Left Brain Thinking: November 4, 2020

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. You can get more information at leftbrainir.com and the firm's on Twitter @leftbrainir. And today we're talking with Janice Quek, senior analyst at LeftBrain, about the investment opportunities in Southeast Asia and one particular company there that looks good through the LeftBrain lens. Janice Quek, thanks for joining me.

Thank you for the opportunity to be on the show, Chuck. It's great to be here.

I should tell the audience that you are based in Singapore, and while most people think of growth companies, they're thinking there's plenty of opportunity here. Well, Southeast Asia is one of the fastest growing places in the world, and emerging markets are among the fastest growing markets in the world. So explain what you see just from the region and why folks might want to look to Southeast Asia for growth.

Sure, Chuck. So many people are probably not as familiar about Southeast Asia. I'll start with my home country, Singapore. It's a small island nation, and for a reference point, At this point, it's about 3.5 times the size of Washington, D.C. It has a population of about 5.8 million, and it's a very multiracial country made up of Singaporean locals and immigrants from the region and the rest of the world coming here to live and work. So when people, most people talk about Southeast Asia, they are referring to the group of countries generally south of China, east of India and northwest of Australia. So, it includes countries like Indonesia, Vietnam, Thailand, Philippines, Cambodia, and Singapore. Southeast Asia is very diverse because while we are located close to each other, the countries within really speak different languages, have different foods, culture, and even socioeconomic levels. So, a country like Singapore has a GDP per capita of more than $60,000 per year. A country like Cambodia has less than $2,000. So there's a very wide gap and big difference in terms of the economic levels. The region has about 600 million people and a GDP of about $3.4 trillion in 2018, and is one of the world's fastest growing regions in terms of GDP per capita. What the company we're looking at today, internet penetration is a factor, and internet penetration rates in this region are moderate and very substantial. Substantially by country. There are about 315 million internet users, but internet penetration is growing very quickly as more people are using smartphones. More than a third of the population in the region already using smartphones, and we see that increasing.

The company we are talking about today is Sea Limited, ticker symbol SEA, as it trades as an ADR here in the United States. And although it's SEA, the name of the company, this is not like a shipping company. Don't think that way. No, as Janice was talking about, it's an internet and mobile platform company. It's also very heavily into online gaming. So explain why this company personifies why you want to be investing in Singapore and Southeast Asia.

Sure, Chuck. So Sea Limited has 3 major business segments. The first, like you mentioned, is the video game segment. It's called Garena. It's a video game development and publishing segment of the company. Some of Garena's games have become very popular in many countries. So if you're a gamer, maybe you've heard of the game called Free Fire or League of Legends. Free Fire was developed by Garena, that platform, and it was the most downloaded mobile game globally in 2019. So Sea earns revenue primarily from Garena through the sale of their in-game items, and the company also organizes eSports events that are viewed by many people around the world. Their second business segment is Shopee. It's an e-commerce platform that is one of the leading online shopping platforms here in the region. And Sea Limited also has a third operating business segment. It's called SeaMoney that provides digital payments and financial services to users. And these include services like a digital wallet, payment processing, and some of the credit products. There are many things that we like about Sea, but one of the things that we look for when we think about investment opportunities here at LeftBrain is the market opportunity. And the statistics I mentioned earlier about the region, you can see that there's just tremendous growth opportunity because more people are using the internet for services like mobile games, media consumption, and online shopping. And the average spending power of the region, because the GDP is growing so quickly here, is that many— Spending power is increasing from many of these emerging economies here. And at LeftBrain, when we think about market opportunity, one indication is the size of the total addressable market. And in this case, we think that Sea's TAM is the online games, e-commerce, and digital payments markets combined, and it's estimated at about $67 billion.

Like pretty much all companies, Sea got hammered at the start of the pandemic. but it is in the right businesses, the kind of things that we think will do well coming out of the pandemic. Since reaching its bottom late in March, when the market reached bottom, where it was a little bit under $40 a share, well, it's now up to $160 a share, roughly. With that kind of growth, which I know left brain loves the growth, is that kind of growth or something close to it sustainable? How high is up?

Yeah, that's a great question. Like you rightfully mentioned, the stock has been up about 290% year to date. And one of the things that we always ask ourselves here at Left Brain is, is that growth sustainable? Because we are very forward-looking and we like to look into the long term. And we think that a lot of the growth, even though the stock price has gone up quite a bit, Sea has been a major beneficiary of the pandemic. The business has grown so much because the emerging markets in the region had previously not gone online very much, but the pandemic accelerated that demand. A lot of the brick-and-mortar retailers that didn't used to have an online shopping presence before now had to move online because of these travel and movement restrictions. At the same time, more people were spending time at home, and so gaming platform demand increased as well. And in the recent earnings call, the CEO of Sea Limited, Forrest Li, mentioned that even though some of these travel and movement restrictions have pretty much been lifted in the region, there's still a lot of growth in terms of the number of users on their platforms, both Shopee and Garena. And at the same time, they haven't seen engagement on their platforms abate. So I think that this gives us confidence and some form of indication that these trends are more or less enduring. And we think that that's going to drive the opportunity for the company in the medium to long term.

And how important is it that the company just win the region, you know, do things in Southeast Asia? As opposed to, say, winning the world?

Well, I think that winning the region is the very first step. The company has been doing very well in the region because when we look at the business, we see that it has a very strong competitive position. It faces rivals in the region, but it is well positioned and among the leaders, and if not the top in its different business segments. For example, Garena is the number one platform by market share, and it owns the distribution and publishing rights to many of the popular and leading game titles. The platform has almost half a billion active players on it. Sea continues to have very strategic partnerships with major game developers like Tencent Holdings, for example, and they have been able to push out very popular titles and deepen engagement on the platform. And on the Shopee e-commerce front, they have just been winning users. So they're winning the region, but beyond that, there are also expanding further out to other places like Latin America and in Taiwan. So it's a first step to win the region, but we see that the company is going to go further than that.

Again, it's Sea Limited, ticker SE, and the full report that Janice has done is available to Left Brain subscribers at leftbrainir.com. Janice Quack, thanks so much for joining me.

Thank you, Chuck. Enjoyed being here.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. These conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe. Find my weekday show on your favorite podcast app or check it out online at moneylifeshow.com. Thanks to my guest, Janice Quek, senior analyst at Left Brain Investment research. Learn more about the firm and its analysis at leftbrainir.com and on Twitter @leftbrainir. Left Brain Thinking is available every Wednesday. Plan to put your left brain thinking cap on every week by subscribing via your favorite podcast app. Until next week, stay safe, everybody.