Market disappointed by excessive focus on market share; negatives are in the price
- Sea Ltd’s (SE) group adj EBITDA in 3Q23 of US$35m (-93% q-o-q) was much lower than consensus expectations of US$147m due to higher than expected e-commerce losses.
- SE intends to invest in live-commerce to gain market share; Shopee continues to acquire banned TikTok Shop’s sellers & customers and we see more downside to 4Q23F consensus adj EBITDA of US$165m.
- We continue to expect a reduction in competitive intensity in 1H24F warranting an e-commerce turnaround in FY24F. Negatives are in the price as SE is trading at ~8x consensus FY24F adj group EBITDA vs 15-20x EV/EBITDA for peers. Maintain BUY with an unchanged TP of US$70
3Q23 group adj EBITDA was US$35m (-93% q-o-q), significantly below consensus expectation of US$147m although better than our expectations of a loss. In 3Q23, Sea Ltd (SE) recorded group adj EBITDA of US$35m (-93% q-o-q), below consensus projection of US$147m, on higher-than-expected losses in e-commerce. E-commerce adj EBITDA loss came at (US$347m) compared to consensus expectation of (US$192m). The widening of E-commerce adj EBITDA losses was primarily due to increasing investments in live-streaming and shipping subsidies to gain Gross Merchandise Value (GMV) market share, as TikTok Shop ban in Indonesia implies room to gain more market share. For Shopee, live-streaming has already reached more than 10% of their order value for October. Shopee’s e-commerce GMV saw a 11% q-o-q increase to US$20.1bn, compared to a 5.7% q-o-q increase at Tokopedia. Similarly, E-commerce segment’s revenue rose by 5.7% q-o-q to US$2.2bn in 3Q23, compared to Tokopedia revenue rising by a mere 1.1% q-o-q. E-commerce adj EBITDA losses in Asia markets stood at (US$306m), with losses expanding by US$510m q-o-q from 2Q23. While other markets adj EBITDA losses narrowed by US$13m q-o-q to (US$40m). Brazil’s unit economics improve in 3Q23, recording contribution margin loss per order of (US$0.10) vs (US$0.24) in 2Q23.
Group adj EBITDA declined by 93% q-o-q to US$35m, as e-commerce adj EBITDA dropped sharply from US$150m in 2Q23 to (US$346m)
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Source: Company, DBS Bank
E-commerce adj EBITDA loss of (US$346m), due to Shopee’s investments in live-commerce and shipping subsidies program in the Asian market.
Source: Company, DBS Bank
Gaming segment’s Bookings witnessed a 1.1% q-o-q improvement to US$448m. Gaming segment saw its QPU declining 6.0% q-o-q to 40.5m mostly due to seasonality. Gaming reported revenue of US$592m (+12% q-o-q) and Bookings, which is a more relevant metric, increased to US$448m (+1.1% q-o-q). Quarterly Active Users (QAU) in 3Q23 declined by 0.4m to 544.1m, while the QPU as a % of QAU declined to 7.4% in 3Q23 (7.9% in 2Q23). Free Fire’s system was recently revamped to enhance the user’s social experience, resulting in better user retention. Free Fire was the most downloaded mobile game in the 3Q23 globally, according to Sensor Tower. New content on Arena of Valor received positive user feedback, where the QAUs reached a new peak. Call of Duty Mobile saw its highest quarterly bookings
Quarterly Paying Users (QPU) declined in 3Q23 losing 2.6m users q-o-q to 40.5m
Source: Company, DBS Bank
Fintech segment’s adj EBITDA was US$166m, compared to consensus expectations of US$137m, supported by growth in loan receivables. Fintech segment’s net loan receivables (netting off allowances for credit losses) improved to US$2.1bn (+5.6% q-o-q), as it continues to diversify the source of funding by partnering with multiple third-party lenders. Total credit losses stood at US$288m compared to US$279m in 2Q23. Non-performing loan (NPL) ratio in 3Q23 was 1.6% vs 2.0% recorded in 2Q23.
Negatives are in the price as SE is trading at ~8x consensus FY24F adj group EBITDA after 23% drop in the share price post 3Q23 results. After grabbing market share of banned TikTok Shop in 4Q24F, we expect Shopee to be less aggressive in 1H24F except for continued investment in live-streaming. Consensus FY24F group adj EBITDA of $1.76bn factors adj e-commerce EBITDA of just US$184m. If Shopee continues to be overly aggressive in 1H24F due to any potential partnership between TikTok-Tokopedia in Indonesia, there could be 10-12% downside risk to consensus group FY24F adj EBITDA. We like to remind our readers that TikTok Shop was successful not just due to live-streaming in the same app but also due to huge logistics subsidies, which may be difficult to offer for any potential TikTok partner in our view. As GoTo is focusing on overall adj EBITDA breakeven over the next 2-3 quarters, Shopee sees an opportunity to gain market share in e-commerce.
