Sea Ltd SE (former Garena)

[winston]

vested

SEA LIMITED (SE US)
Recommendation : BUY
Fair Value : USD 70.00

CHANGE IN CORPORATE STRATEGY MAY DISAPPOINT SOME INVESTORS, BUT LONG-TERM GROWTH AWAITS.

2Q23 revenue miss but earnings beat on non-operating items
Gaming active users finally showing signs of recovery while bookings continue to lag
E-commerce business seeing some signs of underlying growth

Headline numbers look weak but underlying signs of recovery showing; management taking the right steps for the long-term but investors need to be patient. Revise fair value from USD95 to USD70

Sea Limited (Sea) turned in a lacklustre set of results for 2Q23, with operating revenue and adjusted EBITDA flat from 1Q23, and missing consensus expectations.

The company has also guided that they will be increasing investments into the e-commerce business (Shopee), which may lead to losses for the business from time to time.

However, underneath the weak set of results, the company is seeing a recovery in underlying trends, with gaming active users and e-commerce gross orders growing significantly quarter-on-quarter (QoQ).

Given the company’s businesses with strong potential in a growing region, we believe that the management is realigning and repositioning the company to tap on further growth going forward.

While the increased investments into their businesses may lead to losses and negative earnings revisions from time to time, we believe that the company is pursuing the right strategy for stronger growth in the long-term.

Near-term however, we think investors need to be patient with this stock as it undergoes a reset of investor expectations regarding the change in business strategy.

Source: OCBC

[winston]

Reinvestment in growth
1H23 earnings fell short; weakness may persist

1H23 net profit of USD419m was below our and consensus FY23 forecasts (at 47%/45%) due to increased investments in Shopee (e-commerce) to reaccelerate GMV growth.

In our view, lacklustre growth will persist due to continued softness in Garena’s bookings and higher investments in the e-commerce business, which will affect SE’s earnings in the near term.

We thus reduce our FY23-FY25 net profit forecasts by 27-34%.

We have lowered TP to USD80 (from USD105), based on a lower e-commerce multiple. Nevertheless, we maintain BUY.

Near-term uncertainty aside, we believe SE is amongst the best geared towards riding the structural wave of ASEAN digitalisation through e-commerce and fintech.

Source: Maybank

https://mkefactsettd.maybank-ke.com/PDFS/334740.pdf

[winston]

Sea Ltd. – Spending to resume
Recommendation : BUY (Maintained); TP: US$87.00, Last Close: US$40.50

2Q23 revenue missed expectations marginally due to increased shipping subsidies.

Earnings were in line.

1H23 revenue/PATMI was at 46%/103% our FY23e forecasts.

We expect break-even in 2H23 due to increased incentives and investments.

Garena looks to have bottomed out, posting an 8% QoQ increase in operating income after 5 quarters, with an 11%/15% sequential uptick in QAU/QPU.

Increasing shipping subsidies and marketing spend for Shopee GMV growth to impact both top and bottom line, with potential of operating losses in the near-term.

We cut our FY24e revenue/PATMI by 3%/3% to reflect increasing shipping subsidies and marketing spend, and we raise our outstanding share denominator by 8% due to share dilution.

We maintain BUY with a reduced DCF target price of US$87.00 (prev. US$100.00), with an unchanged WACC of 7.6%, and a terminal growth rate of 3.0%.

We still believe SE is well-positioned to capture e-commerce growth in many emerging markets due to increased digitalisation.

Source: Phillips

https://www.poems.com.sg/stock-research/SE/

[winston]

vested

Trading at a 40% discount to GRAB: waiting for catalysts

Shopee to grow its market share and limit TikTok Shop till Tokopedia changes gears. We cut our FY23F/24F group adj EBITDA by 12%/27%, bringing us 9%/14% below consensus.

Gaming’s paying user base has started to rise again while fintech’s profitability is rising, boding well for free cash flow.

BUY with a lower TP of US$66 (prev US$90). SE is trading at 1.2x 12m-forward Enterprise Value (EV) to Revenue at a 40% discount to GRAB (vs historical premium of 69%) and near its own -2SD valuation.

Key catalyst would be potential removal of Free-Fire ban in India

We use normalised adj EBITDA margins to derive our TP of US$66 for SE. We have shifted our valuation base from FY27F adj EBITDA to FY24F adj EBITDA as there is lack of clarity on the long-term profitability in the E-commerce segment.

We have applied 18.0x EV/EBITDA multiple (average of E-commerce, Gaming and Fintech peers’ 12m forward EV/EBITDA is 20.0x) on FY24F adj EBITDA of US$1.9bn (margin of 13%) to arrive at the Enterprise Value.

We have also factored in net cash of US$4.0bn as we expect Gaming and Fintech to generate strong cash flows.

