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Online retail arm Shopee weighing down Asian videogame giant Sea

[HONG KONG] Sea is moving against the tide. The gaming-to-shopping outfit backed by Chinese Internet giant Tencent is trading at a roughly 50 per cent discount to the sum of its three parts, according to Breakingviews calculations. Deep-pocketed rivals mean the valuation gap will be tough to close.

The Singapore-based company's shares have been roiled like a ship in a typhoon. Despite growing losses, investors piled into the initial public offering last October above the top end of the pitched price range, possibly for fear of missing out on South-east Asia's answer to Alibaba or Tencent. The stock then promptly tumbled about 10 per cent. Steep third-quarter losses pushed Sea's value below its 2016 private fundraising valuation of US$3.8 billion.

Garena, the games business, steadies the ship. Using a CLSA estimate of US$252 million of adjusted Ebitda for the coming year, and put on an 18-times multiple commensurate with peers such as NetEase and Activision Blizzard, it would be worth about US$4.5 billion.

The anchor weighing Sea down is Shopee. The online-retail arm has been spending heavily on sales and advertising to win business. Investors aren't yet convinced of its chances against Tokopedia or Alibaba-owned Lazada in Indonesia, Sea's largest market. Similar marketplace enterprises elsewhere – Rakuten in Japan and eBay – are valued at a little over 0.4 times the volume of goods they sell. Shopee is projected by Morgan Stanley analysts to peddle nearly $9 billion of such so-called gross merchandise value, suggesting it is worth some US$3.6 billion.

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Airpay, the payments business, mostly just supports the other two so doesn't hold much standalone value. Add Sea's US$1.2 billion in net cash to the combined US$8.2 billion, and Sea's implied market capitalisation would be US$9.3 billion. It is currently just US$4.5 billion.

Shopee is showing solid signs of growth, and a US$575 million convertible bond Sea sold last month should help. At the same time, Alibaba just put US$2 billion into Lazada and installed one of its most highly-regarded executives, Lucy Peng, to run it. The stiff competition means a higher valuation for Sea won't be clear sailing.

Sea, the South-east Asian gaming and e-commerce company backed by Chinese Internet giant Tencent, said on June 19 it had completed an offering of convertible bonds worth US$575 million.

The Singapore-based company increased the size of the offering from US$400 million to US$500 million following strong demand, it said. It also exercised an overallotment option to expand the offering by 15 per cent, lifting the total amount raised to US$575 million.

Sea said it expects to use the proceeds for business expansion and other general corporate purposes, including supporting the growth of Shopee, the company's e-commerce business.

REUTERS