Analysts from DBS Group Research and UOB Kay Hian are keeping their “buy” calls ahead of Sea Limited’s results for the 3QFY2023 ended Sept 30.
DBS’s Sachin Mittal has, however, lowered his target price to US$70 ($95.59) from US$77.57 as he sees that the company’s 3QFY2023 results may “disappoint the street”.
UOB Kay Hian’s John Cheong, Jacquelyn Yow and Heidi Mo have similarly slashed their target price to US$72.25 from US$94.34 as they expect Sea’s earnings for the 3QFY2023 are expected to turn negative. This is primarily due to a pivot to reinvesting in Shopee and a potential drop in contributions from the digital entertainment segment.
That said, the analysts are expecting to see improved results in the 4QFY2023.
DBS’s Mittal estimates that Sea’s 4QFY2023 adjusted group ebitda while its FY2024 may see a “sharp improvement”. To the analyst, Sea may see a “modest sequential improvement” due to the ban on TikTok Shop in Indonesia. The ban may benefit Shopee from “less intensified competition” and may see Sea’s e-commerce arm gaining some share, says Mittal.
“Overall, we expect Shopee to march towards rising profitability with lower shipping subsidies and higher in-house logistics, partially offset by the rising investment in live-streaming video,” he adds in his Oct 11 report.
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India’s removal of the Free-Fire ban may also lead to a 10% to 15% growth in gaming revenue over the next two years.
In fintech, several banks are using Sea as a lending platform in the region, Mital continues.
“We project gaming + fintech adjusted ebitda to rise by 11% to US$1.532 billion in FY2024, accounting for over two-thirds of group adjusted ebitda,” he writes.
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The UOB Kay Hian team also sees “better visibility” for Sea in the next quarter and the next FY due to the recent ban on TikTok Shop in Indonesia benefitting the group, posing a lesser threat to Shopee’s market share.
“The recent ban on TikTok Shop in Indonesia, announced by the government on Oct 4, eliminates a potential threat to Shopee's dominant market position. As the TikTok Shop feature operated directly on TikTok’s social media platform, its exit from the Indonesian market aligns with regulatory compliance,” says the UOB Kay Hian team.
“This development favours pure e-commerce platforms and diminishes the competitive threat posed by TikTok. However, we remain vigilant regarding potential future developments, including TikTok's potential re-entry into the market with a standalone e-commerce platform and the emergence of new marketplace competitors,” the team adds.
The revival of Free Fire India following a 1.5-year ban is likely to provide Sea with a 20% y-o-y increase in FY2024, reflecting India’s substantial user base.
“Prior to the ban imposed in February 2022, India accounted for approximately 20% of Free Fire downloads and 25% of its monthly active users. Additionally, with Garena's paying users experiencing growth for the first time in seven quarters in 2Q23, we anticipate a stable contribution from its active user base,” says the UOB Kay Hian team.
Further to its report dated Oct 24, the UOB Kay Hian team likes Sea’s digital financial services (DFS) segment, which is pegged to be a “strong growth trajectory”.
Sea’s DFS segment saw considerable adjusted ebitda growth of 38.4% q-o-q in 2QFY2023 mainly from its credit business through its digital bank subsidiary, SeaBank Indonesia.
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“We note that SeaBank Indonesia’s deposits have grown 22% h-o-h in its recent results, which is a positive sign for Sea,” says the UOB Kay Hian team. “With the rapid growth of digital banks in recent years, the financial landscape has also become collaborative, as evidenced by some traditional banks partnering with SeaMoney to scale banking services. We opine that DFS has strong growth potential, with good operating margins and synergy with the Shopee platform.”
Meanwhile, the team has lowered its earnings estimate for the FY2023, FY2024 and FY2025 by 68%, 41% and 40% respectively. This is mainly due to the higher expenses for the e-commerce segment and digital financial services, as well as slower growth for the gaming sector for FY2023 due to the delayed launch of Free Fire India and drop in active gaming users.
The UOB Kay Hian team has also pegged Sea’s e-commerce segment lower at 1.5x price-to-sales (P/S) for FY2024 as compared to its peers at 2.0x P/S FY2024, given the strong e-commerce competition environment in its operating region.
Following Sea’s results in the 3QFY2023, the team is expecting to see a “short-term kneejerk reaction”. As such, the team is recommending that investors accumulate shares in Sea on its share price weakness with “positive news coming on stream”. The “potential better than the market’s expected e-commerce growth and contribution in the following quarters” are also expected to see shares in Sea re-rate after its results for the third quarter.
DBS’s Mittal has also cut his estimates, with his FY2024 and FY2025 adjusted group ebitda lowered by 9% and 5% to US$2.005 billion and US$2.461 billion respectively due to a slower recovery in e-commerce adjusted ebitda.
“We apply an 18x enterprise value (EV) to an adjusted ebitda multiple on FY2024 adjusted ebitda (versus a 20x peer average),” says Mittal.
“We factor in net cash of US$3.6 billion (previously US$4.0 billion) due to higher losses in 2HFY2023,” he adds. “While Sea is attractive, at below 10x FY2024 adjusted ev/ebitda versus its peers’ 20x, investors would look forward to 4QFY2023 and FY2024 guidance by Sea.”
To Mittal, a key risk is the lack of long-term visibility in Sea’s gaming business.
“A recent rise in quarterly paying users (QPU), coupled with the rising user base from India, might benefit the gaming business over the next 12 months. With gaming comprising [around] 40% of group adjusted ebitda In FY2024, the company needs to find new hit games to defend the gaming adjusted ebitda, which might be challenging,” he says.
Shares in Sea closed 14 US cents lower or 0.31% down at US$44.47 on Oct 23.
