Not out of the woods yet
- 2Q revenue missed expectations; SE surprised the market by suspending its FY22F revenue guidance for Shopee.
- SE cited the need to remain nimble in navigating macro challenges, and plans to prioritise profitability and cashflow management.
- Downgrade to Hold as we think the suspended guidance signals a weaker GMV outlook for Shopee over the near term.
2Q22: Revenues missed on tough comps and FX headwinds
SEA Ltd (SE) reported 2Q22 adjusted revenue of US$2.8bn (+7% qoq, +13% yoy) and adj. LBITDA of US$506m (1Q22: adj. LBITDA of US$510m). The results were below our expectations but in line with Bloomberg consensus, with 1H22 non-GAAP net loss of US$1.0bn coming in at 58%/44% of our/consensus loss forecasts.
E-commerce (Shopee) – Prioritising push towards profitability
Post-Covid-19 reopening and FX headwinds dampened Shopee’s 2Q revenue growth to +51% yoy, as GMV growth slowed to +27% yoy. Nevertheless, strong focus on monetisation drove take-rate expansion of 1.6% pts yoy. This helped Shopee’s unit economics in Southeast Asia and Taiwan markets further improve – EBITDA loss per order narrowed to 1 ct, and it is on track to achieve EBITDA breakeven (excl. HQ costs) this year. Brazil’s loss per order also narrowed 35% yoy to US$1.4 (while sustaining revenue growth of c.270% yoy). However, in a surprise move, SE suspended its FY22F revenue guidance for Shopee citing the need to remain nimble in navigating macro challenges , and highlighted a shift in strategic direction to prioritise profitability and cashflow management. SE plans to focus on driving monetisation and optimising cost structure, especially in terms of marketing and logistics expenses.
Gaming (Garena) – Signs of stabilisation
2Q22 bookings came in at US$0.7bn (-13% qoq, -39% yoy), due to post-Covid-19 normalisation and the full-quarter impact of the Free Fire India ban. Adj. EBITDA margin contracted due to operating deleverage and higher spend to improve user engagement. While quarterly active users (QAU) stabilised qoq, paying ratio declined to 9.1%, as economic reopening continued to impact game consumption.
Downgrade to Hold; TP lowered to US$92
While we remain hopeful for reacceleration of sequential revenue growth in 2H with an easing comparison base, we think the suspended FY22F guidance for Shopee signals that near-term GMV growth could remain weak due to 1) longer-than-expected stabilisation trends post reopening, 2) higher inflation affecting consumer sentiment, and 3) FX headwinds from stronger USD, which could force SE to ease off pace of monetisation push. Downgrade from Add to Hold with a lower TP of US$92, as we cut our target multiple for Shopee to 2.9x FY23F P/S (based on 1.5 s.d. below peers’ historical average). Upside risks: strong margin improvements for Shopee and SeaMoney; downside risks: weaker-than-expected consumer spend in the region amidst macro uncertainties.