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Increased regional competition and spending by Sea has PhillipCapital and Maybank lowering TP to US$61 and U$62

Sea is gaining market share against competitors, but has come at a cost of profitability.

Following Sea Limited’s third quarter results ended Sept 30, analysts from PhilipCapital and Maybank Securities have lowered their target price, but maintained their “buy” calls on the internet company.

PhillipCapital’s Jonathan Woo has a target price of US$61 ($81.86) from US$87, while Maybank’s Kelvin Tan has a target price of US$62 from US$80 previously.

Woo says that Sea’s near-term outlook is clouded by increased spending and competition. Although Sea’s 3QFY2023 revenue was in line with expectations, its US$14 million net loss was a “disappointment”, due to a 50% y-o-y surge in e-commerce sales and marketing spend.


The analyst notes that this reverses its three quarters of profitability.

As Sea’s Shopee is gaining market share against its competitors as gross merchandise value (GMV) and gross orders return to strength, driven in part by Shopee Live, it has come at the cost of profitability.

Sea has said that its increased spending into 4QFY2023 will continue as it is seasonally the best time to acquire new users and gain market share, says Woo.

“We further expect spending to persist into FY2024 as Sea attempts to penetrate deeper into its Latin American (LATAM) markets,” he adds.

Sea’s increased spending this quarter has somewhat paid off, as the analyst notes that Shopee has seen a sequential increase in its GMV/gross orders, with both growing 11%/24% q-o-q, while active buyers also increased 11% q-o-q. Meanwhile, core marketplace revenue was up 32% y-o-y to US$1.3 billion.

However, Sea’s gaming arm, Garena, user trends are negatively impacted by back-to-school seasonality.

Despite the release of its new game Undawn in June which Woo had anticipated to result in user growth, bookings and quarterly active users (QAU) were flat q-o-q.

“On a y-o-y basis, QAU decline (-4%) seems to be moderating, although bookings are still down 33% y-o-y, implying still present near-term headwinds for gaming as its largest and most profitable game, Free Fire, continues to decline in popularity,” says Woo.

Although Sea’s near-term outlook is clouded by increasing spend and competition, Woo still believes the company is well-positioned to capture e-commerce growth in many under-penetrated emerging markets due to its scale and logistics infrastructure.

"We expect FY2024 to be profitable given comments from Sea regarding its commitment to not overspend on Shopee, plus profitability contribution from Garena and SeaMoney,” he says.

The analyst has cut his FY2023/FY2024 ebitda by 19%/16% to reflect a ramp-up of investments, and has a reduced discounted cash flow target price of US$61.

Likewise, Tan from Maybank notes Sea’s increased investments in Shopee to accelerate GMV growth. He says that the company’s 9MFY2023 patmi of US$274.2 million was “way below our consensus FY2023 forecasts”.

The analyst expects near-term share price consolidation given the uncertainty about the effectiveness of its investments to re-accelerate Shopee and ability to counter intense competition.

As Temu, the overseas arm of China's e-tailer Pinduoduo, has made a foray into Southeast Asia, alongside persistent competition from TikTok Shop, Tan thinks that pressure to invest could intensify and cloud Sea's net profit path.

However, Tan notes that he continues to see significant longer-term potential for the business given its market-leading position, ecosystem of services across eCommerce and financial services coupled with favorable regional dynamics given expectations for both e-commerce and gross domestic product growth in the region.

As such, he cuts his growth outlook for Shopee, and reduces his FY2023-FY2025 net profit forecasts by 31%-42%. “Our TP is cut to US$62 based on a lower e-commerce multiple,” the analyst says.

As at 1.16pm, shares in Sea Limited are trading 33 US cents down, or 0.87% lower at US$37.57.

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