Trading below -1SD, in line with industry peers
- Total GAAP revenue of US$2.9bn (-10% q-o-q, +64% y-o-y) was 3-4% below our estimate
- Total adj. EBITDA loss was US$510m, 36.2% of our FY22F projections due to higher-than expected losses in e-commerce & fintech business
- Trimmed FY22F/23F GAAP revenue by 4% each and raised FY22F/23F adj EBITDA losses by 43%/45%
- Maintain BUY, TP revised to US$115 based on -1SD valuation of 3.1x 12-month revenue for e-commerce & fintech (vs 7x earlier)
Investment Thesis:
The stock is trading below -1 standard deviation (-1SD) valuation of 3.1x. SE is currently trading at EV to 12m forward revenue of 2.9x, below its -1SD of 3.1x (historic average of 7.2x), like many new economy peers. Lack of a clear path to profitability in FY22F/23F and the general market sentiment towards new economy counters could explain the weakness. SE offers 36% revenue CAGR over FY21-23F led by 60% e-commerce revenue CAGR.
E-commerce in core markets to join gaming business in funding new opportunities. With gaming business normalising to pre-COVID levels in 2022, we expect stable gaming cash flows over 2022-24. Southeast Asia & Taiwan e-commerce business to join the gaming business in funding e-commerce losses in Brazil & Mexico from 2023 onwards.
|Fintech & food delivery to transform Shopee into an everyday app. Fintech service would 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 EBITDA showing sequential growth & core e-commerce EBITDA turning positive in 2Q22F/3Q22F
Valuation:
Maintain BUY with a lower target price (TP) of US$115. SE is trading at an EV to 12-month forward revenue of 2.9x, vs its historical average of 7.2x. Our TP is the sum of (i) US$42 (for gaming, based on 15x FY22F earnings (unchanged), (ii) US$69 per share for e-commerce & fintech (prev US$210) based on -1SD of 3.1x 12-month revenue (previous 7.4x 24-months revenue); and (iii) net cash of US$4 per share.
Where we differ:
Our FY22F adjusted group EBITDA is in line with consensus. We have raised our total adjusted EBITDA losses in FY22F/23F by 43%/45% due to expected rise in HQ costs under the e-commerce segment. From FY23F onwards, EBITDA losses should narrow once Southeast Asia and Taiwan achieve breakeven.
Key Risks to Our View:
Our bear-case TP is US$66 per share. Under this scenario, we assume long-term group EBITDA margins of ~12% (22% under the base case) due to irrational competition.