Gaming comes free
- E-commerce business in Southeast Asia, likely to see narrower losses in 4Q21F and EBITDA breakeven in 2H22F, renewing faith in its growth strategy.
- Our checks indicate good traction for Free Fire Max – contributing ~20% of total Free Fire in-app revenue.
- BUY with a revised TP of US$272 to factor the ban of Free Fire in India. Even if we value e-commerce & fintech at only S$134 per share (vs. base valuation of S$184), gaming comes free.
Investment Thesis:
Offers higher e-commerce growth than its peers. Sea Ltd. (SE) offers a 54% e-commerce revenue CAGR over FY21-23F, higher than any other major e-commerce player and more than double the average CAGR of 24% of its global peers. This stems from a 38% CAGR in gross merchandise value (GMV) coupled with rising take rates.
Southeast Asian e-commerce to join gaming business in funding new growth initiatives. With Free Fire Max receiving a good response, we expect stable cash flows for the gaming business over the next three years. Southeast Asian e-commerce business is likely to join the gaming business in funding growth initiatives in 2023 – e-commerce in Latin America & Europe, food delivery & fintech in Southeast Asia.
Fintech and food delivery to transform Shopee into an everyday app. Its e-wallet will monetise Shopee’s user base via lending, insurance services, and transform Shopee into an everyday app in tandem with its food delivery service.
Potential catalyst: Narrower losses in Southeast Asia e-commerce business in 4Q21F on 1 March.
Valuation:
BUY with a revised TP of US$272. SE is trading at EV to 12-month forward revenue of 5.0x, vs. its 7.4x historical average. Our TP is the sum of (i) US$185 per share for e-commerce & fintech based on 7.4x FY23F revenue; (ii) US$71 (prev US$83) for gaming, based on 20x FY22F earnings; and (iii) net cash position of US$10 per share. Even if e-commerce & fintech are valued at S$134 per share using 7.4x FY22F revenue, gaming business is free at the current price.
Where we differ:
Our FY22F/23F group revenue is 5%/3% below the consensus. The first year of the economy re-opening may lead to slower e-commerce & gaming growth. We project adj EBITDA to breakeven in FY23F, vs. the street’s FY22F breakeven, due to rising loses from the newer markets.
Key Risks to Our View:
Our bear-case TP is US$147 per share. Under this scenario, we assume long-term e-commerce EBITDA margins of ~12% (22% under the base-case) due to an irrational competition.