by winston » Wed May 04, 2022 2:01 pm
not vested
Sea Limited (SEA US) - Leveraged to secular growth trends, but near-term headwinds not trivial
Sea’s key business streams operate across a number of secular growth verticals, including mobile gaming, e-commerce, and fintech/digital banking.
On e-commerce, we believe that Shopee is particularly well-placed to maintain its favourable position across Southeast Asian markets. Also, its recent exit from India is testament to the group’s focus on capital conservation and on markets with more visible opportunities. Management notes that Shopee is on track to achieve positive adjusted EBITDA before headquarters’ costs allocation in Southeast Asia and Taiwan by this year.
Separately, we view Sea’s Fintech business as a credible growth engine for the overall group moving forward, and that management will likely focus on ramping up non-payment verticals. We understand that SeaMoney is also on track to become cashflow positive by next year.
Management has also expressed their expectation that by 2025, cash generated by Shopee and SeaMoney collectively will enable both businesses to substantially self-fund their own long-term growth.
As for Garena’s self-developed global hit, Free Fire, this has continued to maintain top global rankings in user and grossing metrics. However, we understand that the reopening of economies has resulted in some moderation in online activities and fluctuations in user engagement, while Free Fire has run into regulatory headwinds in India.
These have contributed to soft Digital Entertainment bookings guidance of USD2.9-3.1b in 2022, which represents a decline of 33-37% year-on-year (YoY).
We believe that this has led to notable investor concern over Garena, and in particular on its reliance on a single IP.
All considered, despite the opportunities arising from the positive structural trends that Sea is leveraged to, there are a number of near-term headwinds to navigate, such as the reopening and regulatory challenges facing Garena, potential missteps as it focuses more on profitability, as well as a backdrop of rising yields that is likely to be less accommodative towards high growth stocks with minimal/no earnings.
We employ a multiples-based SOTP approach in valuing Sea’s various business segments, and after applying an ESG discount of 10% (to account for governance risk), we derive a fair value (FV) of USD93. HOLD.
Source: OCBC
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