Singapore Market

Sea Limited $SE – Massive Fundraising and International Expansion

Calvin Lo

Sea Limited (SE) on 9th September 2021 announced another round of fundraising, and this time they are looking to raise as much as $6.3B through the sale of 11M American Depository Receipt (ADR) shares and $2.5B worth of convertible bonds. This will be the largest ever amount raised in Southeast Asia.

Sea looking to raise $6.3 bln in SE Asia’s biggest fundraising | Reuters

Sea shares fell on the news and ended the week at $325.50, around 10% off its high of close to $360.

Is this a buying opportunity or should you be cautious about this massive fundraising?

Massive Fundraising – Go Big or Go Home

Sea already has a pretty comfortable cash position of ~$6B. Considering Sea burned through around $1B in H1 2021, that $6B might only carry them through till end 2022. However, most of the cash used during that period was for investing activities. Sea is actually producing positive net cash flow from operating activities.

So why is Sea raising more cash now and in such huge amounts?

The official reason reported in the news is that Sea intends to use the proceeds to fund strategic investments and potential acquisitions. If Sea indeed intends to swing for the fences, i.e. gearing up to re-invest even more heavily into the business, expanding into new markets or acquire complementary/adjacent businesses, that would be a great sign for a growth stock.

This fundraising also seems timely and might just be Sea being opportunistic by taking advantage of the high stock price to raise more capital. The great thing about raising cash at elevated valuations is that the dilution effect to existing shareholders is minimized. Even by raising as much as $6.3B, at a market cap of ~$180B that translates to only around 3-4% dilution.

International Expansion – India and Poland

Sea’s e-commerce arm Shopee was reportedly expanding into Poland, its first foray into Europe. Just a few weeks ago, Shopee was also reportedly hiring and looking for sellers in India.

In my opinion, these markets should be a good fit for Sea’s platform and services since India and Poland fit the emerging markets profile. The stuff currently listed on Shopee appear mostly to be low- to mid-tier goods which appeal to the middle class and cost-conscious consumers. It will be interesting to see whether Shopee can replicate the success in these markets as they had in Brazil.

Shopee dips toe in India e-commerce market with seller recruitment campaign | Reuters

Look Out MercadoLibre and Amazon: Sea Limited Is Entering New Markets | The Motley Fool

With this news, Shopee’s strategy is slowly becoming clearer to me. They seem to be doubling down on emerging markets, especially those where Sea already has a presence through their gaming arm Garena’s mobile game Free Fire. So far, that has been the case for Brazil and India though it doesn’t seem to be the case for Poland as far as I’m aware.

My Thoughts

In my opinion, this massive fundraising will allow Sea to continue to expand their reach into more emerging market economies for both their gaming and e-commerce platforms. The cash will also come in handy next year when they start operations of their digital banking license in Singapore, as well as to grow SeaMoney in other markets.

In the short term, the fact that this fundraising will dilute existing shareholders and that Sea will continue to be unprofitable for some time might weigh on investor sentiments and may cause share price weakness.

However, I view this move as bullish for Sea’s long-term prospects and I how Sea has been aggressively expanding in new markets, executing on their strategy, and gaining market share.

As long as they keep their operating losses under control while expanding revenues at a rapid pace, Sea’s prospects should remain bright.

The latest stock price target on Tipranks is $361.83 implying only a 6.7% upside from current price of ~$339 (as of time of writing around market open 16th September 2021), with all 13 analysts rating the stock as a Strong Buy.

Source: TipRanks

Based on the stock chart for SE, I’d be interested to add to my position should the price fall to the 50-day MA (in blue) around $305. The 50-day MA seems to be trending nicely around the lower band of the upward channel I’ve drawn (in orange).

Source: TradingView

Valuation is of course still rich at around 27x P/S, which is not unexpected with all the positive news around Sea. I’ll definitely keeping a close eye on how the fundraising goes, as well as where Sea will be deploying these funds in the coming months.

What do you think about Sea’s massive fundraising? Are you more or less bullish on Sea on this news?

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Disclosure: I’m long SE

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