Analysts mixed on Sea following 2QFY2023 earnings and re-pivot to accelerating Shopee growth

For this reason, analysts at CGS-CIMB and PhillipCapital have reiterated their “add” and “buy” calls, but with a lower target price of US$65 and US$87 respectively. Analysts at DBS have maintained its “buy” with an unchanged target price of US$90, and Citi has a “buy” call with a target price of US$98.

Analysts Ong Khang Chuen and Kenneth Tan from CGS-CIMB say that Sea’s generally accepted accounting principles (GAAP) revenue of US$3.1 billion (+2% q-o-q, +5% y-o-y) was 5%/4% below their/Bloomberg consensus forecasts.

While 2QFY2023 adjusted ebitda of US$510 million (flat q-o-q) was roughly in line with expectations, led by stronger gaming and fintech units. In addition, Sea’s 2QFY2023 GAAP net profit of US$322 million was 53%/30% above their/Bloomberg consensus forecasts

The analysts say that the e-commerce segment, Shopee, was a “key disappointment”. Although it saw an order growth of more than 10% q-o-q, its 2QFY2023 adjusted ebitda declined to US$150 million (-28% q-o-q) due to increased investments to reaccelerate its GMV growth.

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Segment revenue rose only 2% q-o-q, dragged down by increased investments in shipping subsidies (recognised as negative revenue) and foreign exchange translation.

Ong and Tan express concern about Sea’s announcement to go back in reinvestment mode for Shopee, noting that this could negatively impact its overall profitability or even result in nearterm
losses.

“In our view, this strategic pivot was likely undertaken to win market share from industry peers that are currently still in cost-cutting mode, while also potentially serving as a deterrent for potential new competitors,” they say.

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Meanwhile, the analysts say that Sea’s gaming segment “likely bottomed out”, while its fintech operations saw healthy growth.

Sea’s gaming segment adjusted ebitda rose to US$239 million (+4% q-o-q) in 2QFY2023 after seven quarters of decline, while quarterly active users grew 11% q-o-q and quarterly paying users grew 15% q-o-q.

Its fintech segment adjusted ebitda grew 38% y-o-y to US$137 million with its risk profile remaining stable.

“Sea is cautiously optimistic that this reflects the beginning of a longer term stabilisation trend for its key game, Free Fire,” they say. “Sea plans to continue pushing for healthy development in fintech, leveraging its ecosystem synergies.”

With that, Ong and Tan remove Sea from their high-conviction list as they expect share price volatility with investors likely struggling to find comfort in near-term earnings given the group’s pivot back towards aggressive GMV growth.

However, they believe that Sea remains on strong footing to capture longer-term tailwinds from Asean digitalisation, and now prefer Grab as within the Asean internet space.

“Our sum-of-the-parts (SOTP)-based target price is lowered to US$65 on lower ecommerce multiples,” they say.

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On the other hand, DBS analysts think that the share price weakness is “an over-reaction” to e-commerce competition, and that investors have ignored Sea’s gaming stabilisation.

“With Shopee already profitable, Shopee focusing on market share is the right thing to do in our view when number two player in Indonesia – Tokopedia — is losing market share in order to narrow its losses,” they say.

The analysts say that TikTok shop continues to be a major threat to Shopee, but note that an upward revision in seller commission rates from flat 1% + IDR2000 (18 cents)/ to 1.9% - 4.3% in June by TikTok Shop, aligns it with other e-commerce players.

For this reason, they have maintained their “buy” with an unchanged target price of US$90.

Like DBS, analysts Alicia Yap, Vicky Wei and Nelson Cheung think that the reaccelerated investment into Shopee is the appropriate approach at this juncture, given that Sea has proven to achieve profitable ecommerce business. They acknowledge that it will “no doubt” weigh on ebitda margins in the near term.

“We believe management will balance the top line growth while maintaining a certain sustainable profit level,” say the analysts.

Noting that Sea’s digital gaming business performed positively, they look to see colour on ecommerce and gaming revs and ebitda trend for 2HFY2023 latest competitive landscape for ecommerce and digital financial services.

Citi analysts use a SOTP approach for its valuation methodology, and its target price is based on a combination of factors.

First, US$11.5 per share for the digital entertainment business based on a 8x target FY2024 multiple, at 50% discount with global publishing and developer peers, which they believe is reasonable to reflect lack of new games and concentration risks.

Next, US$61.10 per share for the ecommerce Shopee business is based on an 13% normalised take rate and a 3.5x FY2024 P/S multiple, at average of global ecommerce peers.

Then, US$22 per share for digital financial services based on 6x P/S multiple, and finally, the group’s 1QFY2023 net cash balance.

Lastly, analyst Jonathan Woo from PhillipCapital says that he still believes that Sea is well-positioned to capture ecommerce growth in many emerging markets due to increased digitalisation.

He noted that the 2QFY2023 revenue missed expectations marginally due to increased shipping subsidies. This, he says, will impact the Shopee GMV growth for both its top and bottom line, with potential of operating losses in the near-term.

“We cut our FY2024 revenue/PATMI by 3%/3% to reflect increasing shipping subsidies and marketing spend, and we raise our outstanding share denominator by 8% due to share dilution,” says Woo.

He maintains his “buy” with a reduced discounted cash flow target price of US$87, down from US$100 previously, with an unchanged weighted average cost of capital of 7.6%, and a terminal growth rate of 3.0%.

As at 4.57pm, shares in Sea are trading 8 US cents lower, or 0.20% down at US$40.5.