Macro uncertainties leading to wider Shopee guidance range
• Stabilising trend for gaming users, but more clarity needed regarding self-development pipeline
• Shopee on track to achieve positive adjusted EBITDA after allocation of headquarter (HQ) cost by the end of 2023 in ASEAN + Taiwan
• FV of USD88
A better-than-expected set of 1QFY22 results – Sea Limited (Sea) delivered a good set of 1QFY22 results. Total GAAP revenue grew 64% year-on-year (YoY) to USD2.9b, which was 5% above consensus – we attribute this to stronger-than-expected strength in digital entertainment. Shopee’s EBITDA loss appears lower than expected at USD743m, which we attribute mainly to an improvement in unit economics. Shopee’s gross profit margin improved YoY due to the faster growth of transaction-based fees and advertising income, which commands a higher profit margin compared to that of other value-added services. Adjusted EBITDA loss per order (excluding HQ costs) in ASEAN + Taiwan was 4 cents in 1QFY22, vs a loss of 12 cents in 1QFY21. Digital Entertainment registered a YoY decline in adjusted EBITDA as a proportion of bookings in 1QFY22 due to investments to attract and deepen engagement with users, alongside lower bookings. SeaMoney saw GAAP revenue growth of more than 350% YoY to USD236m, which was attributed to adoption of SeaMoney financial products and services across credit and digital
banking. Total adjusted EBITDA loss came in at USD510m, which we believe was narrower than expected – we attribute this to lower-thanexpected losses in e-commerce. Sea registered a non-GAAP net loss of USD445m which was narrower than consensus.
FV of USD88 – Sea has revised its 2022 e-commerce GAAP revenue guidance to be between USD8.5bUSD9.1b (previously USD8.9b-USD9.1b). While management believes that its previous guidance is still achievable, this new set of guidance reflects its expectations around the upcoming macro
uncertainties (e.g. inflation, rising interest rates, supply chain challenges). Management noted that
Shopee is on track to achieve positive adjusted EBITDA after allocation of HQ cost by the end of
2023 in ASEAN + Taiwan. While management has seen early signs of stabilisation in Free Fire’s monthly
user trends towards the end of 1QFY22, the longer-term impact of reopening remains to be seen. Management notes that Garena’s selfe-development pipeline remains a focus for its development team. Management also believes that SeaMoney remains on track to achieve positive cash flow while at the same time continuing to scale rapidly and efficiently. All considered, the e-commerce outlook does appear to be a tad cloudier in light of macro uncertainties, while the market remains concerned over the lack of clarity into Garena’s pipeline. Furthermore, a backdrop of rising yields is likely to continue to pose
challenges to high growth stocks with minimal/no earnings. Following slight adjustments while still retaining our ESG discount of 5% (to account for governance risk), our FV eases from USD93 to USD88.
ESG updates
As a global game developer and e-commerce company, Sea relies on skilled and creative developers. Multiple acquisitions, which contributed to a substantial increase in its workforce (FY 2020: 33,800; FY 2018: 22,600), could present employee integration challenges. Sea appears to trail leading peers in talent management. The company’s governance practices also appear weak relative to global and home market peers. Sea’s carbon intensity and/or trend appears to be weak relative to peers. HOLD. (Research Team)