SEA Ltd: Pinduoduo ex-China (Part 1)
Pinduoduo's (NASDAQ:PDD) growth without the China risk
“Narratives Tell Stories. But Numbers Don’t Lie.”
30+% market share in a high-growth oligopolistic regional e-commerce sector today. Could Shopee become the Amazon of New China (Southeast Asia) by 2030?
Notice how we’ve just managed to justify that their future growth could potentially be 500% higher than their meager Operating Profits of $225M might have initially implied?
One of Buffett’s favorite type of acquisitions are incumbent businesses situated in rapidly consolidating commoditized sectors that are expected to become oligopolistic. Recent examples include BNSF and the four major US airlines (pre-pandemic). SE’s e-commerce business Shopee fits this description to a T.
Table of Contents (Part 1):
1. Pinduoduo ex-China: See… Not So Limited Anymore?
2. "Adult Supervision No Longer Needed": First Annual Profit Since IPO
3. How SE achieved profitability in FY23: Breaking down Revenue, GP & Adjusted EBITDA performance
4. Estimating Future Growth: Reinvestment of Retained Earnings Analysis
Scroll to the end of report for:
1. AI-generated summary (500 words)
2. Download SE's 3-statement model (Excel with ready-made charts)
Disclaimer: This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the authors. To the best of the authors’ abilities and beliefs, all information contained herein is accurate and reliable. The authors may hold or be short any shares or derivative positions in any company discussed in this document at any time, and may benefit from any change in the valuation of any other companies, securities, or commodities discussed in this document. The content of this document is not intended to constitute individual investment advice, and are merely the personal views of the author which may be subject to change without notice. This is not a recommendation to buy or sell stocks, and readers are advised to consult with their financial advisor before taking any action pertaining to the contents of this document. The information contained in this document may include, or incorporate by reference, forward-looking statements, which would include any statements that are not statements of historical fact. Any or all forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond the authors’ control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.
Pinduoduo ex-China: See… Not So Limited Anymore?
SEA Ltd (SE 0.00%↑) needs no introduction. The Amazon of Southeast Asia famously crashed and burned following the bursting of the 2021 Tech Bubble, becoming the poster child for profitless Tech firms which pursued growth at all costs in an era of easy money.
I’ve covered SEA Ltd (SE) businesses quite extensively in two previous articles (May 2022 and Aug 2023). However, both of them analyzed SE’s financials from the perspective of a startup, given how its financial profile has pretty much resembled one since its IPO — i.e. rapidly growing losses despite rapid revenue growth.
Now that there are actual observable annual profits, we can begin to estimate SE’s valuation based on not just nebulous startup metrics like “Product Market Fit” and “Operating Leverage” to gauge its business sustainability, but actual numerical profits and cash flows. (e.g. to estimate normalized PE)
However, SEA Ltd recently reported its first full-year profit since its IPO. On top of that, it seems to be in the midst of graduating into a kind of Amazon in the regional e-commerce sector, having 30%-50% traffic share in much of the 11 Southeast Asian countries. Considering that E-commerce is pretty much just next-gen Retail, those kinds of economies of scale put SE in a great position to become the region’s Amazon by the end of the decade.
So why do I refer to SEA Ltd as “Pinduduo ex-China” instead of Amazon? Well, the answer is that its business has a similar growth profile to Pinduoduo’s — with none of the China risk. Southeast Asia (SEA) is poised to take over the mantle of “factory of the world” from China over the next generation, as China graduates into a more expensive service economy and loses its luster as a cheap manufacturing economy.
SEA’s regional macroeconomic conditions are also extremely favorable towards embracing this role: a young and growing population of 700M by 2025, low-cost labor pool, a growing middle-class with expanding discretionary wallet, reasonably robust rule of law and relative political stability.
