Still a proxy to ASEAN digitisation
Free Fire slowdown hits guidance
Sea’s 4Q21 revenue of USD3.2b (+106% YoY) was ahead of our and the street’s estimate. However, guidance for Garena bookings disappointed. We cut our FY22-23E revenue by 8-9% but slash our SOTP TP by 56% to USD160 to factor in i) earnings slow-down and lower multiples for Garena, as well as ii) switch to FY23E P/S instead of FY22E P/GMV for e-commerce. While the stock price might face overhang in the near term, we continue to view Sea as a champion of economic digitisation in Southeast Asia and
hence maintain our BUY rating.
Economies reopening slows Free Fire
Guidance for Garena’s FY22 bookings was USD2.9-3.1b (FY21: USD4.7b, FY20: USD3.2b). This takes into account headwinds from i) further reopening of economies globally, and ii) the recent India ban of Free Fire (FF). Garena is developing new games across multiple genres. However, as these games are nascent, meaningful revenue contributions might either come later in the year or when Garena has sufficiently built user scale and penetration that paves the way for monetisation.
Guidance for Shopee in line with our est.
GAAP revenue guidance for Shopee (FY22: USD8.9-9.1b, +155.4% YoY at midpoint) is broadly in line with our prev. est. of USD9.2b. Key points to note are i) Southeast Asia and Taiwan are expected to hit positive adj. EBITDA in 2022; ii) LatAm could double Shopee TAM – and current focus is on Brazil; and iii) take rates direction of high-single digit to low-teens over a longer horizon is on track. The priority on Brazil and exit from France shows Shopee’s capital discipline to maximize sustainable long-term returns, in our view.
Swing factors
If Garena turns out more resilient than we anticipate, this could provide upside risk to our TP as we value the segment on FY22 P/E. This in turn could be driven by restoration of FF availability in India, or simply stronger than expected resilience in FF engagement. While we believe we are conservative on opex assumptions, we believe there is still residual risk that we may underestimate investments needed for Shopee and SeaMoney.