Maybank Securities analyst Hussaini Saifee has maintained his “buy” call on Sea while upgrading his target price to US$110 ($143.41) from US$96.
In his Oct 9 report, Saifee notes that e-commerce competition has been benign, resulting in monetisation initiatives including seller take-rate increases of 1% to 3% alongside advertising growth, driving margin improvements. As such, Saifee has raised his earnings estimates by 2% to 9%.
Saifee has also raised his e-commerce adjusted earnings before interest, taxes, depreciation and amortisation (ebitda) to gross merchandise value (GMV) margins to 2.7% by 2030, up from 1.9% previously.
Saifee notes that Shopee is well placed to exceed its long-term e-commerce adjusted ebitda to GMV margins target of 2% to 3%.
Saifee estimates advertising take-rate to potentially increase to 3% of Shopee’s GMV by 2028, contributing 29% of this expected growth in ebitda margins. This is in addition to organic growth and ongoing monetisation initiatives, Saifee says.
Advertising contributes only 1% to 2% of Shopee’s GMV, compared to around 4% for the global peer average, Saifee notes.
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However, according to research company eMarketer, retail media is the fastest growing segment in the digital ads category at a 23% compound annual growth rate (CAGR), with the growth momentum anticipated to continue in 2024 to 2025, Saifee notes.
Furthermore, he recognises that the Asean internet sector is in a stabilised state and with the help of artificial intelligence (AI) or technology, advertising growth initiatives are on the rise.
While Shopee’s recent seller take-rate increase, potential improvement in advertising and relatively stable costs point towards room for adjusted ebitda margin beyond their long-term target of 2% to 3% of its GMV, Saifee is of the opinion that Shopee is likely to keep its margins capped.
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Saifee expects Shopee to return excess revenue lift in the form of vouchers, coins and an improved user experience through faster delivery times and cancellation and return policies.
“This is mainly to keep the operations nimble to thwart entry of new players and/or attack on Shopee’s market share from existing players” he notes, adding that this is “reflected in initiatives like Shopee’s recent YouTube partnership, which allows the former to narrow social commerce gap compared to TikTok, albeit at a slight margin leakage.”
However, Saifee is of the opinion that absolute ebitda can grow, aided by elevated GMV growth momentum and lifting growth of digital financial services (DFS), a key area tied to e-commerce.
This could indirectly arise from a larger-than-expected shift from offline to online given Shopee’s scale and efficiency creating economics for sellers and an improved user experience, Saifee states.
Furthermore, Saifee adds that DFS can be leveraged to realise a part of e-commerce monetisation for several reasons.
Firstly, he notes that DFS is a derivative of e-commerce and is likely to grow alongside e-commerce. Secondly, DFS is not usually the first area of attack from a competing e-commerce business. Lastly, a purely fintech company does not have the ecosystem advantage that SEA possesses.
Therefore, Saifee raises Sea’s DFS revenue estimate by 1% to 15% alongside increasing e-commerce GMV.
Saifee states that Maybank’s adjusted ebitda estimates are 10% to 14% above the consensus.
Shares in Sea closed 18 cents higher or 0.19% up at US$95.33 on Oct 8.
