entire broad range of possible valuations for SE.

This is especially useful for valuing a company like SEA Ltd, which has only just turned profitable and is sporting rapid earnings growth. Readers can determine for themselves which amongst the broad range of possible valuations displayed in this report makes the most sense to them, based on each of their underlying business scenarios.

This Part 3 report will begin with a refresher of how I approached SE’s valuation in 2021 — using startup metrics such as Product Market Fit and Operating Leverage, when SE was still in ‘startup mode’ at the time with no observable profits. Now that there are actual profits to observe, we shall do a follow-up to my earlier 2021 article by attempting to value SE using more traditional valuation methods in this SE Part 3 report.

Disclaimer: The contents of this document are NOT meant to serve as investment advice. Read our full disclaimers below:

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My ‘Startup’ Valuation of SE in 2021

Given how SE is only newly profitable — and barely so at that — how do we arrive at a meaningful valuation for the company? In my first SE report, the way I approached my SE valuation could be summarized like this:

• Given its headwinds, assume that the DE segment has 0% segment growth into perpetuity. The same goes for the DFS segment — any future incremental contribution from the DFS segment is assumed accounted for under the E-commerce segment, given how DFS is “officially” bundled under E-commerce (as we saw in Part 1).

• Given how the E-commerce industry will likely end up as a direct competitor to the B&M Retail industry over the long-term, assume that SE’s e-commerce segment will sport the latter’s LT industry average Net Margin of 5% into perpetuity.

  • This conservatively addresses all potential future price competition in the “greater Retail” sector — which will likely depress superior e-commerce sector NMs until they reach equilibrium with B&M Retail over the long-term.

  • SE Group’s valuation hinges entirely on its E-commerce segment growth, considering that:

    • SE’s e-commerce segment had a FY23 revenue share of 75% (and growing);

    • its outsized contribution to Group adjusted EBITDA.

  • Since we are using a simplified assumption of their E-commerce segment having a 5% NM, simply forecasting E-commerce segment revenue growth allows us to forecast their e-commerce segment earnings.

• At the time of my first SE report in 2021 (share price: $70), I conservatively assumed that their E-commerce segment revenues would max out at 200% of their FY21 revenues as a steady-state concern into perpetuity. For context, their FY23 e-commerce segment revenues has already eclipsed this benchmark.

• By doing this, I estimated a normalized PE of 37.6x based on their share price of $70 at the time. SE 0.00%↑ is currently trading at $54, which would imply a normalized PE of 29x based on those earlier ‘startup’ assumptions.

Given how SE’s e-commerce segment revenues have already comfortably exceeded my then-conservative assumptions within a short span of just 2 years (much less in perpetuity), I’d wager that this baseline would serve as an appropriate starting point for our SE valuation today.

Article: 3,000 words, 20 minutes reading time, 1 Excel file, 5 original charts (best read on desktop)

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SE Valuation Methodology & Assumptions Used (Updated in 2024)

Our main concern when it comes to estimating SE’s valuation is determining its normalized earnings growth. As we’ve covered extensively above and in Part 1, the factors on SE’s P&L that need to be considered in order to do this can be boiled down to: