Daily Brief Equity Bottom-Up: Sea Ltd’s (SE US) – Through the Looking Glass and more

• Sea Ltd’s 4Q2022 results were nothing short of spectacular, with the company booking a net profit more than a year ahead of expectations, underlining management’s ability to thrive in adversity.
• The company cut costs and most notably A&P spend on e-commerce but it still managed to grow GMV and booked positive adjust EBITDA for all its core Asian markets.  
• Sea Ltd (SE US) now stands out well ahead of its peers on profitability and should trade at a premium but it will have to continue to execute.

• Sea Ltd (SE US) shares went up by 22% yesterday as the company’s top-line beat consensus by 13% and recorded its first-ever operating profit of $342.9m (consensus: -$344m).
• Main growth drivers such as GMV, orders, Gaming active users and Gross-Bookings indicate that growth could stall. Meanwhile, competition is heating up, sidelining the importance of cost discipline in e-commerce.
• Turning unprofitable yet-again could be a hard thing to swallow, even for those firmly believing in Shopee. Therefore, Sea could fall a lot more than the previous-bottom next-time it falls.

• JD Health’s dependence on direct sales business wouldn’t change. But the gross profit of prescription drugs is low. If JD Health increases its revenue proportion, overall gross margin would decline.
• The business supporting JD Health’s high growth in the future is more dependent on the second growth point, but we haven’t seen any new business with high certainty so far.
• The essence of JD Health’s business is “product sale e-commerce” rather than “a comprehensive online healthcare platform” at the current stage, which cannot support high valuation in our view.

• Digital Turbine, Inc.’s misfortunes are about to pivot, providing ad spending reverts to its average growth trajectory.
• The company has a novel business model, and constant expansion by integrating growth ideas such as a Shopify-esque platform could yield substantial financial benefits, according to the company.
• Digital Turbine, Inc. (NASDAQ:APPS) stock has suffered from a trying time during the past year, conveyed by its more than 70% year-over-year drawdown.

• Oracle’s strategy is being acknowledged by one of its major peers – Salesforce.
• Oracle does not appear among the top three cloud infrastructure players, but it doesn’t need to.
• Oracle is expected to deliver another strong quarter, investors should remain focused on the long-term positioning of the business.

• SE reported C4Q22 total revenue 10% and 14% higher than our est. and cons., thanks to the improvement in monetization rate of eCommerce segment. 
• We expect the weak trend to continue into 2023, with intensified competition from eCommerce competitors and weak performance of Free Fire.
• We raise our TP to US$62, which implies 2.5X PS/6X PE/4X PS for eCommerce/gaming/fintech in 2023. Maintain SELL rating due to challenging growth outlook. 

• Before market open on March 8, HNI announced the acquisition of Kimball International (NASDAQ: KBAL), a smaller competitor of HNI’s Workplace Furnishings segment.
• HNI will pay about $485 million, consisting of cash ($9/KBAL share), stock (0.1301 HNI/KBAL share), and ~$46 million in KBAL net debt.
• We see the deal as an excellent fit on strategic and cultural levels. 

IP Group’s NAV per share came in at 132.9p at end 2022, down 20% year-on-year in total return terms but only 2% below the end-June 2022 level. The NAV decline during 2022 was primarily due to the £428.5m loss from listed holdings (before FX changes, mostly Oxford Nanopore Technologies, ONT), while private holdings contributed gains before FX of c £101.4m (or 5.8% of opening NAV). Excluding ONT, IP Group posted a £25.2m profit in 2022. The company will focus on driving short- to medium-term returns from its more developed holdings and devote resources to its ‘priority companies’, which it believes will underpin its self-sustaining model (its top 20 holdings make up 71% of portfolio value).

• Gaia reported 4Q22 revenues of $19.6 million versus $20.8 million in 4Q21, and 2022 revenues of $82.0 million versus $79.6 million in 2021.
• Given the small Yoga International acquisition in December 2021, this implies some revenue contraction in the core business for 2022.
• Despite the top-line challenge, net income was slightly positive for the year after adjusting for one-time legal fees and the anticipated SEC settlement accrual, which confirms the resilience of Gaia’s financial model.

• X2M Connect Limited (ASX:X2M) has reported a 23% reduction in RaaS-adjusted EBITDA losses (to $2.4m) for H1 FY23 on the back of operating leverage from 96% sales growth, 135% gross profit growth and just a 14% increase in operating costs.
• While sales growth was driven by hardware sales (connected devices +100% over the pcp), hardware margins have improved ~500bps and connected devices in the field ultimately drive SaaS/maintenance fees (platform fees).
• Cash at bank was $3.05m with an additional net $0.5m received in January 2023 from an R&D tax credit.