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Sea Limited (SE)

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E-commerce – targeting ASEAN/TW breakeven, scaling up Brazil. Revenues grew 64% YoY in 1Q. Monetization saw improvement with GAAP marketplace revenue as a percentage of total GMV rising to 7.2% in 1Q22 compared to 5.7% last year. Gross profit margin improved YoY due to the faster growth of transaction-based fees and advertising income, which have higher profit margin compared to revenue generated from other value-added services. Adjusted EBITDA loss per order before HQ costs improved both YoY and QoQ for Shopee overall. In Southeast Asia and Taiwan, management expects to reach breakeven soon - adjusted EBITDA loss per order before allocation of HQ costs was 4 cents in 1Q22, an improvement from 12 cents in 1Q21.

E-commerce market leadership intact. Shopee is the leading shopping app by monthly active users and time spent in Southeast Asia and Taiwan. It is also growing rapidly in Brazil, being ranked first by downloads and time spent on its app. We like Shopee for its exposure to the fastest-growing e-commerce markets globally.

Digital Entertainment. The 2nd consecutive slowdown in bookings and users has revealed the gaming segment’s vulnerability –concentration risks from Free Fire. We expect a continued derating of this segment.

Valuation/Recommendation. Sea is valued on SOTP, with its value primarily derived from e-commerce. Given the recent pullback in gaming revenues, it is prudent to value (at 3-5x PE) that segment at a substantial discount to peers due to the gaming segment’s high dependency on Free Fire. At current levels, we believe the derating of SE’s DE segment is almost complete whereas the implied valuation of SE’s e-commerce business has become reasonable (~3x P/S). Our recommended entry price is below our bear case scenario of $57 via an FCN.

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