Southeast Asian internet firm Sea Ltd may add another $1b to cash pile

Photo: Sea website

After a strong 2018 that saw it nearly double its adjusted revenue, regional internet company Sea Ltd appears to be set to add around $1 billion to its cash pile to further escalate competition in the digital entertainment and e-commerce space in Southeast Asia.

The NYSE-listed company on Friday unveiled plans for an equity placement offering comprising 50 million American Depository Shares (each representing one Class A ordinary share). Sea said it has the option to increase this placement offering to up to 57.5 million ADS. China’s Tencent Holdings has indicated its interest to purchase $50 million worth of ADS in the offering.

Back of the envelope calculations indicate that the company will raise a little over $1 billion if one were to assume that the entire offering is taken up at $21.50 per ADS, the closing price on February 28. The final figure may vary based on the share price.

The additional capital will enable SEA to double its cash and cash equivalents to over $2 billion. The company has a cash cow in its gaming platform Garena but is also engaged in a costly e-commerce battle in the region.

The company had about $1 billion of cash and cash equivalents on its balance sheet as of December-end 2018. Sea, whose net loss widened to $961 million for 2018, has forecast that its annual adjusted revenues for both its gaming and e-commerce arms – Garena and Shopee – will more than double in 2019.

During an earnings call last week, the company’s management had not explicitly indicated that it planned to raise capital in the near term.

“[A]s of the end of the fourth quarter, we have over $1 billion in cash and cash equivalents. We are very encouraged by our most recent results in terms of Shopee. At the same time, we also have Garena, it continues to exceed our expectations. We have great accomplishment on the adjusted revenue front, with over $661 million in 2018. We think all of this puts us in a very, very strong position.

“At the same time as a management team, we are very committed to growing our business and market leadership and what we think is a very large and attractive market opportunity. To that end, we will continue to evaluate our fundraising option and may access the capital markets as appropriate,” Sea corporate development and strategy head Howard Soh had said.

This is not the first time Sea has tapped the public markets to raise capital. Last year, it had raised $575 million via a convertible note offering. The company had then said that strong demand from investors had led it to increase the offering size from its initial target of issuing $400 million worth of convertible senior notes due 2023.

Building a logistics network in Indonesia with the cash proceeds?

Some market watchers share the view that the company may use the funds to build its own logistics network for its e-commerce operations as Alibaba did with Cainiao Smart Logistics Network.

Sea currently uses various third-party logistics players (3PL) to handle its e-commerce operations. Unlike Lazada, which has opened warehouses in various parts of Indonesia, Sea’s operations are supported by warehouses limited to certain regions in the country. This has led industry executives to speculate that Sea may use part of the proceeds coming from the latest equity funding round to beef up operations in Indonesia, where the company claims it is the largest e-commerce operator.

In a recent report, Nomura analyst Andrew Orchard noted that the quarterly cash burn at Shopee appears to have peaked as shipping subsidies have begun to decline and sales and marketing costs are expected to decrease year on year. The firm maintains a BUY rating on Sea.

Sea competes with Lazada, owned by Alibaba, as well as several well-funded regional unicorns such as Indonesia’s Tokopedia and Bukalapak. Lazada, its closest regional competitor, is currently partnering with Cainiao to offer logistics management services for e-commerce businesses in the region, including Indonesia. It has raised about $4 billion from Alibaba and has been investing heavily in Indonesia.

Tokopedia, another regional rival based in Indonesia, raised an additional $1.1 billion in funding in December 2018 led by existing investors Alibaba and SoftBank Vision Fund.

DEALSTREETASIA had recently reported that Tokopedia was of the view that its recent funding round was an opportunistic move as the Indonesian online marketplace was yet to spend a similar amount raised in 2017.

“It’s better to raise money when you don’t need it than when you need it. You’re in a much worse off position when you’re one month away from running out of cash, as opposed to being a couple of years out. This sets us up in a very unique position compared to our peers,” Randall Aluwi, AVP – Corporate Finance, Tokopedia, had said in an interaction.

In January, Bukalapak had officially announced fresh funding from the Mirae Asset-Naver Asia Growth Fund, and reports indicated that the latter had invested about $50 million in the Indonesian marketplace. We decoded Bukalapak’s $1.2b valuation math and performance metrics in a separate report.

While the region with over 600 million people spread across four time zones and 11 countries does not have a clear leader in the e-commerce space, Lazada and Shopee are the only players with operations across Southeast Asia.

Over the last couple of months, Shopee has officially claimed to be the leader in Indonesia, the largest market in the region with over 260 million people. Indonesia also offers the most potential for growth as its market is projected to expand to $53 billion by 2025, according to a Google-Temasek report.

According to research consultant iPrice, in the fourth quarter of 2018, Lazada remained the region’s largest e-commerce player in traffic, followed by Tokopedia and Shopee.

But in Indonesia, Lazada lagged behind Tokopedia and Shopee.

DEALSTREETASIA in a recent analysis based on its annual numbers had revealed that Lazada Group appears to have witnessed a continuous fall in revenue growth (in percentage terms) since 2016, and a much slower pace of gross merchandise value growth in Indonesia, the region’s maximum market, compared to its peers.

Traffic aside, based on App Annie numbers, Shopee was the most downloaded app in Southeast Asia in 2018.

“Shopee’s continuing certification of leadership in Indonesia is a powerful demonstration of the strong flywheel effect it enjoys. In the fourth quarter, Shopee recorded total orders of 83.8 million or a daily average of 0.9 million in Indonesia, further extending its leadership as the largest e-commerce platform here. For the full year of 2018, Shopee achieved $10.3 billion in GMV which was above the high end of the recent guidance of $9.7 billion we provided in the third quarter. Breaking $10 billion in annual GMV, was an important milestone for Shopee and an impressive achievement for platform that is just three years sold,” Sea’s Li said during the earnings call last week.

More game titles in the pipeline?

In FY 2018, Sea achieved full-year GAAP Digital Entertainment (DE) revenues of $462.46 million and adjusted DE revenues of $661.04 million. It has also raised the full-year 2019 guidance for adjusted DE revenues to $1.2 billion to $1.3 billion, equivalent to a pace of $310-315 million per quarter of adjusted DE revenues. The company may also increase its capital expenditure on the unit and it has indicated that it is prepared to hire more game developers in emerging markets.

Sea has global ambitions for its game development and publishing unit. In fact, CEO Li moved to Shanghai about five years ago to handpick the first 100 employees for its own development studio.

“Looking to the year ahead, we intend to continue to drive growth in our digital entertainment business as we continue to build out a world-class in-house game development arm and strengthening our publishing capability,” Li said last week.

Sea’s entertainment unit Garena’s self-developed game title Free Fire has been ranked highly in terms of downloads, and usage in several countries, including in India, Indonesia, Latin America, Russia and Turkey. In November 2018, Sea had also entered into a five year, non-binding agreement with Tencent Holdings granting the former the right of first refusal (ROFR) to publish the latter’s game titles in the region.

Garena has indicated it may look at partnering with Tencent in non-ASEAN markets too. “[Sea] Management noted that given their success with Free Fire in non-ASEAN markets such as Latin America, it could potentially open doors for other potential opportunities to work with Tencent and other developers there,” wrote Nomura’s Orchard in a March 1 report.

A game title called Speed Drifters, a localized version of the hit game QQ Speed, is currently in the market, with more slated to come. Garena has also partnered with PUBG to offer PUBG Lite in five Southeast Asian markets, including Indonesia, Malaysia, the Philippines, and Singapore.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.