Sea Could Sink When IPO Lockup Expires

Apr. 11, 2018 10:38 AM ETSea Limited (SE)11 Comments

12.68K Followers

Summary

When SE's IPO lockup period expires on April 18th, 2018, pre-IPO shareholders and company insiders can sell large blocks of currently-restricted shares for the first time.
Just 15% of shares outstanding are currently trading.
A flood of shares into the secondary market could cause a sharp, short-term decline in SE's share price.

The 180-day lockup period for Sea Limited (NYSE:SE) expires on April 18, 2018. When this six month period concludes, the company’s pre-IPO shareholders will have the ability to sell their large blocks of currently-restricted shares. The potential for an increase in the volume of shares traded on the secondary market could negatively impact the stock price of SEA.

(Source: F-1/A)

This group currently-restricted shareholders includes fourteen individuals and three corporate entities.

(Source: F-1/A)

Currently SEA trades in the $10-$11 range, significantly lower than its IPO price of $15. Shares of Sea Limited started off well by closing on its first day of trading in the secondary market at $16.26. However, the shares have since been in decline.

Business Overview: Internet Platform Provider in Greater Southeast Asia

Sea Limited is a provider of internet platform services in Greater Southeast Asia. It focuses on ecommerce, digital entertainment, and digital financial services across three primary platforms. The company offers financial services to businesses and individuals through its AirPay mobile app, which includes payment and e-wallet services. The AirPay app also offers services through computers as well as mobile devices, and the app has features for payment processing services through Shopee, another platform the company offers.

(Source: F-1/A)

Sea Limited also has the Garena digital entertainment platform for gaming and offering eSports operations. Garena gives users access to online gaming, social connections, and live streaming of entertainment content. The Shopee platform is an ecommerce operation that provides a third-party marketplace through its website and mobile app.

Sea Limited’s digital entertainment revenue grew at a 45.4 percent CAGR from 2014 to 2016. The AirPay platform has seen revenue grow at 26.1 percent CAGR between early 2015 to the second quarter of 2017. As of June 2017, Sea Limited had nearly 4,500 employees across Greater Southeast Asia including 1,070 in Thailand, 1040 in Vietnam, and 1,240 in Indonesia. Through its network of partners, Sea Limited has over 196,000 physical sites that operate as cybercafés, AirPay counters or both. They also have 12 data centers.

Sea Limited was formerly named Garena Interactive Holding Limited. It changed its name in April 2017. The company was founded in 2009 and keeps its headquarters in Singapore.

Business overview information was sourced from the company's F-1/A.

Financial Highlights

Sea Limited reported the following fourth quarter 2017 financial results in US dollars:

Group

Revenue was $164.5 million for an increase of 72.8 percent
Adjusted EBITDA was a loss of $(140.2) million versus $(56.0) million for the same period the prior year

Digital Entertainment

Revenue was $141.9 million for an increase of 59.2 percent
Adjusted EBITDA was $52.6 million for an increase of 216.4 percent
Quarterly active users reached 87.8 million for an increase of 74.2 percent.

E-Commerce

Gross merchandise value reached $1.6 billion for an increase of 206.1 percent
Gross orders were 98.3 million up 243.7 percent from the same time period the prior year
Revenue was $9.3 million for an increase of 61.6 percent.
Adjusted EBITDA was a loss of $(175.4) million versus a loss of $(59.2 million) the previous year

Digital Financial Services

Gross transaction value from this platform grew 310.7 percent over the previous year

Financial highlights sourced from SE press release.

Management Team

Forrest Xiaodong Li is the founder of Sea Limited. He serves as group chief executive officer. He has previously held positions at Viacom Media Networks, Motorola, and Corning Inc. He has also served as a member of Singapore’s Committee on the Future Economy. Mr. Li earned an MBA from Stanford University and a bachelor’s degree from Shanghai Jiatong University.

CFO Tony Tianyu Hou joined Sea Limited in 2010. He previously held positions at Ernst & Young in both the United States and China. He is a U.S. Certified Public Accountant and earned an MBA from the University of Chicago.

Management information sourced from Sea Limited company website.

