Tencent pares stake

Stake sale is unrelated to fundamentals; BUY

Sea’s share price fell 11.4% to USD197.84 following Tencent’s decision to pare its stake in the company from 21.3% to 18.7%. Sentiment for pre-earnings stocks tend to be fragile and this move adds to the overhang. Nevertheless, this does not take away long-term growth prospects given Shopee’s position as ASEAN’s top e-commerce player and potential from Garena Free Fire MAX. Maintain BUY and SOTP-TP of USD379.

Tencent will continue to participate in Sea’s growth

According Reuters, Tencent sold the shares at USD208 each to raise USD3b. This represents a 6.9% discount to the previous close of USD223.31. Tencent intends to use the proceeds raised to fund other investments, while retaining a majority of its stake to benefit from Sea’s future growth. Tencent is also restricted from selling further Sea shares for the next 6 months.

Share price could be volatile in the near term…

Tencent’s share sale is likely to create short-term sentiment overhang. In the past 3 months, Sea’s share price has declined by 39%, likely due to i) concerns over normalising growth for Garena Free Fire, as well as ii) rotation away from pre-earnings growth stocks. We believe a near-term risk to the share price is wider-than-expected losses, especially as Sea deploys the USD6b it raised in 2021 to fund growth.

… however, our longer-term conviction is unchanged

That said, our optimism towards the stock’s longer-term performance remains unchanged. Balance sheet is robust with c.USD12b of cash in FY21- 23E (FY21E EBITDA loss: USD1.3b). Shopee continues be the top ranked shopping app by MAU and total time spent in ASEAN (incl. Indonesia) and Taiwan, and e-commerce penetration in ASEAN remains low as compared to mature countries like China and the US. Meanwhile, while Free Fire’s growth is normalising post-Covid, we expect Free Fire MAX to continue delivering growth, largely from new markets. These are likely to be from more affluent countries (which may drive up ARPPU) as Free Fire is already a top grossing mobile battle royale game in emerging markets like ASEAN, LatAm and India. Slower-than-expected e-commerce GMV, digital entertainment bookings, and revenue growth is the key risk to our view.