CGS-CIMB Research has maintained its “hold” call and target price of US$92 ($128.64) on tech conglomerate Sea Limited after the company's e-commerce arm Shopee scaled back its presence in Latin America.
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Layoffs are expected to impact dozens of employees, but CGS-CIMB analysts Ong Kang Chuen and Kenneth Tan believe that Shopee will continue to leverage its cross-border operations to maintain its presence in Chile, Colombia and Mexico.
The move leaves Poland as Shopee’s last “test market”, while Brazil is unaffected, as it was reclassified as a core market in March.
In their report, Ong and Tan note that Shopee entered Chile, Colombia, Mexico and Argentina in 2021 and they are currently at nascent stages, estimating that they account for a “low single-digit” of Shopee’s gross merchandise value (GMV) as of 2QFY2022 ended June, and an even lower sales contribution, as there are higher subsidies given out in new markets.
However, by maintaining its presence in the three markets through cross-border operations, they believe Sea is not ruling out the potential re-establishment of local operations in those markets should the macro environment improve.
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They highlight that the scaled-back presence could potentially save US$40 million a year, or 1.6% of Shopee’s FY2022 adjusted ebitda.
Ong and Tan add that, “Generally, we believe the move is-line with Sea’s latest strategic direction to prioritise profitability and cashflow management. We expect Sea to break even on adjusted ebitda by 2HFY2023, and non-GAAP profitability by FY2024.”
GAAP refers to generally accepted accounting principles, which are a collection of commonly-followed accounting rules and standards for financial reporting.
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Turning to its share price, the analysts highlight a 35% share price correction since its 2QFY2022 results in August due to the suspension of Shopee’s FY2022 revenue guidance, and expect sentiment on the stock to stay weak in the near-term, given newsflows on further cost-cutting.
However, they remain positive on Sea’s longer-term outlook, with its continued market share leadership in Asean e-commerce and easing competitive landscape.
Shares of Sea closed on Sept 9 at US$63.47, with a FY2022 P/B ratio of 6.59 and dividend yield of 0%.
