Maybank Kim Eng has commenced coverage on Sea with an initial “buy” rating and target price of US$378.
“We believe Sea is one of the best proxies to ride the Asean digitisation theme, given Shopee’s position as the top e-commerce app regionally, which paves the way for user conversion into digital finance,” says Maybank Kim Eng analyst Gene Lih Lai in the Sept 10 research note.
Lai highlights that Sea has a Southeast Asian super-app in the making through its three core businesses - digital entertainment platform Garena, e-commerce arm Shopee, and digital financial services subsidiary SeaMoney.
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He sees Shopee’s growth momentum accelerated by Covid-19, with the platform’s strengths lying in its localisation, userfriendliness and aggressive marketing strategies. “ Current take rates are around 6-8%, and Sea sees high-single-digit or low-teens percentage gross merchandise value (GMV) achievable in the long run,” he says.
For SeaMoney, Lai views the platform as still in the early stages of growth. Given the fragmented digital finance services landscape in Asean, he anticipates the platform’s long-term success will be driven by user acquisition, which Sea will seek out through aggressive sales, marketing and R&D initiatives in the coming years.
Sea’s investments to grow Shopee and SeaMoney continue to be funded by cash-generative Garena via its Free Fire mobile game franchise which launched in 2017.
Lai notes that in 2Q2021, Free Fire was the highest-grossing battle royale game in the US for the second consecutive quarter, and also remains “extremely popular” in other regions including Southeast Asia, Latin America and India. To that end, he believes the franchise is still in the early stages of its lifecycle, with the potential to become a major intellectual property franchise.
Driven by economies of scale, Lai anticipates Sea to achieve profitability in FY2023, with EBITDA and earnings of US$1.7 billion ($2.3 billion) and US$ 236 million respectively. He expects Sea’s FY2020-2023 revenue to expand at a compound annual growth rate of 59.4%, driven by growth across digital entertainment (38.1%), e-commerce (75.3%) and digital financial services (118%).
“From a balance sheet perspective, we are projecting Sea to not just maintain a net cash position, but for cash and cash equivalents to grow from US$7 billion to US$14.7 billion in FY2023, largely due to cash generation from the digital entertainment business, as well as from the circa US$6 billion equity and convertible debt fundraising announced on Sept 10,” he adds.
His target price is derived from a sum-of-the-parts of the individual businesses. Sea's digital entertainment business is valued at US$112 per average dollar sale (ADS) based on 27 times FY2022 P/E, at a slight premium to peers on account on faster earnings growth. For the e-commerce business, Lai ascribed a valuation of US$227 per ADS, based on 1.4 times FY2022 P/GMV. For digital financial services, he values the business based on 0.4 times FY22E P/GMV, resulting in a valuation of US$23 per ADS.
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In terms of risks, Lai sees revenue concentration as Sea's biggest obstacle, given that its gross profitability is largely driven by Garena, with Free Fire contributing a significant portion of revenue. Meanwhile, for its e-commerce business, he points out that Shopee's top two markets account for a "sizeable" number of orders and GMV.
"While we note strong growth momentum and stickiness in Free Fire and Shopee’s core markets, we believe the Achilles heel that could unwind these dynamics are decline in popularity of these offerings and/or regulatory risk," Lai remarks.
Shares in NYSE-listed Sea closed US$2.90 or 0.9% higher at US$325.50 on Sept 12 (New York time).
Photo: Bloomberg
