How one ruling saved Sea Ltd. bankruptcy
Disclaimer: The opinions expressed below belong solely to the author. The author does not hold any stock position in any of the companies mentioned (or any of their competitors).
My performance coverage of Sea Ltd. tends to be viewed by some as close to fanboy, as I rarely criticize the company or its core businesses, especially Shopee.
In reality, however, I am simply reviewing the performance numbers which, in the framework they provide, tell a story about the company and how it is performing in the market and relative to its direct competitors. This does not mean, however, that it is devoid of fundamental weaknesses or risks, some of which are very serious.
So let’s talk about them.
For all the growth driven by Shopee – which does more business than the entire international arm of Alibaba (and overall, can be considered second only to Amazon, given its international presence in Asia, South America South and Europe, as opposed to many other still local or regional competitors) – it still requires huge capital to continue to operate, causing considerable losses for Sea as a whole.
They have now ballooned so high that at the last rate recorded in the second quarter, it could lose as much as US$4 billion for the year. It’s just not sustainable.
However, without the sound decisions made by the company’s management in 2021 (and 2020 to some extent), we would soon be talking about it in the past tense, simply because it might already be missing a financial track.
Almost exactly a year ago, in mid-October, Sea shares peaked at around $370 per share, giving the company a market capitalization of around $170 billion.
A month earlier, it had closed its largest funding round of $6.3 billion, thanks to a mix of new equity and equity-linked debt.
At the time, comments about the increase ranged from “understandable swelling of finances” in order to fuel future growth, to question its necessity and to qualify it as opportunist movement that the company does not really need:
“Sea isn’t really burning money,” said Aequitas chief research officer Sumeet Singh, adding that the latest increase “seems opportunistic rather than something the company needs.” Given that Sea had nearly $7 billion in cash on its balance sheet at the end of the first half, this deal will take it to nearly $13 billion, Singh, who publishes on Smartkarma, told Reuters.
In the end, it turned out to be neither.
Sea Founder and CEO Forrest Li may have intended to use the silver as a war chest for future expansion – but as is often the case in business, especially corporate growing, liquidity is king no matter what happens to you.
US$7 billion (or, in fact, closer to US$6 billion) in the bank may have seemed like a lot of money, but if market conditions turn dire, it could quickly disappear. Now, just a year later, we can see how true that rings.
I believe Li simply understood the numbers very well at the time and was not swayed by the hype around his own company, even though Citigroup analysts had predicted that Sea might soon be priced. at US$416 or even US$424 per shareencouraging people to buy (even if the price was already falling at the time).
I have no doubt that Li thinks Sea can become a trillion dollar company one day, but he also must have known that $150 billion or more was a pretty inflated price in mid-2021, so he decided to take advantage of the situation and collect as much as he reasonably could, preparing for the unpredictable global exit from the pandemic.
And this decision may have just saved the whole company.
At the end of June 2022, Sea’s cash and cash equivalents were $7.8 billion. A simple back-of-the-envelope deduction of US$6.3 billion, presciently raised last year, would have left the company with only US$1.5 billion – which is not enough to fund its survival for as little as the last two quarters of 2022.
Even if we assume that without the additional funding, Sea would have reduced spending and limited investments several months earlier, it is highly unlikely that it would have been able to fully stem the losses and still ended up with a financial trail of, at best, a year (or, probably, less).
Given the bleak outlook heading into 2023, that would put it in a very tough spot, especially as its capitalization has crashed along with the rest of the stock market to just US$23 billion today.
To amass as much as Li did then, he would now have to part with almost a third of the company – assuming, of course, there would be takers. And at that price, a competitor like Alibaba could swallow Sea with just a year of profit.
What a difference this year has made.
This whole situation reminds me of a gripping portrayal of a Wall Street fund CEO by Jeremy Irons in Margin Call (an excellent film zooming in on the events of the day the 2008 financial crisis began, as the first companies realized what was going to happen).
John Tuld, played by Irons, then explains why he holds the position of CEO, makes a lot of money and calls all the shots. It is no more skill or brain than that of its analysts or traders:
“I am here for one reason and one reason only. I’m here to guess what music could do in a week, a month, a year. That’s it. Nothing more.”
People often wonder why CEOs (founders or not) get paid millions of dollars while their regular employees often get very little.
Well, it is precisely because a single decision taken at the highest level, using imperfect and incomplete data on the unpredictable market situation, can make or break the company.
Analysts and banking experts can afford to be wrong – their stake in the company is negligible, if not non-existent, but business leaders cannot.
And it looks like Li (likely aided by some clever partners) made a decision that turned out to be deeper than any of them could have even thought at the time. That must have seemed like a lot, but it ended up providing a lifeline before a storm that few predicted would come so soon.
Featured Image Credit: Vulcan Post