PhillipCapital has maintained its “buy” rating on tech conglomerate Sea, but have cut its target price to US$110 ($153) from US$150.
This comes after Sea reported a loss increase of 115% y-o-y in its 2QFY2022 ended June, despite revenue increasing by 29% y-o-y.
Analyst Jonathan Woo says the company’s net loss was worse than expected, standing at 79% of his FY2022 forecasts.
He noted that Shopee’s revenue guidance for FY2022 was suspended due to an uncertain macroeconomic environment, as well as a shift in focus towards profitability metrics.
“We lower our FY2022 revenue slightly to reflect weaker e-commerce growth, and we increase our net loss forecasts by 43% to reflect higher expenses,” he says.
In his report, he notes that Sea’s growth drivers still performing well, with Shopee close to a positive adjusted ebitda per order. Its adjusted ebitda loss per order before HQ costs was less than 1 US cent, which was 95% better y-o-y, and Woo expects this to turn positive by year-end.
Shopee itself grew 51% y-o-y, with gross orders up 42% y-o-y and gross margins improving q-o-q as a result of faster growth in higher profit margin items like transaction-based fees and ad revenue.
Shopee also generated more international (ex-China) revenue than e-commerce giant Alibaba for the first time.
Woo says that he does expect unit economics for Shopee to continue to improve moving forward, particularly with growth from higher margin items like ad revenue and transaction-based fees.
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“The expectation is also for Shopee to gradually increase its take rate in mature markets moving forward to grow margins,” Woo highlights.
He expects that growth in e-commerce industries, especially in emerging markets that Shopee is in, should continue to provide long-term tailwinds for Shopee moving forward. However, he does expect near-term challenges like foreign exchange headwinds and a weaker macroeconomic environment.
As for payment arm SeaMoney, Woo highlights that it is the fastest growing segment within Sea, leveraging on synergies with Shopee, and continues to tap on a vastly underserved market to grow its user base.
SeaMoney’s loan receivables grew by about US$200 million q-o-q, with Woo saying that he expects a continued expansion of active users and payment volume to support the long-term growth of SeaMoney.
On the other hand, Woo is not as positive about Sea’s gaming arm Garena, saying that he expects revenue from Garena to continue its decline, in part due to a continued decline in the player base.
Quarterly paying users (QPU) for Garena was down 39% y-o-y and 9% q-o-q, in addition to a limited number of games in their pipeline.
Nonetheless, Free Fire, Sea’s most popular in-house developed game – Free Fire, still managed to be the most downloaded mobile game globally, and the highest grossing mobile game in SEA and Latin America during 2Q2022, supporting most of the revenue generated in this segment for the quarter.
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Overall, he lowers his FY2022 revenue by 6% to reflect weaker-than-expected e-commerce growth in the near-term, due to FX headwinds and macro uncertainty.
Net loss forecasts were also increased by 43% to reflect higher research and development costs, administrative costs and a higher tax expense.
Shares of SEA closed at US$64.30 on Aug 22, with a FY2022 P/B ratio of 4.2x.
