UOB Kay Hian analysts John Cheong, Jacquelyn Yow Hui Li and Heidi Mo have maintained “buy” on Sea with a target price of US$94.34 ($125.29), highlighting the counter’s share price appreciation of over 15% since it turned profitable for the first time in 4QFY2022 ended December.
In their July 25 report, the analysts note that Shopee’s continued dominance in its established markets and growth in new markets should allow it to continue increasing commission fees as well as expand its logistics structure. As such, the analysts expect margins to improve moving forward.
Shopee is still leading in the Southeast Asian market share, achieving a gross merchandise value (GMV) of US$47.9 billion in FY2022. This is followed by Lazada, with a GMV of US$20.1 billion.
The analysts point out that Alibaba further injected US$845 million into Lazada on July 19, bringing its total injection from May last year to US$2.8 billion. This provides Lazada with dry powder for higher spending on areas such as marketing, which may put Shopee’s growth plans at risk.
Despite these, the analysts firmly believe that Shopee will maintain its market leadership, underpinned by its sizable merchant and customer base. Additionally, Shopee’s localisation setup in each country it enters has proven to be highly effective, providing excellent support and tailored solutions to diverse localisation requirements.
“For instance, Shopee Singapore had 13.6 million visits in February as compared with Lazada Singapore’s 5.8 million visits. Despite starting its Singapore operations three years after Lazada, Shopee Singapore’s higher online traffic to date demonstrates its effective strategies,” the analysts note.
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At Sea’s 1QFY2023 ended March results briefing, the company highlighted its focus on expanding its logistics network and integrating its in-house logistics arm, Shopee Express. While working with third-party logistics (3PL), Shopee has also been introducing automation into its workflow to improve efficiencies.
Sea claims that these initiatives would reduce average delivery times by more than half a day across its markets. With return rates for e-commerce sales ranging from 15% to 20%, building on its logistics arm will ensure a better and faster return experience to attract and retain customers, the analysts point out.
“We also note that Shopee has been improving monetisation of this arm, such as increasing seller shipping fees in Singapore from June. This allows Shopee to capture opportunities in the Southeast Asia logistics value chain. As e-commerce becomes increasingly prevalent, we reckon that such value-added services will drive margin expansion for the e-commerce segment,” they add.
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In January, Shopee had closed its operations in Poland, following four Latin American markets, France, Spain and India. While this raised doubts in its ability to succeed in Brazil — one of the newer markets it entered in late-2019 — Shopee has achieved significant milestones in the market.
For instance, Shopee Brazil reached 2 million local sellers on its marketplace in April 2022, beating competitors like Magazine Luiza and Americanas that had 160,000 and 122,000 local sellers respectively at the time. Since then, the number has grown by 50% to 3 million in March this year. As the leading ecommerce app in Latin America by monthly active users, the analysts opine that Shopee has huge potential in Brazil as it scales up operations and grows its presence.
UOBKH maintains its earnings forecast for Sea at US$935 million, US$1.27 billion and US$2.06 billion for 2023 to 2025 respectively.
“Given the current macro headwinds like rising global inflation dampening appetites for ecommerce, we expect the share price to trade sideways, buoyed by positive earnings momentum moving forward,” the analysts add.
Shares in Sea closed 2 US cents lower or 0.33% down on July 24 at US$61.16.
