Big focus on profitability even at the cost of revenue growth
- Group adjusted EBITDA loss of US$506m flat q-o-q was in line although GAAP revenue missed our estimates mainly due to softer e-commerce Gross Merchandise Volume (GMV)
- Reversed two consecutive quarters of declining Quarterly Active Users (QAU) at Digital Entertainment (DE), hinting stablisation of DE revenue in the 2H22F
- Investors have overreacted to suspension of e-commerce revenue guidance, but EBITDA trajectory rather than revenue should drive the stock price in our view. Maintain BUY with an unchanged TP of US$126, based on FY27F normalized EBITDA margins of 17%.
2Q22 overall adjusted EBITDA loss of US$506m met our expectations. Sea Ltd reported adjusted EBITDA loss of US$506m, in 2Q22, which was flat q-o-q, accounting for 25% of our FY22F estimates. Sequentially lower EBITDA at Digital Entertainment was offset by reduction in adj EBITDA losses at e-commerce. Digital entertainment adjusted EBITDA dropped by 23% q-o-q to US$334m due to the q-o-q decline in revenue. E-commerce adj EBITDA loss reduced to US$648m (-13% q-o-q) largely supported by rising take rates and improving unit economics in Southeast Asia and Taiwan. Take rates in the e-commerce segment improved to 9.2% in 2Q22 from 8.7% in the preceding quarter. E-commerce adj EBITDA loss per order before the allocation of headquarters’ common expenses in Southeast Asia & Taiwan reduced significantly to US$0.01 from US$0.04 in 1Q22. Similarly, Brazil experienced an improvement in the EBITDA loss per order, recording at US$1.42 in 2Q22, compared to US$1.52 in the preceding quarter.
Overall GAAP revenue rose 1.5% q-o-q to US$2,943m, was below our expectations. 2Q22 GAAP revenue of US$2,943m (+1.5% q-o-q) represented 23% of our FY22F expectations, largely due to the below par performance in the e-commerce segment. GAAP revenue of e-commerce stood at US$1,749m (+15% q-o-q) accounting for 21% of our FY22F projections primarily due to lower-than-expected GMV. However, 2Q22 take rate met our expectations. Given the present inflationary environment which is impacting the GMV and more focus towards profitability prompts Sea Ltd to suspend the e-commerce GAAP revenue guidance for FY22F.
2Q22 witnessed sequential improvement in Quarterly Active Users (QAUs) reversing two consecutive quarters of decline. Garena experienced an addition of 3.4m users to its QAUs taking the total count to 619.3m reversing two consecutive quarters of decline, however, the segment saw an 8.6% q-o-q drop in quarterly paying users (QPUs) to 56.1m as users spend less time post easing of COVID restrictions. Garena’s QPU represented 9.1% of QAUs in 2Q22, falling from 10.0% in the preceding quarter.
Key take-aways from Sea Ltd’s quarterly segmental results review
Digital Entertainment:
- Digital entertainment GAAP revenue was US$900m (-21% q-o-q), where the decrease was mainly due to full quarterly impact of Free Fire India ban in Feb 2022 and the softening of bookings post COVID. As of 2Q22, Free Fire continued to maintain top global rankings in user and grossing metrics. It was the most downloaded mobile game globally in the 2Q22 and ranked third highest by average monthly active users on Google Play. Free Fire also continued to be the highest grossing mobile game in Southeast Asia and Latin America according to data.ai. Free Fire has maintained this leading position for the past 12 consecutive quarters.
- Reported adjusted EBITDA of US$334m (-23% q-o-q) and the margin dipped by 700 basis points q-o-q to 52% in 2Q22.
- DE segment saw a drop in the quarterly paying users (QPU) as users spend less time post easing of COVID restrictions. Garena’s QPU during 2Q22 stood at 56.1m (-9% q-o-q), representing 9.1% of quarterly active users (QAU), falling from 10.0% in the preceding quarter. While Garena’s QAU remained at 619.3m, displaying a slight recovery following two quarters of sequential decline.
- Average revenue per user declined further to US$1.2 in 2Q22 from US$1.3 in the preceding quarter.
Quarterly paying users as a % of quarterly active users dipped from 10.0% in 1Q22 to 9.1% in 2Q22
Source: Company, DBS Bank
E-Commerce:
- Shopee reported GAAP revenue of US$1,749m (+15% q-o-q) on improved gross merchandise value (GMV) coupled with higher take rate. Revenue from product sales of US$285m (+8.8% q-o-q) accounted for ~16% of GAAP e-commerce revenue. GMV improved by 9% q-o-q to US$19,080m. Resultantly, Shopee’s take rate in 2Q22 was recorded at 9.2% (compared to 8.7% in 1Q22). Gross orders in 2Q22 were recorded at 1,983m (+ 6.0% q-o-q) resulting in merchandise value per order increasing 3.0% q-o-q to US$9.6.
GAAP take rate in 2Q22 increased to 9.2% from 8.7% in the preceding quarter.
Source: Company, DBS Bank
- Shopee’s adj EBITDA loss per order before HQ allocation costs in 2Q22 improved to US$0.33 from US$0.40 in the previous quarter. As a result, Shopee reported adjusted EBITDA loss of US$648m (-13% q-o-q).
Digital Financial Services:
- The mobile wallet’s Total Payment Volume (TPV) increased by 10% q-o-q to US$5,564m while digital financial services GAAP revenue improved 18% q-o-q to US$279m implying that GAAP revenue as a % of TPV improved to 5.0% in 2Q22 from 4.7% in 1Q22. The quarterly paying users of SeaMoney grew 8% q-o-q to 53m. The company continued to roll out more SeaMoney offerings across more markets and have expanded synergies between Shopee and SeaMoney. Close to 40% of the quarterly active buyers on Shopee in Southeast Asia have used SeaMoney products or services in the 2Q22.