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Cash cow intact, growth engines at full throttle

  • Gaming, the cash cow, to continue to grow albeit at a slower pace due to lesser movement restrictions
  • E-commerce revenue has shown a strong 98% correlation with the share price; we raise e-commerce revenue CAGR to 82% in (prev 72%) in FY20-23F mainly due to its success in Brazil 
  • BUY with a higher TP of US$402 due to higher valuation for the e-commerce business
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Investment Thesis: 

Hyper-growth story in e-commerce. Sea Ltd (SE) offers 82% e-commerce revenue CAGR in FY20-23F (prev 72%) vs. 33% average CAGR offered by major players. This stems from SE’s 57% CAGR (prev 51%) in gross merchandise value (GMV), not reflected in its price to FY23F GMV of 0.72x vs non-Chinese peers at 1.3x. 

Rising cash flows from gaming to support expansion of new businesses. With countries coming out of lockdowns, we see gaming to grow albeit at a slower pace. Importantly, Garena continues to win market share by expanding into new markets, new games, and upgrading features. Gaming cash flows to fund expansion of new businesses – e-commerce in new markets, food delivery and e-wallet in Southeast Asia.

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Fintech and food-delivery to transform Shopee into an Everyday App. E-wallet to monetise Shopee’s user base via lending and insurance services, but the real intent is to transform Shopee into an everyday App in tandem with its food-delivery service.

Potential catalyst: Rising weightage of Sea in MSCI Singapore, strong quarterly results.

Valuation: 

Maintain BUY with a higher TP of US$402. We assign a fair value per share of (i) US$269 (prev. US$242) to e-commerce business based on 1.2x 24-month forward GMV, translating to 11.5x 24-month forward revenue (ii) US$100 (prev. US$117) to gaming business based on 23.0x 12-month forward PE, (iii) US$23 (prev US$19) to fintech business based on 15x 12-month revenue (iv) US$10 from net cash.

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Where we differ:

Our FY22F revenue is 2.5% above but adjusted EBITDA is significantly below consensus. We raise FY21F/22F GAAP revenue by 4%/9% to factor rising GMV and take rates in e-commerce and fintech businesses. However, consensus is too optimistic about adjusted (adj) EBITDA in FY22F as we expect SE to achieve adj EBITDA breakeven in FY23F only.

Key Risks to Our View:

Sea Ltd may not achieve EBITDA breakeven in FY23F. (i)due to focus on market share in e-commerce and (ii) there could be risk to adj EBITDA if Free Fire declines in FY23F.

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