Citi maintains 'neutral' on 'high risk' Sea Limited with TP of US$49

Citi analysts have assigned a “high risk” rating to Sea given the “lack of visibility” to the effectiveness of recent investments.

Citi Research analysts have maintained their “neutral” call and “high risk” rating on NYSE-listed Sea, with a target price of US$49.00 ($66.67).

According to analysts Alicia Yap, Vicky Wei and Nelson Cheung, Sea’s 3QFY2023 revenue of US$3.3 billion, a 4.9% y-o-y improvement, beat their estimates of US$3.21 billion.

This was driven by outperformance in Sea’s digital entertainment segment which recorded revenue of US$592.2 million for the quarter, 16.7% higher than Citi’s estimates, while its e-commerce revenue came to US$2.2 billion, largely in line with their expectations.

“We view the 3QFY2023 results as better-than-feared since e-commerce revs, gross merchandise value (GMV), order volume and adjusted ebitda loss came relatively in-line with our preview expectation,” say the analysts.

“While value-added service revenues came in lower than our forecast as sales and marketing spend came higher, which suggests higher-than-expected subsidies, it was offset by better marketplace revenues, suggesting improved monetisation rates from ads and commission, which we view as positive development,” they add.

The analysts note that although digital entertainment revenue fared better than their forecast, bookings, paying users and adjusted ebitda for the segment came in softer. They point out that this does not bode well for future revenues trends, suggesting a continued moderation of gaming activity.

However, Sea’s digital financial services segment performed well during the quarter ended September, beating the Citi analysts’ expectations in revenue and adjusted ebitda.

“We will seek colour from management regarding the latest competitive landscape and business strategies for e-commerce and whether the heavy spending in sales and marketing will continue in 4QFY2023 and into 2024,” they say.

“We also hope to hear of any turnaround solution for the gaming business,” add the analysts.

Their target price of US$49.00 is derived from a combination of US$7.40 per share for Sea’s digital entertainment (Garena) business, US$31.20 per share for its e-commerce Shopee business and US$10.50 per share for its digital financial services or payments business.

“Since Sea operates three distinct business segments — online games, e-commerce, and payment services — we believe using a sum-of-the-parts (SOTP) approach is an appropriate valuation methodology,” they reason. “We believe a multiple in line with global peers is reasonable given expanding user cases of SeaMoney as well as deepening integration with the Shopee platform.”

Nevertheless, the analysts have assigned a “high risk” rating to Sea given the “lack of visibility” to the effectiveness of recent investments.

Their key downside risks include Shopee continuing to lose market share in e-commerce, Shopee’s losses being larger and more extended than anticipated, a weaker-than-expected performance of Free Fire and the challenges posed by operating in seven regulatory jurisdictions.

Shares in Sea closed 55 US cents or 1.21% up at US$46.03 on Nov 13 on the NYSE.

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