OCBC Investment Research’s Ada Lim has kept “buy” on Sea at a raised fair value estimate of US$90 ($118.81) from US$86 previously following the group’s 2QFY2024 ended June results.
Lim notes that during the period, Sea’s revenue came in higher by 1.9% q-o-q and 23% y-o-y at US$3.8 billion, while total adjusted earnings before interest, taxes, depreciation and amortisation (ebitda) came in at US$448.5 million, down 12.1% y-o-y but up 11.8% q-o-q.
While the group returned to black during the period with its 2QFY2024 net profit of US$79.9 million versus its 1QFY2024 net loss of US$23 million, Lim notes that its earnings per share (EPS) of 14 US cents came in below consensus estimates of 18 US cents, making up around 19% of her initial full-year forecast.
On revenue in Sea’s Shopee segment, which grew 2.7 q-o-q and 33.7% y-o-y to US$2.8 billion, Lim writes: “Notably, unit economics continued to improve in Brazil such that Shopee was able to achieve a positive contribution margin per order of 9 US cents during the quarter.”
She adds that Sea has revised its guidance and now expects e-commerce adjusted ebitda to turn positive from 3QFY2024, and for FY2024 gross merchandise value (GMV) growth to hit mid-20%.
Meanwhile, Chinese online retailer, Pinduoduo, has launched its marketplace platform Temu in Thailand in July. This follows its entry into the Philippines and Malaysia last year.
On this, Lim notes that impact on Shopee is likely to be limited, due to Temu’s lower price advantage, longer shipping times and fewer payment options, although the analyst will remain watchful should the platform enter Indonesia.
On the other hand, revenue in Sea’s Garena segment slipped 4.9% q-o-q and 17.7% y-o-y to US$435.6 million, but adjusted ebitda increased 3.6%q-o-q and 26.5% y-o-y to US$302.8 million.
The business’s quarterly active and paying users also improved to 648 million and 52.5 million respectively, and bookings grew 4.8% q-o-q to US$519.3 million.
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“That being said, Garena’s paying user ratio dropped 10 basis points (bps) to 8.1%, while average bookings per user slipped 3.5% q-o-q to 83 US cents,” writes the analyst.
Sea noted that gaming is prone to seasonality such as school holidays, but the segment’s long-term growth trajectory remains intact.
Finally, revenue and adjusted ebitda for the group’s digital financial services segment increased 21.4% y-o-y and 20.2% y-o-y to US$519.3 million and US$164.7 million respectively, while non-performing loans past due by over 90 days as a percentage of gross loans receivable grew 10 bps q-o-q to 1.3%.
Potential catalysts noted by the OCBC analyst include material improvement in competition in the e-commerce landscape, more high-profile self-developed games as well as stronger-than-expected GMV growth.
Conversely, investment risks include regulatory pressure in key markets, execution risks in new markets leading to increased losses and finally, a weaker-than-expected game pipeline and lacklustre performance of new games.
Shares in Sea closed at US$2.49 higher or 3.24% up at US$79.29 on Aug 16.