On top of that, a cursory search reveals that the SEA e-commerce industry has dramatically consolidated since the bursting of the 2021 Tech Bubble, with just 4-5 oligopolistic players holding the bulk of regional e-commerce marketplace market share — Shopee, Lazada, Temu, Tiktok/Tokopedia, etc. Who else stands to benefit more from such macro tailwinds than the next Amazon of Southeast Asia — or the Pinduoduo ex-China?
Most industry observers can agree that e-commerce marketplaces are in fact direct industry peers to B&M retailers. Such incremental cost-competitiveness puts SE in a great competitive position amidst the regional retail sector. This is extra important in emerging markets like Southeast Asia, where most retail businesses are still B&M in nature, and where the regional e-commerce sector has already consolidated into 4-5 player oligopolies. Et tu, economies of scale?
One of Buffett’s favorite type of acquisitions are incumbent businesses situated in rapidly consolidating commoditized sectors that are expected to become oligopolistic — recent examples include BNSF and the four major US airlines (pre-pandemic). SE’s e-commerce business Shopee fits this description to a T.
Click the links below to check out our earlier articles about SEA Ltd & Amazon! (biz model primer)!
What the early Amazon investors saw
“Adult Supervision No Longer Needed” — First Annual Profit Since IPO
The phrase “Adult Supervision No Longer Needed” was first stated by former Google CEO Eric Schmidt in 2011, when he passed the reigns of the global search giant to its young founders Larry Page and Sergey Brin. What he meant was that Page and Brin had finally developed sufficient business maturity to run a large listed global Tech megacap “without adult (his) supervision”, and that he could leave Google and its shareholders in safe hands by stepping down as CEO.
This is also an apt phrase to describe SEA Ltd‘s recent developments. In my earlier May 2022 report, I mentioned being flabbergasted at their startup levels of wanton sales & marketing spend, with their E-commerce segment Shopee spending 60%-70% of segment revenues on sales & marketing alone in FY20-21, as the chart below shows:
However, SEA Ltd has since quickly grown up. After the tech bubble burst in 2021, they dramatically curtailed marketing spend and have proven that they could become not just cash-flow positive, but profitable as well. In the following section of this report, we shall perform a breakdown analysis of their P&L and analyze how they managed to improve this metric to 26% in FY23 (as shown in the chart above), which contributed significantly to helping them attain their first annual profit in FY23.
SE’s future trajectory as the future Amazon of the region is pretty clear with their existing economies of scale in the retail sector. That’s the epitome of “Adult Supervision No Longer Needed”.
In this report, we’ll be performing our signature financial deep-dive on SEA Ltd, where we’ll analyze its future prospects as a profitable business for the first time. This Part 1 report will largely be analyzing SE’s historical financial indicators at the Group level — while next week’s Part 2 will dive into their nitty-gritty operational data at the individual segment level, in order to reveal deeper insights into their individual businesses once we’ve gained sufficient context from Part 1. In this report, we’ll discover the following:
How SE achieved its negative capital structure (spoiler: Float similar to GEICO, or “Other People’s Money”).
The most impactful line items moving the needle on their P&L — and the ones which matter most in determining their future profitability and earnings growth.
GP/Adjusted EBITDA trends over time, and what they actually mean in real-life.
A breakdown of their Cash Flow Statements to discover their primary FCF generators (post-Free Fire).
Which business segment contributed the most to its first annual profit since their IPO in FY23.
… and many more!
Check out our previous stock reports:
Article: 4,800 words, 25 minutes reading time, 1 Excel file, 8 original charts (best read on desktop)
How SE achieved profitability in FY23 — Breaking down Revenue, GP & Adjusted EBITDA performance
To start, we’ll take a look at SE’s historical 3-statements to paint a picture of their growth over time. The purpose of this section is to quickly get newcomers to SE up to speed on their business, so that you can see things from my perspective as someone who has extensively analyzed it.
Keep reading with a 7-day free trial
Subscribe to Value Investing for Professionals to keep reading this post and get 7 days of free access to the full post archives.