Do valuations reflect normalisation of growth?

  • US data shows that the first year of economy re-opening may lead to a slower e-commerce & gaming growth; we trim FY22F/23F revenue by 10%/5%
  • Investors’ focus on monetisation makes revenue metrics more critical than GMV; Enterprise value (EV) to FY22F revenue is back to its 7.4x historical average
  • BUY with a revised 12-month TP of US$278 implying 48% upside potential

Investment Thesis:

Offers higher e-commerce growth than any other major player. 
Sea Ltd (SE) offers 54% e-commerce revenue CAGR over FY21-23F, higher than any other major e-commerce player and more than double of 24% average CAGR of global peers. This stems from 38% CAGR in gross merchandise value (GMV) coupled with rising take-rates.

Stable gaming cash flows to support expansion of new businesses. 
Sea Ltd is expanding into new markets, new games, and upgrading key features, which should offset the impact of customers spending less time online with the economy re-opening. Gaming cash flows is funding the expansion of new businesses – e-commerce in Brazil plus food delivery and e-wallet in Southeast Asia.

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: 
FY22F consensus revenue might be trimmed 8-10% over the next 1-2 months; the stock may rise once consensus estimates are more realistic

Valuation:
Maintain BUY with a revised TP of US$278. 
SE’s current EV has re-traced to 7.3x 12-month forward revenue from its highs of 15-16x in 2021. Our 12-month TP is based on (i) US$185 per share for the e-commerce & fintech business (prev US$292) based on 7.4x FY23F revenue as investors focus on revenue instead of GMV (ii) US$83 for the gaming business based on 20x 12-forward earnings (prev US$100) and (iii) net cash position of US$10 per share

Where we differ:
Our FY22F/23F group revenue is 10%/5% below consensus. 
US data shows that the first year of economy re-opening may lead to slower e-commerce & gaming growthWe project adj EBITDA breakeven in FY23F due to rising loses in Brazil versus consensus expecting the breakeven in FY22F.

Key Risks to Our View:
Sea Ltd may not achieve EBITDA breakeven in FY23F 
due to its focus on market share in e-commerce. There could be risk to adj EBITDA if gaming revenue declines in FY23F.