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Maybank re-initiates Sea at ‘buy’ with TP of US$90

Felicia Tan
Felicia Tan • 3 min read
Maybank re-initiates Sea at ‘buy’ with TP of US$90
“We see Sea entering the ‘post post-Covid phase’ from a position of strength to tap the 15% CAGR in the Asean e-commerce and fintech space," says Maybank Securities analyst Hussaini Saifee. Photo: Bloomberg
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Maybank Securities analyst Hussaini Saifee has re-initiated coverage on Sea Limited with a “buy” call and a sum-of-the-parts (SOTP)-based target price of US$90 ($121.72).

“We see Sea entering the ‘post post-Covid phase’ from a position of strength (multiple competitive moats, scale advantage and financial muscle) to tap the 15% compound annual growth rate (CAGR) in the Asean e-commerce and fintech space,” the analyst writes in his June 18 report.

For Sea’s e-commerce segment, Saifee sees a few factors in driving a 15% gross merchandise value (GMV) in Asean. One of these factors is a “healthy” 8% growth in Asean retail sales while e-commerce penetration is just half of that of the US and China’s. Another factor is “rational competition” while the third factor is the limited risk of “disruptive” entrants.

Furthermore, Sea’s e-commerce platform, Shopee, has enough scale, logistics and a live streaming competitive moat that places it in a “position of strength” for it to maintain its leading market share.

According to Saifee, a consumer survey conducted by the brokerage shows that Shopee is the favourite and the cheapest platform even in a market like Indonesia where TikTok Shop had an aggressive growth strategy till 2023.

“[Over] 50% of [its] GMV is supported by its own logistics, which allows for superior unit economics and customer experience (short delivery time, return policy),” notes Saifee. “Case studies suggest that having their own logistics had been the key source of differentiator for players like Amazon and NASDAQ-listed Mercado Libre. We estimate Sea’s GMV to expand at 15% CAGR over FY2023 [to] FY2026.”

See also: Grab Holdings ‘undervalued’ despite multiple growth catalysts and levers: Morningstar

Sea’s gaming segment is also poised to see growth.

Following its post-Covid reset, revenues for Garena have “turned the corner” with three consecutive quarters of improvements.

“While lacking new games pipeline, management’s strategy is to elongate Free Fire’s life by de-emphasizing monetization, improve engagement/retention and grow the new user base,” says Saifee.

See also: RHB maintains ‘buy’ call on Prime US REIT with unchanged TP

“We find management’s strategy to be credible and see potential for a sustained Free Fire franchise given: its dominant position in the less crowded emerging markets (EMs); ii) budget-conscious EM gamers; and iii) frequent new content & feature upgrades,” he adds.

The analyst estimates Garena’s bookings to grow by 12% in FY2024 and at a 2% CAGR over FY2024 to FY2026 with stable margins.

As a group, Saifee has pegged Sea’s revenues to expand at a 16% CAGR over FY2023 to FY2026. He also expects the group to report a 24% ebitda CAGR over the same period thanks to a “healthy mix” of scale benefits and steady monetization improvement.

“Asean market seller take-rates at [around] 5% - 7% is 30% - 50% below other markets (ex-China). This creates room for improvement, although we note that the near-term focus remains on deepening penetration and boosting GMV growth,” says the analyst.

“We estimate take-rates to rise by 80 basis points (bps) in FY2024 – FY2025. However, we see room for sales and marketing intensity to fall in light of improving competition and rolling back of elevated live streaming spending,” he adds.

Based on Sea’s last-traded share price of US$74.42 as at Saifee’s report, the stock is trading at 0.4 times EV/GMV and 3 times EV/sales for FY2024 with valuations at a 25% to 30% discount to Mercado Libre.

Shares in Sea closed 50 US cents higher or 0.67% up at US$74.92 on June 17.

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