SEA Ltd: 1Q24 Segment + Group Analysis
I'm also making my previous 2Q23 analysis free-to-read
In Aug 2023, I made the case for SEA Ltd’s -40% overnight crash being unjustified from a LT fair value standpoint.
SE’s valuation has roughly doubled since then, with many bulge bracket firms changing their view on its business prospects, in light of 1Q24’s improving fundamentals. Even Wall St legend Leon Cooperman is snapping up its shares.
These improvements in their business fundamentals could’ve been wholly expected just from analyzing data in their 2Q23 quarterly results1. Note my description in the sub-title of my previous 2Q23 deep-dive below, which summarizes why I felt so strongly that Mr Market was being inefficient at the time:
Positive 6M23 Ecom Contribution + Fortress Balance Sheet + 11% TAM Growth + 12.5x Earnings Multiple. Is Mr Market stupid?
If you’d like more details on this, I’ve made my previous 2Q23 deep-dive on SE free-to-read:
“This quarter marked one of Sea's best performances in several years. Regular subscribers will recall my anticipation of this inflection point and a return to growth, which was indeed materialised this quarter. The company reported substantial growth across all fronts while maintaining positive cash flow. While anyone can achieve growth by burning money, Sea has demonstrated that the infrastructure investments made in 2023 are yielding tangible competitive advantages.”
The Wolf of Harcourt Street (TWHS) did a pretty good review of SE’s recently published 1Q24 results, and I’d encourage everyone to check it out.
In the interest of providing more granular insight into SE, I’ve updated the SE three statement model from my recently published SE reports to incorporate new data from their 1Q24 results. I think readers will find it useful to cross-check management assertions against hard reported numbers, in order to verify the former’s accuracy. This should provide quite a bit more detail to his already excellent analysis above — simply look for the corresponding data.
Since many others have already covered SE’s gross performance, the incremental value of this article will be in analyzing their unit performance. This is also especially relevant in light of SE recently turning an annual profit for the first time in FY23 — let’s see whether they did it legitimately, or if they only achieved it by pulling some tricks2.
For brevity’s sake, this article will assume that you’ve already read my previous SE reports. If you feel like you’re missing out on some context, please click the links below for a refresher:
Paid subscribers will also get access to my earlier SE three statement model updated for 1Q24 attached at the bottom of this report. Don’t miss it!
Disclaimer: The contents of this document are NOT meant to serve as investment advice. Read our full disclaimers below.Check out our previous stock reports:
Digital Entertainment: Gross & Unit Performance (Garena, Free Fire)
We can see that the DE segment’s Quarterly Active Users (QAU, blue line) actually increased quite substantially in just one quarter — jumping from 529M at the end of FY23 to 595M in 1Q24. TWHS provided the business explanation behind this jump:
Key strategies contributing to sustained player engagement include the frequent introduction of new play modes, redesigns, and content updates. Notable updates include the successful "Chaos" version in January 2024, which allowed player voting for key events, and the "Mechadrake" version in April 2024, introducing a cooperative mode against a mechanical monster alongside the traditional PvP gameplay.
On the conference call, management confirmed that they are expecting double-digit growth for the year. After an initial decline in gaming activity post-COVID, there has been a resurgence in gamer engagement.
It may not be super visible in the chart above, but Quarterly Paying Users (QPU, purple line) also saw a significant 22% sequential increase in 1Q24 (40M to 49M).
It’s interesting to see how their 1Q24 Adjusted EBITDA3 (dark green bars) increased YoY despite their Contribution4 (light green bars) falling YoY. The main difference that would explain such a shift would be Net Changes in Deferred Revenues — and a quick glance at their results reveals a surge increase in their Deferred Revenues for the quarter, amounting to over 60% of their Operating Income ($46m / $71m):
This is great because DE segment Deferred Revenues represents cash float to SE — similar to GEICO’s insurance float at Berkshire. I’ve already covered this quite extensively in my previous SE Part 2 report.
We can see from the chart above how Revenue/QPU (light blue line) spiked upwards and recovered back to 2021 levels.
This happened despite 1Q24 Bookings/QPU (blue bars) actually declining by -10% YoY ($0.94 to $0.86) — perhaps demonstrating Free Fire’s pricing power, which saw its MAU increase by 24% YoY.
Segment margins more or less remained the same, so we’ll just leave it at that.
E-Commerce Segment: Gross & Unit Performance (Shopee)
We can see how their 1Q24 Marketplace revenues (light blue bars) spiked dramatically YoY ($1,156M to $1,700M).
This is perhaps owing to Gross Orders (orange line) jumping by 55% YoY; while GMV (blue line) increased by 35% YoY. This increase in unit GMV (GMV/orders) implies higher prices by sellers, or perhaps a greater mix of higher-valued items being sold on the platform as compared to last year.
Meanwhile, 1Q24 GAAP revenues (green line) grew by 33% YoY, slightly less than GMV’s YoY growth. While this would intuitively imply a lower take rate, we will see in the chart below how their implied take rate actually increased YoY.
It’s worth highlighting that this could be due to a higher rate of refunds — which could potentially throw off the usual correlation between GMV and revenues. Shopee only recently started allowing 15 day returns for any reason in participating countries.
As TWHS observed, 1Q24 marked their highest ever quarterly performance in terms of e-commerce Orders and GMV. Fortunately, the chart above shows how this was not done at the expense of unit performance.
We can see how 1Q24 Marketplace rev/order (blue line) only dipped slightly YoY ($0.76 to $0.60) — whereas Marketplace rev/GMV (implied take rate, orange bars) barely changed YoY ($0.07).
Total Revenue/GMV (blue bars) also maintained its FY23 level in 1Q24 ($0.11); whereas both of their GP/GMV (white line) and GP/order (brown line) maintained their trends YoY.
1Q24 Contribution margin (yellow line) did fall quite materially YoY (30% to 19%) due to a higher ratio of E-commerce S&M spend5, but was in-line with FY23’s 18%. I wouldn’t read too much into a single quarter’s sequential change regarding this.
In summary, it would seem that their Gross 1Q24 E-commerce growth was legitimately attained. There do not appear to be signs of window dressing from analyzing their segment unit performance, e.g. my initial unfounded fears that management could potentially be shifting S&M spend below the GP line by offering large amounts of free e-commerce shipping vouchers.
I won’t be touching on their Digital Financial Services (DFS) segment here — as while DFS is growing like a weed, it’s still quite a nascent business for them and contributes immaterially to the Group. As you can imagine, the charts for the DFS segment aren’t particularly insightful — however for anyone interested, please check out TWHS’s DFS segment review.
SE’s 3-Statement Analysis & Model (Updated: 1Q24)
For those interested in SE’s group performance, I’ve updated all relevant charts in my previous financial model to reflect 1Q24 data. In it, we discuss:
Revenue & Earnings growth
Sales & Marketing expense performance
Gross Profit/Margins
Breakdown of Operating Profit performance (and non-OPEX)
Cash Flows
Valuation (updated for 1Q24)
This part is reserved for paid subscribers only — download the full updated SE three statement model below, which has these charts and more!
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