DBS Group Research analyst Sachin Mittal has downgraded Grab to “fully valued”, maintaining preference for Sea in his Asean internet coverage due to its earlier ebitda breakeven.
In his Jan 30 report, Mittal reiterates that Sea’s ebitda breakeven is expected in 3QFY2023, compared to 2QFY2024 previously. He projects a US$1.8 billion ($2.36 billion) reduction in losses from Shopee, partially offset by US$500 million drop in ebitda from gaming. Shopee is expected to self-find its own expansion from 3QFY2023 onwards.
Mittal uses normalised long-term ebitda margins to derive its target price of US$100 for Sea. “With ecommerce peers trading at 10x-20x 12-month forward ev/ebitda, we use a 12x ev/ebitda in five years, discounted back by 12% each year.
“We project a conservative ebitda margin of 20% at Sea leading to a FY2027 ebitda of US$7.3 billion. This is towards the lower end of the projected ebitda margins of 14%-34% for mature peers such as Amazon, eBay, and PayPal in 2022,” says Mittal.
On a segmental basis, DBS has assumed ebitda margins of 27% for Garena and 20% for both ecommerce and fintech segments for FY2027.
In his industry overview, Mittal highlights that TikTok, which focuses on live e-commerce in Southeast Asia, may pose a threat to internet companies in the region. Southeast Asia is home to four out of 10 countries worldwide with the greatest number of active TikTok users. With five out of 10 countries with the highest retail e-commerce sales growth globally, Southeast Asia is projected to be TikTok Shop’s most promising region, led by Indonesia.
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TikTok’s e-commerce gross merchandise revenue (GMV) totalled to about US$951 million in 2021, of which 70% or more came from Indonesia.
Mittal expects live e-commerce to potentially evolve into a niche market in Indonesia due to three key reasons — the first being an absence of support from incumbent players. Citing iResearch, Mittal says that live e-commerce accounts for over 19% of e-commerce in China, rising 2% from 2018.
This is supported by the incumbent local players, especially Alibaba which partnered with its online shopping subsidiary Taobao to connect an online live stream broadcast with an online store. Taobao Live currently enjoys a market share of 68.5% followed by Douyin and Kuaishou.
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Mittal says that there is immense support from Alibaba to strengthen the Taobao Live platform as it seeks to cultivate 200,000 new live streamers and 10,000 live streaming accounts in key industries and sectors. This support is not visible in Indonesia, as none of the traditional e-commerce players are profitable yet to embrace a new trend.
“It can also be noticed that many merchants are willing to sell on Facebook as it is the most widely used social media in Indonesia. And unlike TikTok and other e-commerce platforms such as Shopee or Tokopedia, Facebook has demonstrated no intention to develop similar live e-commerce, because it is more focused on advertising,” says Mittal.
Unlike China, it might also be culturally inappropriate for content creators to wear provocative outfits in a Muslim-majority Indonesia, he adds. Aside from the possibility of content creators attracting unwanted attention or harassment, many religious communities in Indonesia may take offense to clothing that is considered immodest or disrespectful of their beliefs.
Lastly, there is also a lack of novelty products in Indonesia compared to China. This may be due to relatively low level of economic development which limits the resources available for research and development of new products; political and regulatory environment, which may not be as conducive to innovation; as well as low levels of disposable income or access to the latest technologies that would allow them to purchase and use novelty products.
Furthermore, Indonesia has a lengthy return and refund process, says Mittal. This may be due to lack of clear regulations and guidelines for retailers and consumers to follow — the legal system may not be as efficient as in China, which can slow down the process of resolving disputes and processing refunds.
Shares in Grab and Sea closed 2.2% and 2.31% higher on Jan 27 at US$3.71 and US$68.55 respectively.
