Cut TP to USD105; oversold on negative news
After media reports of jobs cuts following its exit from France, Spain and India, Sea’s share price has continued to fall, bringing its decline to 78% below its peak in October 2022. Our new SOTP-based target price of USD105 (from USD140) still indicates 36% upside even after deep cuts to Shopee’s EV/S from 3.0x to 1.5x on supply chain risks and after rolling forward Garena’s EV/EBIT from 15.0x (FY22E) to 13.7x (FY23E). Sea is testing our bedrock valuation of USD73.30/share and could become a deep-value buy and a strong play on normalisation of supply chains once interest rates peak. Transferring coverage to Samuel Tan.
China supply chain issues look to be easing
With a more flexible ‘Dynamic Zero-COVID-19’ policy in place and progress in development of China’s AWcorna mRNA vaccine, a conclusion to supply chain issues could be on the horizon. Data indicates that supply chain issues are mostly centred around container and trucking capacity in Chinese ports and manufacturing is picking up (China PMI – Jun-22: 50.2, May-22: 49.6). Freight rates, based on WCI Composite, look to have peaked, falling from a high of USD9,567/FEU (3Q21) to USD7,051/FEU (3Q22), but still higher than the sub-USD2,000/FEU levels pre-COVID.
Well-placed to reduce China dependence if needed
Sea said direct cross-border sales from China make up high single-digit to low-teens of its GMV, but we note that China-sourced items, which make up merchant partner inventories, are likely to account for more. However, Sea’s retention of Poland, despite its retreat from the EU, and expansion into Mexico – both emerging manufacturing hubs – positions it well to adapt to the ‘regionalization’ trend. Sea appears to be consolidating LATAM logistics networks with investments in 5 distribution centres in Brazil. Shopee’s ASEAN dominance, also a potential substitute for China manufacturing, should also help it pivot with shifts in supply chains.
Consumer sentiment strong despite inflation
Consumer indices across 6 of the 10 markets under our study where Shopee is present are showing upticks in consumer confidence. The potential unbuckling of China’s supply chain, one source of inflation, is likely to lead to a trampoline effect. Key risks include further geopolitical events affecting supply chains and FX effects from dollar appreciation.