CGS International (CGSI) analysts Ong Khang Chuen and Kenneth Tan have kept their “add” call on Sea Limited following the group’s healthy performance in 2QFY2024 across segments.
In their July 23 note, the analysts note Sea’s solid performance in 2QFY2024 amid seasonal weakness.
Following the group’s strong 1QFY2024 performance due to the earlier timing of Ramadan, Sea’s adjacent earnings before interest, tax, depreciation and amortisation (ebitda) stand at US$423 million ($568.95 million), as per the analysts’ estimates.
This reflects a 5% increase q-o-q, driven by Shopee’s narrowing losses and the group’s digital financial services business, SeaMoney’s, continued growth.
The CGSI analysts also see Garena as a “bright spot”.
Despite expectations of seasonal weakness, Sea’s digital entertainment segment has experienced a healthy bookings momentum in 2QFY2024.
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Shopee’s gross merchandise value (GMV) is expected to come in at US$22.8 billion for the 2QFY2024, 3% lower q-o-q but 26% higher y-o-y.
The e-commerce platform is forecasted to narrow its losses in 2QFY2024, reaching near ebitda breakeven. This follows Shopee’s continued take rate increases and sales alongside controlled marketing spend.
The analysts note that this will be further offset by higher investments into logistics and user experience as Shopee begins to “further strengthen its moat” in the e-commerce space.
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Additionally, the analysts see room for Sea to raise Shopee’s FY2024 GMV growth guidance of “high teens y-o-y”. Its current guidance implies a 3% h-o-h GMV growth rate in comparison to Shopee’s 1HFY2024 GMV which sits at US$46.6 billion, 7% higher h-o-h and 31% higher y-o-y.
They add: “While there are pockets of increased spending by competitors in Indonesia (after they implemented commission rate hikes in May 2024), we think the broader Asean e-commerce competitive landscape remains healthy.”
Shopee has launched further commission rate increases, of up to 200 basis points (bp), in Thailand and the Philippines as of July, following a previous adjustment in April.
This move has been mirrored by its peers, with Lazada following suit and TikTok Shop raising its transaction fee in Vietnam by 100bp as of July.
“In Brazil, we observed significant web visit increases by Shopee in 2QFY2024 (+27% q-o-q, +65% y-o-y), suggesting market share gains as Shopee leverages on its strong in-house delivery capabilities there,” write the analysts.
Overall, the analysts kept their target price for Sea unchanged at US$88 due to Shopee’s improved outlook amid stabilisation of the Asean e-commerce competitive landscape and strong growth potential for its fintech segment given the huge underbanked population in Southeast Asia.
Potential re-rating catalysts identified by the CGSI analysts include earlier ebitda breakeven by Shopee and launch of a share buyback programme upon achieving a more sustainable level of group profitability.
That said, lacklustre GMV growth as Shopee rationalises its marketing spend, and increasing e-commerce competition are downside risks.
As at July 23, shares in Sea Limited are trading at 48 US cents lower or down 0.72% at US$66.50.