Our bear case TP is US$35. We assume FY24F e-commerce adj EBITDA dropping 47% y-o-y to US$300m (vs base of US$456m) due to irrational competition and 9x FY24F EBITDA (18x under the base case)

Source: DBS

https://www.dbs.com/insightsdirect/comp ... ecid=15813

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vested

Indonesia seeks to separate TikTok Shop from its social media app- positive for Sea Ltd

According to Jakarta Globe, the Indonesian government is set to follow the lead of India and the United States, in prohibiting social media platform TikTok from engaging in e-commerce activities within the country.

TikTok has its own digital payment system and logistical support, and allowing it to run e-commerce operations could harm local businesses, Cooperative and SME Minister Teten Masduki said in a statement.

"India and the United States have banned TikTok from simultaneously operating its social media and e-commerce businesses, while in Indonesia, TikTok is currently free to do both," Teten said.

Sea Ltd’s Shopee secures almost 35-40% of its e-commerce volume from Indonesia.

We maintain BUY on Sea Ltd at TP of US$66.

Source: DBS

https://www.dbs.com/insightsdirect/comp ... ecid=16091

[winston]

vested

TikTok Shop ban threat positive for Sea
Potential boost for Shopee

TikTok Shop has been accused of unfair competition by local MSMEs through cheap imports.

Indonesia is one of Shopee's largest markets and the platform has ~40% share of online sales. Regulatory action that restrains TikTok Shop should result in market-share shifts in favour of
existing platforms, including Shopee (which is owned by Sea).

Further, TikTok shop's relatively lower fee structure and aggressive investments in Indonesia have spurred Sea to invest more heavily in subsidies and marketing to protect market share.

Any regulation that restrains TikTok is likely to result in a more rational competitive market.

TP US$ 80

Source: Maybank

https://mkefactsettd.maybank-ke.com/PDFS/339417.pdf

[winston]

President Jokowi talks about upcoming regulation on social media companies

President Jokowi has said that regulations regarding social media-based e-commerce would soon be completed

This supports our view that Indonesian govt is serious about defending the local small and medium enterprises

The key beneficiaries should be GoTo (not covered) and Sea Ltd (BUY, TP US$66) whose over 35-40% of e-commerce gross merchandise value (GMV) comes from Indonesia.

Source: DBS

https://www.dbs.com/insightsdirect/comp ... ecid=16258

[winston]

vested

E-commerce back in focus

Indonesia bans social e-commerce effective immediately; we raise Shopee’s FY24F/25F adj. EBITDA by 77%/29%

TikTok Shop might struggle to
(i) secure a license as a standalone business and
(ii) succeed as a separate app as bulk of its purchases are impulse

Maintain BUY with revised TP of US$78 as FY24F/25F group adj. EBITDA is raised by 19%/10%

BUY with a higher TP of US$78 (vs. US$66 previously). We raise our FY24F adj. group EBITDA by 19%/10% to US$2208m/US$2580m due to higher e-commerce adj. EBITDA.

We apply an 18x EV to adj. EBITDA multiple on FY24F ad EBITDA (vs. 20x peer average).

We factor in net cash of US$4.0bn. SEA is attractive, at below 8x FY24F adj. EV/EBITDA vs. its peers at 20x.

Source: DBS

https://www.dbs.com/insightsdirect/comp ... ecid=16281

[winston]

vested

Sea (SE US)
Recent Developments Are Positive For The Company

We reiterate BUY on SEA amid the recent positive developments.

The revised Regulation of Minister of Trade in Indonesia favours Shopee's competitive standing,
while Garena's Free Fire re-entry into the Indian market (which previously accounted
for 10% of its monthly active users) signals additional growth avenues.

We believe there is room for share price to re-rate further, primarily due to lower-than-anticipated sales and marketing costs.

Target price remains at US$94.34.

Source: UOBKH

https://research.uobkayhian.com/content ... 39e7d79ed5

[winston]

vested

Beneficiary if Indonesia bans TikTok Shop
TikTok Shop faces regulatory headwinds in Indonesia

Indonesia's Ministry of Trade is reportedly planning to announce the country’s new online trade regulations, which may include laws to inhibit social media companies like TikTok from
facilitating direct e-commerce payments on their platforms and placing additional ban on imported products sold through digital channels.

TikTok Shop in Indonesia has been under regulatory scrutiny in recent months and Sea Ltd would be the biggest beneficiary (see note: TikTok Shop ban threat positive for Sea) as the company is navigating an intensely competitive e-commerce environment in Southeast Asia.

We think Indonesia’s decision may influence regulators in other countries as they assess TikTok’s growing ecommerce capabilities.

TP: US$80

Source: Maybank

https://mkefactsettd.maybank-ke.com/PDFS/342155.pdf