DBS Group Research and Maybank Securities are keeping their “buy” calls on Sea Limited after the Indonesian government was reported to be seeking to ban TikTok Shop in the country. The team at DBS has kept its target price of US$66 ($90.05) unchanged while Maybank's target price of US$80 remained the same as well.
"India and the United States have banned TikTok from simultaneously operating its social media and e-commerce businesses, while in Indonesia, TikTok is currently free to do both," said Indonesia’s corporative and SME minister, Teten Masduki in a Sept 6 article in the Jakarta Globe.
He added that TikTok’s own digital payment system and logistical support could harm local businesses.
“It seems to us that [the] minister seeks to separate the TikTok social media app from TikTok Shop app as its social media app is the dominant app whose extensive user base and algorithms can be used to grow TikTok Shop, giving it an unfair advantage,” notes the DBS team.
“In our view, these subjects could be covered under [Indonesia’s] ‘Prohibition of Monopolistic Practices and Unfair Competition Law’. In the region, TikTok is already under scrutiny in Vietnam for its toxic content; and, content is likely to be moderated rather than outrightly banned, unlike India. We could see similar moves in other Southeast Asia countries as well,” it adds.
To the DBS team, the news from Jakarta could prove negative enough to distract advertisers away from TikTok Shop.
See also: Test debug host entity
However, it could be positive for Indonesia’s GoTo Group and US-listed Sea Limited, even though it is unclear as to whether the move was approved by Indonesia’s president Joko Widodo given the country’s “strategic interest in China”.
“An intense e-commerce competition is hurting GoTo the most who is losing market share each quarter as it needs to generate free cash flow first. Sea Ltd’s Shopee secures almost 35% - 40% of its e-commerce volume from Indonesia,” the team writes.
The accusation against TikTok Shop could be a potential boost for Shopee, where Indonesia is one of the latter's largest markets, notes Maybank analyst Kelvin Tan. Shopee currently has about a 40% share of online sales in Indonesia itself.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
"Regulatory action that restrains TikTok Shop should result in market-share shifts in favour of existing platforms, including Shopee. Further, TikTok shop's relatively lower fee structure and aggressive investments in Indonesia have spurred Sea to invest more heavily in subsidies and marketing to protect market share," he adds. "Any regulation that restrains TikTok is likely to result in a more rational competitive market."
That said, the threat to Shopee by competitors such as TikTok Shop, Temu and other potential newcomers is "overstated", says Tan.
Unlike the market's view that these other brands could "significantly erode" Shopee's market share, the analyst believes that this could be less severe due to three factors.
First, Southeast Asia has yet to develop a mature industry chain for live stream e-commerce, which is around 21% in the region unlike China's 56%. Next, TikTok Shop has started to charge a different percentage of commission fee for each product category aiming to shift from a high-risk, high-reward model to a more stable approach. "We believe [this] could slow its gross merchandise value (GMV) growth," says Tan. Finally, Temu's low-cost user acquisition and full merchant outsourcing model used in Europe and the US may not be a long-term competitive advantage in Southeast Asia, in the analyst's view.
At present, the analyst is expecting to see "near-term share price volatility" for Sea due to the uncertainty about the effectiveness of its investments and its ability to counter intense competition.
"However, as Sea’s gaming business may have bottomed and GMV and commission rates of its overseas e-commerce platforms have improved, Sea’s revenue growth may accelerate going forward," he says. "Downside risks include new entrants, which could intensify competition in the Southeast Asia e-commerce industry."
Shares in Sea closed 7 US cents lower or 0.18% down at US$39.15 on Sept 7.
