DBS Group Research analysts have kept “buy” on Sea with a higher target price of US$78 ($107) from US$66 previously after Indonesia bans e-commerce transactions on social media platforms.
Indonesia’s move takes effect immediately from Sept 27, aiming at protecting offline merchants and marketplaces as predatory pricing on social media platforms is threatening small and medium-sized enterprises.
DBS believes that TikTok Shop would have to prove that its e-commerce is a separate business from its social media, with no data sharing from the backend as well as possibly a clear source of funding for e-commerce losses — which was funded earlier by advertising business on its social media app.
“Even if it can secure the license, operating as a standalone app may still be challenging. Given that most of its purchases are impulse buys, the need to log into a separate app might lead to a high drop-out rate,” the analysts add.
The new regulation has also set a minimum price of US$100 for certain items purchased outside Indonesia on e-commerce platforms. TikTok Shop has a much higher reliance on imported items compared to its competitors.
TikTok Shop’s 12%-15% market share might end up shared amongst existing players — including Shopee, the analysts note. “Overall, we expect Shopee to march towards rising profitability with lower shipping subsidies and higher in-house logistics, partially offset by rising investments in live-streaming video,” they add.
DBS has not changed its FY2024 and FY2025 gross merchandise volume (GMV) projections for Shopee due to a potentially lower cross-border business in Indonesia. It is estimated that 8%-10% of Shopee’s Indonesia business is cross-border in nature, which may reduce by 80%-90% due to the new regulation., which restricts certain items.
Meanwhile, Maybank Securities analyst Kelvin Tan is keeping buy on Sea with a target price of US$80 as it is one of the biggest beneficiaries of the ban.
In his Sept 27 report, Tan says TikTok's possible split of e-commerce and social-media operations in Indonesia could impede further conversion of its 125 million local monthly active users into shoppers. This would benefit Sea's Shopee, which, similar to TikTok Shop, relies on beauty and personal care for most of its domestic sales.
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The analyst believes that any disruptions that TikTok sellers experience during the transition would likely be beneficial to Shopee as well as other traditional e-commerce platforms in the coming months.
UOB Kay Hian analysts note that Indonesia is the largest contributor to the Asean GMV, accounting for 52% with Shopee taking the lead at 36% of the total GMV in Indonesia. The new regulation will give Sea a competitive edge and aligns well with its focus on strengthening its e-commerce segment due to existing market rivalry, they add.
The new development is also expected to result in Shopee's sales and marketing expenses in the upcoming quarters to be lower than market forecasts. As such, the UOB analysts believe there is room for share price to re-rate further. UOB is keeping "buy" on Sea with a target price of US$94.34.
Maybank expects near-term share price volatility for Sea as competition continues to pressure GMV growth and take rate. That said, Tan is encouraged by rising seller fees across platforms in the region, which may encourage increased monetisation by newer entrants and more rational competition after a period of aggressive investment.
“Moreover, we believe Sea’s revenue may accelerate going forward as its gaming business has bottomed and GMV and commission rates of its overseas e-commerce platforms have improved,” says Tan.
Shares in Sea closed US$1.95 higher or 4.86% up on Sept 27 at US$42.09.
