Indonesia’s latest regulatory move to separate social media and commerce is a positive development for Sea, according to Citi Research analyst Alicia Yap.

Referring to news reports on Sept 25, Yap notes that president Joko Widodo had convened a cabinet meeting to discuss issues related to e-commerce as well as to address the growing concerns about how TikTok Shop had negatively impacted micro, small and medium sized business in Indonesia.

Widodo commented that TikTok should only be a social media platform, not a medium for conducting business. The official decision will likely be formally announced on Tuesday, Sept 26. 

This is positive for traditional e-commerce players in Indonesia particularly Sea, given the latest competitive intensity between TikTok and Sea’s e-commerce arm Shopee, says Yap. She highlights that Sea’s share price jumped over 10% during the trading session on Sept 25, reacting positively to the latest regulation. 

Given the large size of the seller base and the affiliate creators base on TikTok, it is possible that implementation of the regulation or transition period could take time, says Yap. 

“During the process, any disrupted experience faced by the sellers is likely to prompt many of them to shift focus back to their online stores on traditional e-commerce marketplaces like Shopee while awaiting any alternative solution that TikTok could offer,” she adds.

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That said, the regulation will also affect live-streaming activities offered by Shopee. Nevertheless, Citi believes Shopee will still be the net beneficiary from the latest regulatory decision by the government.

“If regulators in other Asean countries also consider similar restrictions and bans, Shopee will likely see further upside in the overall competitive landscape, in our view,” adds Yap.

Citi maintains “neutral” on Sea with a target price of US$50. The stock is assigned a “high risk” rating given the lack of visibility on the effectiveness of Sea’s recent investments. 

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The news is similarly seen by DBS Group Research as positive for Sea, which suggests that if the regulation is implemented, it could lead to the demise of TikTok Shop, which does not have its separate license to operate from the social media app.

"Another possibility is that Tiktok Shop might apply for a new license with structural separation from its social media business," says DBS, which estimates Tiktok Shop’s market share at between 12-15% based on June 2023 transactions. 

If TikTok Shop was to suffer an outright ban, DBS would see a "sharp upward revision: in its adjusted ebitda estimates for Sea, as DBS's current valuation for the stock assumes intensified e-commece competition in 2024. 

For now, DBS is keeping its "buy" call with an unchanged target price of US$66.

Shares in Sea closed 11.73% higher or $4.22 up on Sept 25 at US$40.20.

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