July 3, 2020 / 4:12 AM / a month ago

Breakingviews - Sea’s $55 bln valuation can rise with the tide

SEA LTD's Arena of Valor mobile game is seen on a phone in this illustration photo November 22, 2017. REUTERS/Thomas White/Illustration

HONG KONG (Reuters Breakingviews) - Sea is benefitting from a high tide. The Singaporean tech company’s $55 billion market capitalisation has risen eight-fold in the three years since its New York listing, outpacing global rivals. A pandemic-related boom in online games and e-commerce has helped, justifying much of the investor enthusiasm. Its payments business could provide the Tencent-backed outfit with an extra valuation buoy.

Southeast Asians are expected to spend an average of $392 online in 2025, more than triple what they spent in 2018, according to a Facebook and Bain & Company report. Sea is at the helm of the boom. Garena, its profitable games unit, had 60 million quarterly active users when it went public: it now has over 400 million, thanks to the global success of shoot ‘em up Free Fire.

While still loss-making, e-commerce unit Shopee now has more monthly active users than Tokopedia in Indonesia, according to App Annie. And there are signs of weakness at Alibaba-backed rival Lazada, which last week named its third chief executive in three years. Bored consumers on extended lockdown are expected to juice second-quarter gaming and shopping numbers, too.

If listed in Singapore, Sea would be the FTSE Straits Times Index’s biggest company, surpassing lender DBS and conglomerate Jardine Matheson. The tech outfit’s valuation isn’t too frothy, though.

Using a Goldman Sachs estimate of $1.3 billion of adjusted EBITDA for the coming year and applying a 19-times multiple in line with global peers such as NetEase and Activision Blizzard, Garena would be valued at $25.3 billion.

The shopping business is worth a similar sum. China’s JD.com and eBay are valued at around 0.4 times the volume of goods they sell. Sea’s faster rate of growth and further expansion into Latin America, a new and burgeoning market for the company, deserves a premium. Apply a 0.6-times multiple to a Goldman Sachs estimate of $32 billion in so-called gross merchandise value for 2020, and Sea’s e-commerce unit is worth around $20 billion.

That gives the two businesses an enterprise value of $45 billion, and that’s without assigning any value to the payments unit, which also dabbles in buy now, pay later products and merchant lending. Adding on Sea’s $3 billion of net cash results in an implied market value of $48 billion, only 12% shy of where it trades. Sea’s rise is strong and steady.

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