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TikTok Shop Indonesia's combination with Tokopedia a net negative for Sea's Shopee

Khairani Afifi Noordin
·3-min read

Shopee is expected to fight vigorously for market share in Indonesia following the move by TikTok and GoTo.

Analysts are cautious on the outlook for Sea’s e-commerce arm Shopee following rival GoTo and TikTok’s move to combine Tokopedia and TikTok Shop Indonesia’s business.

Citi Research analysts Alicia Yap, Ferry Wong and Nelson Cheung view the move as a net negative for Shopee. They note that the timing of the announcement came sooner than they had expected, especially given the social commerce ban as well as the closure of TikTok Shop in Indonesia which was only about two months ago.

“In addition, the deal structure and the consequences of the TikTok Shop's ability to resume its operations also came as a surprise to us. While this is likely a big win for TikTok, it is a big negative for Shopee and to a lesser extent for Lazada.

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“Given TikTok's commitment to spend the initial US$1.5 billion ($1.99 billion) and potentially more in the future to strengthen its Indonesia operations, we expect Shopee will need to further step up spending to defend market share which will unfortunately be negative to Sea's margins outlook and likely push out any potential profitability timing for Shopee,” the analysts add.

Citi expects Sea’s share price to remain under pressure, with possible downside revisions to financial outlook in the coming quarters if TikTok and Tokopedia prove to further pressure Shopee’s gross merchandise volume growth and market share. The analysts are keeping “neutral” on Sea, with a lower target price of US$44 from US$49 previously.

DBS Group Research analyst Sachin Mittal concurs, expecting Shopee to fight vigorously for market share in Indonesia following the move. As such, he has downgraded Sea to “hold” and slashed his target price to US$42 from US$62 previously.

Mittal notes that the controlling stake in Tokopedia will remain with TikTok Shop Indonesia, taking away the negative impact to GoTo’s profitability as it will receive a steady stream of revenue from TikTok. Most of GoTo’s revenue share from the enlarged Tokopedia entity will flow directly to GoTo’s bottom-line. This allows GoTo to use its stronger financial position to grow its fintech business.

To this end, DBS has lowered its estimates for Sea’s FY2024/FY2025 group adjusted ebitda by 8% and 22% to US$1.2 billion and US$1.6 billion respectively. This assumes higher e-commerce adjusted ebitda losses. Mittal has also delayed the estimate for e-commerce adjusted ebitda turnaround from FY2025 to FY2026.

“Shopee could benefit if TikTok is unable to integrate Tokopedia, although that is not our base case. If TikTok Shop cannot make this merger successful, possibly due to integration challenges from cultural misalignment, Shopee could benefit. Also, the loyal customers of Tokopedia could be disappointed due to a local company being controlled by a foreign entity now,” says Mittal.

Shares in Sea closed US$1.06 lower or 2.75% down on Dec 13 at US$37.50.

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