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Citi positive on Sea following upbeat business prospects

Khairani Afifi Noordin
Khairani Afifi Noordin • 3 min read
Citi positive on Sea following upbeat business prospects
The analysts see upside risk to share price and estimates if the landscape further stabilises with earlier-than-expected breakeven. Photo: Bloomberg
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Citi Investment Research analysts Alicia Yap, Nelson Cheung and Vicky Wei are keeping “buy” on Sea following an in-person non-deal roadshow meeting with the company’s management on its overall business prospects.

In their March 25 report, the analysts wrote that the communications with the management team in Hong Kong and Singapore were insightful — helping to demonstrate the company’s long-term vision and near term focus on executing each of the three core business lines through clear operational targets and collaborative commitment from senior leadership on delivering sustainable high-quality profitable growth. 

According to the analysts, Sea’s management sounded confident on the overall business prospect of the company. For Shopee, the focus is on maintaining its market leadership gap and is on track to regain profitability in 2HFY2024, with room for overall monetisation rate to improve. 

This is specifically given the relatively lower advertising revenues as a percentage of gross merchandise volume for its Southeast Asia market compared to China and the US. The analysts also note that the company believes sellers will be willing to pay a higher commission and advertising service fees to drive even more transactions over time. 

Recognising that not all the categories of goods are suitable to sell through the live-streaming model, Shopee will be able to offer and provide a comprehensive platform to enable sellers to optimise the marketing tactic according to product categories and their targeted sales approach. 

Additionally, by continuing to broaden and deepen its logistics infrastructure with increasing percentage of orders fulfilled through its first-party service Shopee Express together with gradually scaling back or optimising its subsidies to buyers, the company will further improve its cost structure. 

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“Hence with ability to reaccelerate order volume growth, gradual improvement of overall take rate and continued optimisation of cost to serve, management is confident that Shopee's unit economics to improve further and on track to regain profitability in 2HFY2024. Management noted that it will still be investing strategically in Brazil, while uncertain, it hopes that by end 2024 or later, it could achieve breakeven in every single market it operates in,” the analysts note.

For Garena, the company is maintaining a steady adjusted ebitda profit of US$1 billion ($1.34 billion) while patiently incubating new game development and exploring breakthroughs of new games technology. The analysts highlight that the management is confident in guiding Free Fire to reaccelerate to double digit y-o-y growth in users and bookings in 2024. 

This is due to stabilising user traffic over the past two quarters and reaching 100 million daily active users in February — as such, management expects user engagement metrics to increase and believes monetisation will follow careful execution. 

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Meanwhile, for its digital financial services (DFS), Sea reiterated that the business requires patience. The company believes DFS is a long-term business which benefits from structural factors such as the large population of underbanked and unbanked in Southeast Asia. As the business grows larger, it may also improve the overall margin profile of Sea given DFS is a highly profitable business with long-term growth trajectory, the analysts point out. 

Citi maintains “buy” on Sea with a target price of US$66. Despite solid year-to-date share price performance of over 30%, the analysts see upside risk to share price and estimates if the landscape further stabilises with earlier-than-expected breakeven timing. 

Shares in Sea closed 8 cents lower or 0.15% down on March 22 at US$54.47.

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