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CGS-CIMB downgrades Sea after 2QFY22 results, Maybank maintains ‘buy’ call

Lim Hui Jie
Lim Hui Jie8/18/2022 03:46 PM GMT+08  • 3 min read
CGS-CIMB downgrades Sea after 2QFY22 results, Maybank maintains ‘buy’ call
CGS-CIMB calls "sell", but Maybank calls "buy" on Sea. Photo: Bloomberg
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Analysts are mixed over on tech conglomerate Sea after the company extended its losses in its 2QFY2022 results ended June 30.

Sea saw its losses more than double in 2QFY2022 compared to 2QFY2021, going from US$433 million ($595.66 million) to US$931 million, despite revenue for the company rising 29% for the quarter to US$2.9 billion.

On this, CGS-CIMB’s Ong Kang Chuen and Kenneth Tan downgraded Sea from a “buy” to a “hold”, slashing their target price sharply from US$150 to US$92.

Explaining their downgrade, the analysts feel that the company is not “out of the woods yet” due to missed expectations.

Sea also “surprised the market by suspending its FY2022 revenue guidance for Shopee.”

According to Sea, the company suspended its FY2022 revenue guidance for Shopee as it needs to remain nimble in navigating macro challenges, and highlighted a shift in strategic direction to prioritise profitability and cashflow management.

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The analysts also note that Sea plans to focus on driving monetisation and optimising cost structure, especially in terms of marketing and logistics expenses.

As such, they think the suspended guidance signals a weaker gross merchandise value (GMV) outlook for Shopee over the near term.

Despite the disappointing results overall, Ong and Tan see “signs of stabilisation” from Sea’s gaming arm Garena as quarterly active users (QAU) for the segment stabilised q-o-q. However, the paying ratio declined to 9.1%, as economic reopening continued to impact game consumption.

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“While we remain hopeful for reacceleration of sequential revenue growth in 2H with an easing comparison base,” the analysts say, “we think the suspended FY2022 guidance for Shopee signals that near-term GMV growth could remain weak.”

This is due to longer-than-expected stabilisation trends post reopening, higher inflation affecting consumer sentiment, and foreign exchange headwinds from a stronger US dollars, all of which force Sea to ease off the pace of monetisation.

In contrast, Maybank’s Samuel Tan is more optimistic on the stock, keeping his “buy” call and unchanged target price of US$105.

To the analyst, Sea’s 2QFY2022 revenue figures were “marginally below expectations”, and gross profit “exceeded expectations”

This, he says, stems from Sea’s pledge to drive unit economics for Shopee. “While we lower our forecasts across the board, and slash Shopee’s FY2022 revenue forecast to US$7.7 billion, EBITDA breakeven is maintained at FY2024.

For Garena, Tan thinks its “post Covid hangover” can end soon, saying that despite the segment experiencing its third consecutive quarterly decline, QAU grew 0.5% q-o-q after declining the past two quarters, which is “a sign of bottoming out”.

Separately, Tan thinks that Shopee’s path to profitability is becoming clearer, saying that Sea emphasised a focus on unit economics moving forward amid a suspension of e-commerce revenue guidance on macro uncertainty.

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Furthermore, he sees tailwinds to fulfilment costs moving forward as supply chain issues ease, pointing to the World Container Index - which reports actual spot container freight rates - standing at US$6,430 per forty-foot-equivalent-unit (FEU), the 24th consecutive weekly drop.

Tna saying that while Sea is still undervalued to peers, solvency risks are rising with 1HFY2022’s cash flow turning negative to -$1.2 billion (from US$451 million as of 1HFY2021) as Garena’s cash generative support weakens and points out that Sea will need to recalibrate its balance between growth and liquidity.

Shares of Sea closed at US$72.49 on Aug 17, down 6.38% compared to its previous close. The stock has a FY2022 P/B ratio of 8 and a dividend yield of 0%.

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