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Analysts cheer Sea's positive set of results for the 3QFY2022; CGS-CIMB upgrades to 'buy'

Felicia Tan
Felicia Tan11/16/2022 05:23 PM GMT+08  • 5 min read
Analysts cheer Sea's positive set of results for the 3QFY2022; CGS-CIMB upgrades to 'buy'
NYSE-listed Sea Limited has reported a total net loss of US$569.3 million ($781.7 million) for the 3QFY2022 ended Sept 30, down 0.3% from the total net loss of US$571.0 million in the corresponding quarter before. Photo: Bloomberg
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Analysts are positive on Sea Limited after the company’s results for the 3QFY2022 ended Sept 30 saw a sharp narrowing of losses.

“[Sea’s] strategic shift to focus on profitability starts to bear fruit, with [its] 3QFY2022 non-GAAP net loss of $370 million (-18% q-o-q, -35% y-o-y) coming in 20%/25% narrower than our/Bloomberg consensus forecasts,” CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan write.

GAAP refers to generally accepted accounting principles, which is the financial reporting standard for publicly-listed companies in the US.

“Though this has resulted in a deceleration in topline growth, GAAP revenue of US$3.2 billion [or $4.38 billion] (+7% q-o-q, +17% y-o-y) was in line with expectations,” they add.

Noting Sea’s announcement that it expects Shopee to achieve an adjusted ebitda breakeven by end-FY2023 overall, a year earlier than the analysts’ expectations, this could “come at the expense of weak gross merchandise value (GMV) growth in the near-term”.

“Management will only look to reaccelerate growth in a more sustainable manner after achieving groupwide self-sufficiency,” the analysts point out.

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In their report dated Nov 16, CGS-CIMB’s Ong and Tan have upgraded their recommendation on Sea to “add” from “hold” previously.

This is due to Shopee’s faster-than-expected narrowing of losses, they explain.

The analysts have also raised their target price to US$75 from US$61 previously. Their new target price is based on a higher target multiple of an FY2023 price-to-sales (P/S) of 2.9x for e-commerce, from 2.0x previously.

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To them, potential catalysts include a resilient set of GMV numbers despite the profitability push and successful game launches, while downside risks include a macro slowdown impacting consumer spend in the region and hurting Sea’s topline growth.

In her Nov 15 report, Citi Research analysts Alicia Yap, Vicky Wei and Nelson Cheung have kept “buy” on Sea with an unchanged target price of US$129.

“On first glance, [Sea’s] 3QFY2022 results came with positive and negative surprises,” the analysts write.

“On the positive front, total GAAP revenues beat expectations due to higher GAAP digital entertainment (gaming) revs and fintech revs while e-commerce was in-line. Operating loss and net loss all came narrower than our forecast while ebitda profit for [digital entertainment] was lower and ebitda loss for e-commerce was better than our forecast.”

That said, Sea’s e-commerce order numbers and GMV missed, while its gaming metrics and grossing missed the analysts’ estimates.

“We are not too surprised by the revision of full-year grossing guidance for gaming given the missed in 3QFY2022 grossing,” they write.

“Management’s decision of not providing any future guidance (FY2023) amid challenging macro environment will no doubt adding more uncertainty on future forecast. Nevertheless, we welcome more disclosure of e-commerce revenue breakdown by monetization type and the change of ebitda methodology to include the headquarter cost with supplement disclosure of contribution margins replacing previous ebitda margin before headquarter’s (HQ) cost,” they add.

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“We will seek colour on foreign exchange (forex) impact, consumption demand and any change of growth strategy and competitive landscape for e-commerce in Southeast Asia and Latin America,” they continue.

In a separate report on the same day, the analysts kept their “buy” call but lowered their target price to US$97.

Furthermore, they announced that they have lowered their total GAAP revenue estimates for the FY2022, FY2023 and FY2024 by 1%, 11.1% and 14.1% respectively.

They also forecast Sea’s gaming bookings to come in at US$540 million in the 4QFY2022, down by 50% y-o-y and US$2.75 billion in the FY2022, down 40% y-o-y.

Meanwhile, they expect Sea to see higher GMV of US$20 billion and US$75.5 billion for the 4QFY2022 and FY2022 respectively, up by 10% y-o-y and 20% y-o-y.

Maybank Securities analyst Kelvin Tan has maintained his "buy" call despite the company undergoing what he calls "short-term speed bumps".

"In the short run, Sea’s results may fluctuate and be affected by the macro environment. We believe Shopee’s regional leadership and scale should draw more merchants into higher-margin transaction-based services, helping raise take rates and e-commerce revenue," he writes.

That said, Tan has lowered his target price estimate to US$98 from US$105 previously as he adjusts his valuation multiple to "better reflect" the profitability metrics for Shopee and Sea's digital entertainment arm.

Based on Maybank's estimates, Sea's 9MFY2022 revenue stood "marginally below" its full-year expectations, although the company's gross profit came within its full-year estimates.

While the brokerage's forecast has not been adjusted as it expects further headwinds for the digital entertainment business in the 4QFY2022, Tan says Sea could reach ebitda breakeven by FY2024 on the back of its strong focus on cash flow and achieving self-sufficiency.

"However, we see further downside from solvency risks, which are rising with 9MFY2022 cash flow from operating activities (CFO) US$1.38 billion (9MFY2021's US$513 million) turning negative as Garena’s cash-generative support weakens," Tan writes. "Sea would need to recalibrate its balance between growth and liquidity."

Meanwhile, PhillipCapital analyst Jonathan Woo has kept his "buy" call on Sea with an unchanged target price of US$110. This is as the company's revenue for the 3QFY2022 surpassed the brokerage's expectations by 7%.

Its net loss was also a beat by 35% on employee expense cuts and more prudent spending on sales and marketing.

Shares in Sea Limited closed US$16.51 higher or 36.05% up at US$62.31 on Nov 15.

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