Limited Stock at Sea: Why I Keep Growing My Position (NYSE: SE)

introduction

It appears that the butchering of stock prices for high growth stocks continues so far into 2022 and, as Sea (NYSE: SE) has been immune for quite a while, over the last few weeks that has changed as well. The stock is now trading down 49% from its high which was not reached until October 2021.

Just to give you a bit of context on the brutality of this sale, this is the first time since Sea went public in 2017 that the stock has gone down so much:

Of course, this has to do with the sale of a lot of high-growth stocks, but on Tuesday Sea was much more down because of news about one of its investors, Tencent.

What happened?

Tencent (OTCPK: TCEHY) on Tuesday announced that it would sell part of its stake in Sea Limited. This was hardly surprising after Sea already revealed on Monday that Tencent will convert all of its Class B shares into Class A shares. This means the company could sell those shares.

Like many technology companies, Sea has a two-class structure. Each Class B share is entitled to 3 votes … so far (more on this later).

Tencent was an early investor in Sea. She invested in 2010 when Sea was still only Garena. Tencent and Sea founder and CEO Forrest Li had an agreement (or proxy) that stated that Forrest Li had the right to vote for all of Tencent’s shares. With his own Class B shares, this resulted in Forrest Li owning more than 50% of the voting rights in Sea.

Now, with all of Tencent’s Class B shares converted to Class A shares (which only have one vote) and Tencent selling part of its shares, Forrest Li would no longer have absolute control over the votes. This is why Sea is proposing to change the voting power of class B shares (of which Forrest Li is now the sole holder) to 15 votes instead of 3. This is something that must be voted on at the general meeting. annual, to be held on February 14.

Tencent will sell 2.6% of the company, which will reduce its stake in Sea from 21.3% to 18.7% and the Chinese tech giant says it will keep “the substantial majority of its equity stake” at long term :

Tencent intends to retain a substantial majority of its stake in Sea for the long term and will continue its existing business relationship with the company.

(Source)

Within six months of the sale of the shares, there will be a lock-up period during which Tencent cannot sell any shares of Sea. But due to the conversion of class B shares to class A shares, Tencent’s voting power falls below 10%.

Why is Tencent selling?

Recently, Tencent announced the distribution of more than $ 16 billion in shares of JD.com (NASDAQ: JD) among its shareholders and now it sells over $ 3 billion of Sea shares, over 14 million shares between $ 208 and $ 212. Why?

To understand this, you have to know what is going on in China. You may have heard that the Chinese government is making it difficult for big tech in China: Alibaba (NYSE: BABA)Tencent, JD, etc.) One of the criticisms that the CCP (Chinese Communist Party) addresses to these large, very successful companies is that they do not distribute their wealth enough. This is why they are pushed to pay colossal sums for “charitable works”. Alibaba has already pledged $ 15.5 billion, Tencent itself $ 7.7 billion in April 2020.

These are, in fact, thinly veiled donations so as not to be banned by the CCP. This is why Tencent writes about the sale of Sea shares:

Divestment provides Tencent with resources to fund other investments and social actions

It’s not that Tencent doesn’t have enough money to pay for the forced charity projects, but it probably wants a bit of a war chest for whatever might happen. At the same time, handing out JD shares and giving up much of the voting power (more clearly than the proxy) is also a way of giving in to the Chinese government, which continues to hit the nail on the head of antitrust.

What does this mean for the sea?

When something does happen, the media always insist on the negative because they know it attracts worried readers. So, of course, immediately a link was made to Tencent and Sea’s contract for the distribution of Tencent games in Southeast Asia. In November 2018, Sea’s Garena was granted the first right to publish all Tencent games in Indonesia, Taiwan, Thailand, Philippines, Malaysia and Singapore, which is important because Tencent is the largest games company in the world. world. This contract still runs until 2023 but several commentators have tried to justify the sharp drop in prices by citing this higher risk.

I’m sorry, but 2.6% less with 18.7% remaining ownership of the company does not significantly change the relationship between Sea and Tencent. Yes, they are giving up the B shares with triple voting rights, but the voting rights were still granted to Forrest Li.

For Sea, it could be good. Now that Tencent has less than 10% of the voting rights, that’s one less argument for Indian sellers who say Shopee / Sea is “Chinese” owned and should be banned, just like Tencent’s games in the country. Although Forrest Li was born in China, he is a citizen of Singapore. With Tencent no longer having as much voting power, the argument becomes even weaker than it already was. Shopee only entered India recently and local unions weren’t happy with this as the company is known to sell cheaply and charge no commission up front.

Sea will also give Forrest Li majority voting power, as noted above. I definitely agree with that. He’s had this de facto privilege from the inception of the business until today, so why wouldn’t it be good, all of a sudden? The only difference was that Tencent had given them the right to vote. Making that clearer seems to me to reduce the risks.

What am I going to do now ?

With Tencent’s share price selling between $ 208 and $ 212, it’s normal for Sea to fall into this range. But since then the stock price has continued to plunge and even crossed the $ 200 line.

What I’m going to do is simple: I’ll just continue to increase my position at sea. None of this news shows a weakness in the business or a changed image no matter what you might hear there.

If you look at the long-term assessment of an enterprise value-to-revenue ratio, you see that the sea has already fallen to pre-pandemic levels.

With fourth quarter earnings approaching, this will decrease further (as this is not a forward chart).

The company has a stable cash cow in Garena, its gaming division, which is funding the expansion of Shopee, Sea’s e-commerce business. Shopee was launched outside of Sea’s main market in Southeast Asia: Brazil, Mexico, Argentina, Chile, France, Spain, Poland, India and I may be missing -to be. On top of that, the company recently raised $ 6 billion through a stock offering and convertible notes. The stock was sold for $ 318 per share. The stock price is now $ 187, or 41% lower. Well timed.

If you look at the revenue estimates, you see that the business is poised to continue growing, albeit, of course, at a slower pace.

(From Alpha Premium research)

In a few markets (Thailand, Malaysia), Shopee is already profitable, because profitability comes with a scale. It also has a lot of levers for pulling to the left. Advertising, for example, is still in its infancy. This is very high margin income. Right now, it’s only 0.5% of the GMV (gross merchandise volume, the total dollar amount that an ecommerce site sells). Amazon (NASDAQ: AMZN)which is of course much more mature, owns 3.5% on a $ 390 billion GMV. With an expected GMV of $ 50 billion for 2021, Shopee, which only started in 2015, shows how quickly Sea can scale its business.

And advertising is just one of the many possibilities. Shopee Food (think Uber Eats) has already rolled out in a few countries, the company has a $ 1 billion venture capital fund, SeaMoney, its fintech, is growing like gangbusters, and more. For me, Sea has enormous potential for long term investors. With Potential Multibaggers, I try to find companies that can grow 10 times or more in the next 10 years. I think Sea still has that potential. I know that would make it a T $ 1 business, but I think it will get there.

Conclusion

Dips in stock prices aren’t pleasant, but in retrospect they often seemed like great opportunities to raise or add. Don’t let the fear that is now pervading you distract you from the long term goal.

In the meantime, keep growing!