Kerrisdale Has A New Favorite Long: Sea

Kerrisdale Capital attended the MOI Global Best Ideas 2019 event this week and named Sea Ltd SE as the firm’s top overall stock pick.

Tremendous Value

In Kerrisdale CIO Sahm Adrangi’s presentation, he said the Southeast Asian internet company is primarily focused on gaming, e-commerce and payments — and investors aren’t recognizing the tremendous value in the stock.

Sea operates the leading gaming platform in Southeast Asia and is one of the top two e-commerce platforms in the region. The company’s Shopee platform is a massive monetization opportunity with an impressive long-term cash flow profile, Adrangi said. 

Kerrisdale estimates Shopee’s value at around $10 billion, with the gaming business worth an additional $4-$4.5 billion. At an enterprise value of only $5 billion, Adrangi said the stock is an excellent buying opportunity.

“[A] $10-billion valuation for Shopee would imply shares are worth at least $33/share, 175 percent above today’s levels,” he said.

Underappreciated Markets

In addition to Sea’s company-specific advantages, Adrangi said Southeast Asia has an impressive long-term growth outlook. Kerrisdale forecast that the e-commerce market of young shoppers in the region will grow by more than 400 percent in the next seven years.

Southeast Asia includes nearly 600 million people in nations such as Indonesia, the Philippines and Vietnam and generates a combined GDP of more than $3 trillion.

While India gets most of the attention from U.S. emerging market investors, the $3 trillion in combined GDP in Southeast Asia exceeds the estimated $2.8-trillion GDP of India in 2018. India is often praised for its strong economic growth, but India’s 6.7-percent GDP growth rate is roughly in-line with both Vietnam (6.8 percent) and the Philippines (6.7 percent).

Price Action

In the past six months, concerns over the impact of the trade war have weighed on Sea shares, but Adrangi said the nearly 20-percent pullback is an excellent entry point for long-term investors.

Sea shares were down 0.16 percent at $12.55 at the time of publication Friday. 

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