Sea: Recovery of gaming industry and improvement of loan profitability (rating upgrade) (NYSE:SE)

In a mostly gloomy earnings season, it’s rare to see technology companies soar on good news. Ocean (New York Stock Exchange:S.E.), the Singapore-based e-commerce conglomerate is often associated with Amazon (AMZN) is from Southeast Asia. One of the exceptions. The company delivered impressive results across all three of his major businesses (gaming, e-commerce, and financial services), helping push the stock price up nearly 15%.

Year to date, Sea stock has nearly doubled.

The last time I wrote a neutral opinion on Sea was in April, when I warned investors about a multi-quarter slowdown in its gaming business. Now, after analyzing the company’s latest Q1 results and seeing a resurgence in paying users and tailwinds for its nascent financial services business, I’m re-upgrading my view on Sea. bullishmy concern is Garena’s meltdown has been quelled.

Here’s my latest long-term bull case on Sea.

• Sea operates in an attractive “tiger economy” with long-term, multi-year growth tailwinds. We provide services to rapidly growing Southeast Asia (Singapore, Indonesia, Philippines, Malaysia, etc.). Outside its home country of Singapore, Sea is benefiting from rapid infrastructure modernization and a growing middle class. It’s not ridiculous to compare our investment in Sea to our early bet on Alibaba (Baba) and JD.com (J.D.) in China.
• Synergies between businesses. Unlike many other e-commerce companies, Sea also has its own payments and financial services department, which eliminates the need to pay fees to third parties. The company’s loan origination division also has improved profitability and reduced portfolio losses.
• Continuous innovation. The company not only has the know-how to create new games, but also constantly updates its games and marketplace with new features (like social shopping).
• Reduce headcount and cost discipline. Sea has proven its commitment to profitability and expense discipline by laying off up to 10% of its workforce in 2023 as gaming bookings slump. Bookings have since rebounded, but the savings will help the company become even more profitable as it scales up.
• It’s incredibly well capitalized. As Sea continues to invest in growth and potentially acquire new platforms, it has more than $9 billion in cash and investments on its balance sheet (to adjust for size, this is approximately one year’s worth of the company’s (equivalent to operating expenses).

Of course, there are risks with this stock. The gaming business is most volatile because the company relies on in-game reservations for a large portion of its revenue (as well as profits, since gaming is its most profitable segment), which fluctuates from quarter to quarter. That means there is a tendency. – More than a quarter (regular releases and in-game events help stimulate activity and purchase behavior, but a steady flow of game activity is not guaranteed). Competition is another challenge, especially in the competitive market of Indonesia, Southeast Asia’s largest economy, where Chinese company ByteDance (TikTok’s parent company) has acquired a large stake in local company Tokopedia.

But overall, we’d say Sea has enough long-term tailwinds to justify a long-term investment. The more favorable trends seen in the gaming sector make me feel comfortable going long here as well.

Q1 downloads

Now, let’s dive into the latest performance and trends across Sea’s businesses.

The biggest headline here is that Garena, the name of Sea’s gaming division, has seen a dramatic improvement in paying users.

As seen in the chart above, after several quarters of decline, the company added 66 million net new paying users in the first quarter. Paid users as a percentage of total users reached a multi-quarter high of 8.2%, up 70 bps sequentially and 50 bps year over year (during the pandemic, paid users accounted for around 10%). Note that it was close).

Meanwhile, game reservations returned to an 11% year-over-year increase. And while revenue was down (remember, Garena recognizes revenue as users consume in-game items and memberships expire), adjusted EBITDA was down year-over-year. Increased 27% to $292.2 million, representing a 57% booking margin (sales were 50%). 1 year ago Q1).

New features and high engagement are the main reasons for the game’s resurgence. The company notes that its flagship game, Free Fire, remained the number one downloaded gaming app globally in the first quarter (according to independent ratings agency Sensor Tower). The company recently added a new feature that allows players to vote on in-game events, which the company says will increase engagement. Average MAU (average monthly users) increased by 24% year over year.

On the e-commerce side, revenue increased 33% year over year to $2.7 billion. Core marketplace revenue grew 47% year over year to $1.7 billion (Representing a sharp acceleration from 23% year-over-year growth in the fourth quarter).

On the profitability front, after experiencing significantly negative Adjusted EBITDA over the past two quarters, we nearly broke even in the first quarter, with modest gains in Asia.

Improving logistics and order fulfillment remains a driver and ongoing priority for the company. According to CEO Forrest Lee, First quarter financial results announcement:

We have put a lot of effort into SPX Express, which is now one of the fastest and most intensive logistics operators in our market, temporarily improving our customer experience. In the first quarter, about 70% of his SPX Express orders in Asia are delivered within his three days of ordering. And thanks to the scale we have achieved in the market, we have been able to steadily reduce costs. SPX Express’ first quarter order costs were down 15% in Asia and 23% in Brazil year over year. Introducing his SPX Express into the Shopee ecosystem will also allow us to efficiently roll out new features that will benefit our buyers, such as the on-time delivery guarantee program we launched in Southeast Asia. The program guarantees delivery time for orders, and buyers appreciate this certainty.

Another initiative we’ve taken is to let Shopee directly manage the return and refund process. This resulted in a 30% increase in resolution time compared to the previous year. In the first quarter, about 45% of cases were resolved within one day. Collectively, this initiative has increased operational efficiency, improved the customer experience, and strengthened Shopee’s reputation as a trusted shopping destination. ”

Finally, in the financial services sector, the company’s outstanding loans reached an all-time high of $3.3 billion.

Profitability and loan book performance have also improved, with the NPL90+ ratio, a measure of non-performing loans that have been in default for more than 90 days, dropping 30 bps year-on-year to 1.4%.Digital Financial Services revenue grew 21% year-over-year and adjusted EBITDA soared 50% compared to previous year Up to $148.7 million.

Important points

There is strong momentum across Sea’s businesses, including a rebound in user trends in gaming, significant order growth in e-commerce, and improved lending performance and overall profitability in financial services. Given these trends, now is a good time to return to SeaTrain.