DBS Group Research analyst Sachin Mittal has maintained his ‘buy’ rating on Sea Limited with an unchanged target price of US$330 ($442.23), citing a strong e-commerce outlook and continued momentum for its gaming business.

Mittal believes that contrary to popular perception, Shopee is “highly undervalued” as it offers the highest growth among major e-commerce players globally.

“Shopee’s gross merchandise value (GMV) has been growing faster than its peers in Asia and Latin America in the past and is expected to have the highest GMV growth of 52% during FY2020 to FY2022,” he says.

While South Korea’s Coupang comes closest in terms of growth rates, Mittal points out that it is trading at a 2.5 times higher multiple (based on P/GMV) compared to Shopee.

Shopee’s revenue is forecasted to grow over 100% y-o-y in FY2021 ending December, which the analyst says paves the way for an adjusted revenue CAGR of 74% between FY2020 to FY2022.

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Mittal highlights that Sea’s mounting free cashflows from its gaming segment has propelled Shopee’s expansion, which gives it a competitive edge over competitors that face funding pressures. 

For FY2021, based on Sea’s guidance of 34% - 40% annual growth in the gaming business, Mittal expects Sea’s adjusted EBITDA to remain positive despite continued losses for Shopee as it focuses on gaining market share. 

Nevertheless, he views Shopee’s profitability will likely improve with rising advertising revenue over the next 2-3 years. 

“With Shopee planning to increase the platform’s monetisation, the contribution from advertising revenue to the overall take rate is likely to increase from less than 30% in 2020 to an estimated 40% in our estimates, implying 100% CAGR in advertising revenue over FY2020 to FY2022,” he says.

Mittal also views Sea’s fintech business to complement its e-commerce arm. Sea’s number of paying mobile e-wallet users rose 130% to over 23 million in 2020, and Mittal believes this provides stickiness to the e-commerce customer base while also opening the door for Shopee to kick-start the lending and insurance services. 

“Sea has obtained the licence to function as a digital bank in Singapore, and Sea will use SeaMoney to offer regional digital banking facilities which would accelerate the company’s growth,” he says.

As at 5.44pm (SGT), shares in Sea are up 5.16% at US$247.03.