Re-cutting the valuation, and my thoughts on the stock
“Adjusted EBITDA loss per order before allocation of HQ-costs” is one of the most imaginative Non-GAAP figures that I have ever encountered. How far is the pathway to TRUE profitability after they reach breakeven on this adjusted level?
In Q4/2021 we were able to put together some pieces that could lead us closer to an answer for the above question. They reported gross orders of 2.0 bn, whereof more than 140 million were recorded in Brazil, i.e. the remainder of approximately 1,860 million were recorded majorly in the SEA/Taiwan region (ignoring minor markets like Mexico, Chile, and Colombia). Furthermore, for Q4/2021 they reported “adjusted EBITDA loss per order before HQ-costs below US$2”. Difficult to say whether it is closer to US1.99 or US$1.51. Let’s assume the middle point of US1.75 (Q1/2022 came In at US$1.52).
Q4/2021 adjusted EBITDA loss before HQ-expenses in Brazil is likely to amount to 140 million orders x US$1.75 = US$ 245 million. For the range of US$1.51-1.99, the adjusted EBITDA loss would amount to US$ 211-279 million.
In the same quarter, an adjusted EBITDA loss per order before allocation of HQ-expenses was US$0.15 for SEA/Taiwan. Multiplying this with the number of orders in this region, we come up with an adjusted EBITDA loss of around $US280 million. Interestingly, they achieve pretty much the same results both in Brazil and SEA/Taiwan, although the latter is 13x bigger than Brazil based on the number of gross orders.
Adding both, we end up with an adjusted EBITDA loss before HQ-costs of around US$490-558 million. Total adjusted EBITDA for the E-Commerce segment was negative US$878 million, which implies around US$320-403 million in HQ expenses!
In Q2/2022, the number of gross orders again amounted to around 2.0bn. If we assume the same number of orders as in Q4/2021 and adjusted EBITDA loss per order before HQ-costs of US$0.01 for SEA and US$1.42 for Brazil, we end up with an adjusted EBITDA loss before HQ in the amount of approximately US$106 million for both markets combined. As the total adjusted EBITDA was negative US$648 million, we can assume HQ costs in Q2/2022 of around US$542, an increase of 35-70 % compared to Q4/2021. This is mainly driven by the increase in other opex (R&D and G&A) in the E-Commerce segment which increased by around US$145 million compared to Q4/2021 according to my calculations.
The largest driver for breakeven on segment level is of course SEA/Taiwan. Assuming a steady-state for Brazil and HQ costs and the number of orders in both regions, adjusted EBITDA PROFIT per order before HQ costs need to come in at around US$ 542 million / 1,800 million orders = US$0.30 to breakeven on the segment level. The actual number would be lower when they bring down HQ costs and the negative EBITDA-impact from Brazil, i.e. increasing the number of orders disproportionately to the decline in loss per order in Brazil.
I think you tackled the decisive points phenomenally.
A lot of Sea investors have been feeling pain lately and clearly we had to adjust our investment thesis. It is much appreciated, that you tackle this directly with your well researched post and valuation.
Shopee needs another 2 to 3% uptake in take rates via commissions or advertising or slashing promo discounts (S&M) to make Shopee bottomline turn the corner.
I tend to be optimistic (I need a sanity check for being so optimistic all the time) that they can tweak the model without sacrificing growth too much and optimize the bottomline!
What were the hurdles to releasing Undawn? Mgmt seemed confident to meeting 2022 Garena guidance (unless they may end up shooting it down in Nov)!!
Fair credit for tackling this beast again! For me I’ll always be a happy spectator, but it’s certainly an interesting to watch at least. Never a dull moment.
Sea Limited Podcast revisited? 👉👈
Fantastic analysis as always! Great and timely piece.
Do you have any thoughts on how asset securitisation would work, and it's impact on Sea's balance sheet, cash flows, and ability to leverage up its loan book?
I'm not familiar with the accounting nor the regulations to make a good judgement on this front.
Another year, another 50% drawdown. Glad I read your notes in 2021 and decided to short this stock.
top notch analysis. thanks
the 100-150$ are assumed for 2033 or for 2025?
Fantastic stuff, sharing this on Sunday.
Is it reasonable to think Capex will go to 3% of sales? It has been hovering around 8% for some years. Were capex to stay at 8%, the perpetuity value would be 23% lower. More work there is needed, specially to understand how much of the take-rate expansion comes from logistics (Mercado Livre story includes tons of take-rate expansion through logistics). I could envision a world were competitive pressures forces Shopee to be more asset heavy. The disclosures with EBITDA as a main metric are quite weird for a retailer (BABA uses EBIDA).
Nonetheless, great work. The DCF approach is the only correct one, especially because it correctly accounts for the fact that Garena cash flows are being reinvested and not paid to shareholders, therefore making a SOTP doesn't account for that.
Thanks the up date. Do you have any thoughts on the reduced ownership of the firm by tencent and the overall relationship between tencent and sea. It would seem as if by working together, the two firms could both benefit, yet this does not seem to be happening. tia your thoughts. SC