SEA

SEA Ltd, a predominantly Southeast Asian ecommerce and gaming business, was a glory stock during the pandemic when its share price increased eightfold from the bottom of the market in March 2020. The flood of cheap capital allowed SEA to raise $3.5bn of equity at $318 a share close to the peak of the market, as well as $2.5bn in convertible bonds. Needless to say, the embedded call option in these bonds is now worthless with the share having traded below $50 fairly recently.

We first built a position in SEA in the first quarter of 2022, as it was too expensive prior to that, and added to the position size as it declined. The market view of SEA had gone from a buying frenzy to one more circumspect as Free Fire has bled users and the ecommerce business incurred huge losses. Our research suggested that Shopee would see a material reduction in losses and SEA would exit markets where they had little hope of becoming profitable due to strong incumbents or a lack of competitive advantage. This thesis largely played out during 2022, with SEA exiting the Polish market and materially reducing losses in their other big loss-making market – Brazil. For 2022 as a whole, despite flat Gross Merchandise Value, their ecommerce revenue increased 42% in constant currency terms, and they generated positive EBITDA of $196m even though they lost $124m in Brazil (down from a $352m loss in Brazil in 2021). Management is confident that Brazil will be profitable by the end of 2024 and with all their Asian markets now profitable they are on track to deliver from an operational point of view.