Competition

Sea Limited has competition at the local level in each of its market segments. In its SEC filings, the company notes that it considers itself to be the primary player in the region with outside competition facing significant barriers to entry into the Greater Southeast Asia region.

Early Market Performance

The underwriters for Sea Limited priced its IPO at $15 per share, considerable higher than its expected price range of $12 to $14. The stock closed on its first day of trading at $16.26 then began declining. Currently, the stock trades in the $10-$11 range.

Conclusion

When the IPO lockup for Sea Limited expires on April 18th the company's pre-IPO shareholders and insiders will be able to sell large blocks of currently-restricted shares for the first time. With just 15% of shares outstanding currently trading, the currently-restricted shares could flood the secondary market when the lockup expires, causing a sharp, short-term decline in share price.

To take advantage of a potential slide in share price when the lockup expires, risk tolerant investors should short shares of SE ahead of the April 18th IPO lockup expiration. Interested investors should cover these positions during the April 19th and April 20th trading sessions.

This article was written by

Don Dion

12.68K Followers

Don Dion is the CEO of Inland Management, a company focused on acquiring, subdividing, developing and marketing large tracts of land on the fringes of major metropolitan markets. Inland Management has sold land in all 48 contiguous states totaling billions of dollars. As CEO, Don is responsible for helping to maintain and enhance the firm’s strong financial position and identifying opportunities for growth. In addition to his role at Inland Management, Don Dion is the Chief Investment Officer of DRD Investments, LLC. Based in Naples, FL. and Williamstown, MA., DRD Investments is a family office focused on managing a long/short hedge fund, real estate, venture capital and various other financial assets for the Dion family. Don also serves as the trustee of the Dion Family Foundation, which focuses on helping individuals with tuition assistance at Catholic Institutions for grammar school, high school, and college education. The foundation also helps individuals by supporting Massachusetts General Hospital. Don is on two leadership boards and advisory committees at Massachusetts General Hospital and the Home Base Program (a partnership between Mass General and the Red Sox Foundation). He consults with Saint Dominic's Academy and serves as a trustee of Saint Michael’s College. Previously, Don was the founder and CEO of Dion Money Management, a fee-based investment advisory firm for affluent individuals, families and non-profit organizations. Founded in 1996 and based in Williamstown, MA. and Naples, FL., Dion Money Management managed approximately one billion in assets for clients in 49 states and 11 countries. While at Dion Money Management, Don was responsible for setting investment policy, creating custom portfolios, and overseeing the performance of client accounts. Don sold the firm to NYC-based Focus Financial Partners (FOCS) on September 1, 2007 and no longer manages money for other families or institutions. Don remains a shareholder of Focus Financial Partners (FOCS). Don is also the retired publisher of the Fidelity Independent Adviser family of newsletters, which provided a broad range of investor commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With nearly 100 thousand subscribers in the United States and 29 other countries, Fidelity Independent Adviser published two monthly newsletters and one weekly newsletter. The flagship publication, Fidelity Independent Adviser, was published monthly for 16 years and reached over 60,000 subscribers. In 2011 Don and his daughter Carolyn co-authored the Ultimate Guide to ETFs, available on Amazon.com. Prior to founding Dion Money Management, Don co-founded Litchfield Financial Corp. (LTCH) with Summit Partners. Don served as Chairman and CEO of Litchfield, which was listed on the Nasdaq in 1992 and acquired by Textron Corp. (TXT) in 1999. Don was also the Executive Vice President, CFO and General Counsel for Patten Corporation (BGX) from 1986 to 1988, where he played a critical role in the company’s successful initial public offering on the New York Stock Exchange. From 1983 to 1985, Don was a corporate lawyer with the Boston Law Firm of Warner and Stackpole. Before joining Warner and Stackpole, Don worked as a C.P.A. for Ernst and Young from 1979 to 1983. Don graduated with honors from Saint Michael’s College in 1976 with a B.S. degree in Economics and Business Administration. He received his J.D. from the University of Maine Law School in 1979 and his LL.M. from Boston University Law School in 1982. Don can be reached at donalddion@gmail.com

Analyst’s Disclosure: I am/we are short SE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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