Gaming & Core E-commerce EBITDA to dictate the share price
- Gaming outlook impacted by macro factors & India- ban rather than market share loss; quarterly gaming EBITDA is critical for the share price
- Narrowing of e-commerce EBITDA losses in its core markets in the upcoming quarter is critical; uses the same playbook in Brazil and other markets
- Raise FY22F/23F group revenue by 4/8% while raising group EBITDA losses from expansion into new markets. BUY with revised TP of US$256. Attractive at 4.6x FY22F revenue vs. 7.4x hist. avg.
Investment Thesis:
Offers explosive e-commerce growth. Sea Ltd. (SE) offers a 65% e-commerce revenue CAGR over FY21-23F (prev 54%), more than double the 24% average CAGR of its global peers. This stems from a 42% CAGR in gross merchandise value (GMV) coupled with a rising take rate.
E-commerce in core markets to join gaming business in funding new opportunities from 2023 onwards. With gaming business normalising to pre-COVID levels in 2022, we expect stable gaming cash flows over 2022-24. Southeast Asian e-commerce business to join the gaming business in funding e-commerce in Brazil, followed by others.
Fintech & food delivery to transform Shopee into an everyday app. To monetise Shopee’s user base via lending and insurance services and transform Shopee into an everyday app in tandem with its food delivery service.
Potential catalysts: Quarterly gaming & core e-commerce EBITDA, pulling out of certain new markets such as India.
Valuation:
BUY with a revised TP of US$256. SE is trading at an EV to 12-month forward revenue of 4.6x, vs. its historical average of 7.4x. Our TP is the sum of (i) US$42 (prev US$71) for gaming, based on 15x FY22F earnings (prev 20x), (ii) US$210 per share for e-commerce & fintech (prev US$185) based on 7.4x FY23F revenue; and (iii) net cash of US$5 per share. Even if e-commerce & fintech are valued at S$135 per share using 7.4x FY22F rev, gaming business comes free.
Where we differ:
Our FY22F/23F adj group EBITDA is significantly below the consensus. We project adj group EBITDA losses to widen in FY22F due to lower gaming EBITDA. Overall e-commerce EBITDA might remain high in FY23F due to expansion into newer markets.
Key Risks to Our View:
Our bear-case TP is US$130 per share. Under this scenario, we assume long-term group EBITDA margins of ~12% (22% under the base case) due to irrational competition.