by winston » Thu Nov 30, 2017 10:28 am
New report: Leading e-commerce & online game provider in GSEA
We initiate coverage of Sea Limited (Sea) with an OUTPERFORM rating and target price of US$16.50. We like Sea for its solid gaming business and its potential to be one of the leading e-commerce platforms in South East Asia and Taiwan (GSEA).
Key risk to our valuation comes from intense competition in e-comm.
Sea is the leading online gaming platform (Garena) in GSEA with revenue market share of 11.9% (1H17). We expect it to continue to gain market share with gross billings expected to grow at a five-year CAGR (2016-21E) of 26.0%, owing to its strong relationship with Tencent and solid local market knowledge.
Sea’s third-party marketplace (Shopee) in GSEA has achieved rapid GMV growth since its launch (in 2015), and 2017E GMV is expected to reach US$3.9 bn. We believe that Shopee is likely to
emerge as of one of the leading e-commerce platforms in GSEA as it has now attained a sizeable scale.
Our valuation for Sea is SoTP based, wherein we value Garena at 2018E P/E of 18.5x (US$3.2 bn). Our DCF-based valuation of Shopee (US$2.5 bn) implies 2018E/19E EV/GMV of 0.53x/0.33x. We expect Sea to turn free cash flow positive in 2021E.
Initiate coverage with OUTPERFORM; TP of US$16.50
We initiate coverage of Sea with an OUTPERFORM rating and an SoTP-based target price of US$16.50, implying ~44% potential upside.
We like Sea due to its solid gaming business and for its potential to be one of the leading e-commerce platforms in GSEA.
We value Garena at 2018E P/E of 18.5x, implying the valuation of US$3.2 bn. Our DCFbased
valuation of Shopee is US$2.5 bn, implying 2018E/19E EV/GMV of 0.53x/0.33x (post factoring cash). We value AirPay/others at 0.7 EV/sales (US$65 mn).
We expect Sea to turn FCF positive in 2021E and, hence, its current cash position should be sufficient to fund the expansion until 2020E.
We believe risk-reward appears favourable post the recent correction as Sea's stock is trading close to our grey sky scenario (~8% potential downside), while upside can be meaningful (~44% to our TP) if it is able to execute well.
Source: CS
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