DBS Group Research and Maybank Research analysts have kept their “buy” calls on Sea with lower target prices of US$256 and US$160 from US$272 and US$379 previously.
In his March 3 note, Maybank’s Lai Gene Lih says while the stock price might face overhang in the near term, Maybank will continue to view Sea as a champion of economic digitisation in Southeast Asia, hence maintaining its rating.
Sea’s 4Q21 revenue was ahead of Lai’s estimates at US$3.2 billion, a 106% growth y-o-y. However, Sea’s guidance for Garena’s FY22 bookings at US$2.9 billion to US$3.1 billion disappointed, says Lai.
“This takes into account headwinds from further reopening of economies globally, and the recent India ban of Free Fire (FF).
“Garena is developing new games across multiple genres. However, as these games are nascent, meaningful revenue contributions might either come later in the year or when Garena has sufficiently built user scale and penetration that paves the way for monetisation,” says Lai.
Similarly, DBS analyst Sachin Mittal says Sea’s guidance for gaming booking was below DBS’s expectations at US$4.5 billion. He adds that Sea has assumed that gaming revenue may drop to pre-Covid-19 levels in 2020.
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“We had expected the user acquisition to moderate in 4Q21. However, Garena experienced a steeper drop of 10% q-o-q, largely due to the economy reopening and virtual socialisation being less of a virtue,” says Mittal.
DBS does not expect any other Garena games to replicate the success of FF. Although Garena had mentioned that the other games in its portfolio had been doing well, their contributions to the overall gaming business is unclear, says Mittal.
Following the ban in mid-February, FF can no longer be downloaded across popular app stores in India. DBS suspects that this could be due to its alleged affiliations with Chinese company Tencent, as India has been going after Chinese apps.
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“Based on third-party (3P) sources, we had estimated that the revenue contribution from India to FF could be less than 5%. Based on our discussion with Sea, it seems that 3P sources have underestimated the sizable Indian market. Management’s 2022 guidance for the gaming business excludes the contribution of the Indian market,” Mittal adds.
Sea’s 4Q21 e-commerce revenue of US$1.6 billion and EBITDA loss of US$878 million were in line with DBS’s expectations. Its 4Q21 take rate stood at 8.8%, rising from 8.6% in the preceding quarter, Mittal highlights.
Shopee’s adjusted EBITDA loss per order in 4Q21 rose to 45 US cents. This is largely attributable to rising contributions from Brazil, where revenue was up 326% y-o-y to over US$70 million.
Lai says Latin America is a key growth market for Shopee, with prime focus in Brazil which saw 140 million orders in 4Q21, up 400% y-o-y and accounting for about 4% of its e-commerce revenue. “In Indonesia, Shopee is the largest e-commerce platform and gross orders grew 88% y-o-y, which Sea claims is much faster than its next competitor,” he adds.
On March 1, it was announced that Shopee is exiting the France market. Lai says while Shopee is always open to exploring markets, this shows its discipline with capital to exit markets it believes may not provide long-term sustainable returns.
Sea’s e-commerce revenue guidance of US$9 billion is above DBS’s US$8 billion estimates. The company expects EBITDA to breakeven for e-commerce in Southeast Asia and Taiwan in FY2022 as well as fintech in 2023. This should renew faith in its expansion plans, says Mittal.
Meanwhile, fintech performance was better than expected — Sea’s fintech revenue in 4Q21 grew 49% q-o-q to US$197.5 million, 24% ahead of DBS’s estimate at US$160 million while EBITDA loss at US$149 million was lower than its estimate.
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On top of slashing his target price, Lai cut Sea’s FY22-FY23 revenue estimate by 8%-9% to factor in earnings slow-down and lower multiples of Garena as well as the switch to FY23 P/S instead of FY22 P/GMV for e-commerce.
Shares in Sea closed US$7.71 lower or 6.55% down on March 3 at US$110.04.
Photo: Sea
