Tech stocks continue to profit from Covid-19 lockdown measures, as SEA Ltd reported strong adjusted revenue growth of 93.4% y-o-y and 40.8% q-o-q. Despite still forecasting a net loss of US$1.418 billion ($1.94 billion) in December 2020, CGS-CIMB analysts Ngoh Yi Sin and Darren Ong have maintained their “buy” call with a target price of US$158.20 up from US$152.
The results were ahead of the analysts’ full year forecasts -- corroborated by Bloomberg -- following strong growth in SEA’s digital entertainment (Garena) and ecommerce (Shopee) units. The counter’s EBITDA of US$8 million beat Ngoh and Ong’s forecast of an US$59 million EBITDA loss.
“SEA made no changes to its earlier FY20 guidance of US$1.9 billion-2.0 billion gaming revenue and US$1.7 billion-1.8 billion ecommerce revenue, but we note that during its briefing call, management seemed confident of outperforming these targets,” remark the analysts.
The analysts have also increased their adjusted revenue estimates for FY20-22F by 1.5-19.9% on higher gaming and ecommerce growth.
The success of Garena’s self-developed mobile game Free Fire has seen the gaming arm’s 2Q20 adjusted revenue surge 39.8% q-o-q and 61.6% y-o-y to US$716 million. The record popularity of the game has seen 500 million quarterly active users (QAUs) and an exponentially higher paying ratio of 10% relative to 8.9% in 1Q20.
This saw Garena’s adjusted EBITDA rise 46.2% q-o-q and 65.4% y-o-y to US$436 million. According to Ngoh and Ong, its strong content creation of games like Rampage II Uprising and an in-game crossover with Money Heist, as well as its organisation of recurring esports events, will see it sustain strong user momentum into 2H2020.
E-commerce arm Shopee’s 2Q20 gross merchandise value (GMV) has also seen a robust 110% y-o-y and 30% q-o-q rise following higher gross orders numbering 616 million. Take-rates have also risen to 6.4% from 1Q20’s 5.1% and 2Q19’s 4.6% due to higher commissions, advertising revenue and cross-border volumes.
Still, Shopee’s adjusted EBITDA losses widened from US$260 million in 1Q20 to US$305 million in 2Q20 due to higher S&M costs. Adjusted EBITDA loss per order also fell from US$1.01 in 2Q19 to US$0.50 in 2Q20. Its balance sheet is also somewhat concerning, with the analysts predicting a -784% net gearing for the firm in December 2020 and a 520% gearing in December 2021 that is projected to hit -1025% in December 2022.
On the bright side, however, Shopee’s market leadership, growing brand portfolio and added social and entertainment features such as live streams of K-pop music festivals have seen it continue its high GMV growth trajectory despite countries rolling back lockdown measures.
As of 2.08pm, SEA Limited is trading 11.7 points up at US$145.98 on the New York Stock Exchange, with a 1.37 5-year monthly beta and a -2.29 earning per share (TTS).
