Targets earlier breakeven than street estimates
- SE’s top management decides to forgo salaries and targets earlier EBITDA breakeven compared to our estimates
- The recent pullback in key Latin American markets could result in an estimated reduction in EBITDA losses of US$300m on an annual basis
- Maintain BUY with an unchanged TP of US$126, as SE’s shift towards profitability seems to be on track
SE management’s positive cash flow target is better than our expectations. According to Bloomberg, SE’s top management announced that they will be forgoing their compensations and tighten expense policies as the Singaporean tech giant attempts to weather the storm stemming from macro-economic uncertainties and slowdown in gaming business. The news also highlights that SE management’s primary focus is to achieve positive cash flow over the next 12-18 months. This seems positive in our view since we project SE to achieve positive cash flow (equivalent to adjusted EBITDA breakeven) in 18 months.
However, SE needs to be more cautious in terms of its cash position as its cash liquidity stands at US$7.9bn at the end of 2Q22, compared to US$10.8bn in the beginning of FY22F. Cash liquidity of US$7.9bn should be able to last for 24-36 months, in our view. SE’s annual EBITDA loss projection in FY22F is US$1.9bn which is expected to narrow to US$0.9bn before turning positive in FY24F.
Shopee could save US$300m annually in adjusted EBITDA losses by exiting key markets in Latin America. Shopee will exit Argentina and shut local operations in three more Latin American countries. SE’s e-commerce arm, Shopee will be exiting Argentina and close local operations in Chile, Colombia and Mexico, as macro-economic uncertainty continues to prevail in the e-commerce industry. However, Shopee will be maintaining cross-border operations in Chile, Colombia, and Mexico.
Shopee’s adjusted EBITDA loss in 2Q22 was US$648m and assuming an headquarter common expenses (HQ costs) of US$357m, Shopee’s pre-HQ adjusted EBITDA loss stood at US$291m. Southeast Asia and Taiwan is about to achieve EBITDA breakeven reporting adjusted EBITDA loss per order of US$0.01. We assume that 2/3rd of the adjusted EBITDA losses come from Brazil, hence from pulling back from the other markets, Shopee could avoid incurring additional adjusted EBITDA losses of US$79m on a quarterly basis (annual savings of US$320m). The annual savings represents 17% of projected FY22F adjusted EBITDA losses of US$1.9bn
| As of 2Q22 | US$m |
| Shopee’s Adjusted EBITDA loss | (648.15) |
| Estimated HQ costs | (357.11) |
| Adjusted EBITDA loss pre-HQ | (291.04) |
| Estimated Brazil EBITDA loss | (194.03) |
| SE Asia and Taiwan EBITDA loss | (17.65) |
| Other markets | (79.36) |
Source: Company, DBS Bank
Maintain BUY with an unchanged TP of US$126. For our valuation, we use a conservative 12x FY27F EV/EBITDA when EBITDA margins would have stabilized around 17%, which is discounted back by 10% annually.