2022 Mega Discount
Share price for Sea corrected close to 30% in 4Q21 following the increasingly hawkish stance by the US Fed and the Chinese government tightening policies in the ecommerce industry. More recently, the stake reduction by Tencent also spurred further doubts on Sea’s potential rebound. We deem the recent price action to be healthy, and firmly believe that the growth momentum for Sea’s main revenue driver, GMV, to continue going forward. Maintain BUY with target price of US$370.76.
WHAT’S NEW
• 2021 ended in doubt for Big Tech shareholders. Sea Limited (Sea) and its ASEAN ecommerce peer, Bukalapak.com (BUKA IJ, BUY/ TP: IDR790.00), have lost 30-49% in 4Q21. Similarly, Grab (GRAB US, Not Rated) lost 45% from its IPO price of US$13.05 since listing on 2 December till 31 December. Profit-taking in high-growth stocks pursued following the increasingly hawkish stance by the US Federal Reserve, reducing monthly bond purchases from US$120b to US$105b (in Dec 21) and by US$30b each subsequent month before zero net new purchases by Mar 22. Additionally, China tightened its policies for the ecommerce industry, clamping down on antitrust and anti-unfair competition in the country’s Big Tech firms. Overall, Sea has gained 12.7% in 2021.
• Tencent’s stake sale unrelated to Sea’s strong fundamentals. On 4 Jan 22, Tencent reduced its stake from 21.3% to 18.7% via the sale of 14.5m shares at US$208.00. Postsale, Tencent will have a six-month lock-up period on any further sale of Sea shares. We view the move by Tencent as an attempt to reduce its control in various businesses, to avoid allegations of potential manipulative activities by the Chinese government. The Sea divestment also follows the recent sale of Tencent’s stake in JD.com (JD US, BUY/ Target: US$95.00), and similar to various other divestments made by other Chinese internet giants, Alibaba (BABA US, BUY/Target: US$170.00) and Meituan (3690 HK, HOLD/Target: HK$256.00). Ytd, share price of Sea returned a negative 17.4%.
• Healthy correction or end of the era for Sea? We deem the recent correction to be healthy. Specific to Sea, GMV remains in solid growth momentum and 3Q21 was no different, marking consecutive record highs since inception of the e-commerce segment in 1Q16. According to the research paper “e-Conomy SEA 2021” by Google, Temasek and Bain, Southeast Asia is entering the Digital Decade and seismic shifts in consumer and merchant behaviour mean its internet economy could reach US$1t GMV by 2030 (2021:
US$170b), implying a 9-year CAGR of 21.8%. This is supported by the deepening use of, and adoption from new users, for digital services, which was hastened by the COVID-19 pandemic. Based on the total addressable market of US$260b GMV, Shopee is the undisputed leader in the region with 21.7% market share, followed by Lazada’s 8%. We firmly believe that the growth momentum for Sea can continue going forward.
STOCK IMPACT
• 3Q21 tracking well, further growth in e-commerce. Sea’s 3Q21 GAAP-revenue of US$2.7b (+121.8% yoy, +18.4% qoq) surpassed our estimate due to strong takings in Shopee. However, group adjusted EBITDA deepened to -US$165.5m (3Q20: US$120.4m, 2Q21: -US$24.1m) from the continued rise in sales & marketing expenses in Shopee. The 3Q21 transcript circled (again) around Shopee’s global expansion into new geographies, in tandem with expectations that sales & marketing expenses will rise.
• E-commerce revenue guidance revised upwards for second time this year. From the earlier revision for segment revenue of US$4.7b-4.9b, Sea raised its 2021 guidance by 6.3% to US$5.0b-5.2b, representing growth of 135.3% yoy at the midpoint of the revision. We attribute this to: a) the strong momentum in the Indonesian market, b) expansion of product categories including the sale of more groceries and fast moving consumer goods, and c) the expansion to Latin America.
EARNINGS REVISION/RISK
• No changes to forecasts.
VALUATION/RECOMMENDATION
• Maintain BUY with target price at US$370.76, which translates to 12.7x 2022F Price/Sales, compared with Amazon.com (3.0x), MercadoLibre (6.1x) and e-commerce peers’ average of 2.9x. We believe valuations look attractive following the recent share price correction. The premium over peers’ valuation is backed by Sea’s stronger sales growth profile at 3-year CAGR of 73.6% over 2020-23, compared with e-commerce peers’ average of 24.3% based on consensus estimates.
SHARE PRICE CATALYST
• Earlier-than-expected reduction in cash burn.
• Continued market share gains in e-commerce.