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PhillipCapital downgrades Sea to ‘accumulate’ due to share price change

Felicia Tan
Felicia Tan • 3 min read
PhillipCapital downgrades Sea to ‘accumulate’ due to share price change
On March 4, Sea reported a net profit of US$162.7 million ($218.5 million) for the FY2023 ended Dec 31, 2023. Photo: Bloomberg
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PhillipCapital analyst Helena Wang has downgraded Sea Limited to “accumulate” from “buy” even though Sea has hit its first profitable year since its initial public offering (IPO) in 2017. The downgrade comes due to a “recent share price change”.

On March 4, Sea reported a net profit of US$162.7 million ($218.5 million) for the FY2023 ended Dec 31, 2023, reversing from its net loss of US$1.66 billion in the FY2022.

Sea’s FY2023 revenue stood at 98% of Wang’s forecasts while its patmi came in US$0.7 billion below her estimates. The company’s 4QFY2023 revenue and patmi were in line with her expectations.

Shares in Sea spiked to US$56.01 as at 9.30am (US time) on March 4 from US$50.90 as at March 1 after the company released its results. While shares in the company fell again to US$50.46 as at 10.30am on March 4, Sea’s shares grew steadily by 17.7% to close at US$59.34 on March 7.

In her report dated March 8, Wang only has positive things to say about the company, among them being Shopee’s market share gain.

“Shopee’s strategic pivot to reinvigorate its topline growth through ramped up investment to competed aggressively for market share since July last year has paid off, helping Shopee gain more market share: there was a renewed surge in its gross merchandise value (GMV) and gross orders (29%/46% y-o-y),” says Wang.

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“Revenue grew 23% y-o-y in 4QFY2023. Shopee focuses on the expansion of last-mile delivery facilities and optimising routing, which cuts costs and improves delivery speed. Both market gain and improved logistics signal long-term growth for Shopee,” she adds.

The e-commerce platform is also expected to see GMV growth in the high teens in the FY2024 as its investment in gaining market share starts to bear fruit. Shopee’s new initiative live-streaming e-commerce business continues to gain traction, which now accounts for 15% of its order volume as at the end of the FY2023.

“Sea claims to be making adjustments in take-rates, especially in ads, which has a sizable room to grow compared to global peers. Sea has disclosed their confidence of returning Shopee to positive ebitda in 2HFY2024 even as competition picks up,” says the analyst.

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Sea’s guidance for its gaming arm is also a “pleasant surprise”.

“Despite gaming continuing to show a 52% y-o-y revenue decline, Sea has surprisingly guided a positive outlook for Free Fire. Both user base and bookings of Sea’s largest and most profitable game are expected to increase by double digits in FY2024, indicating a rebound in gaming earnings after two years of decline,” she adds.

Looking ahead, the analyst expects FY2024 to be profitable given contributions from Sea’s gaming and e-commerce businesses. She has raised her FY2024 revenue growth rate and patmi by 2% and US$280 million respectively driven by these two segments.

In addition, Wang notes that the decline in gaming revenue seems to have bottomed out. She is also expecting to see positive reversions in Shopee’s earnings expectations especially as Sea tries to adjust to higher take rates. Lastly, on SeaMoney, Sea says it has seen a significant upside in its markets in the financial services space and intends to continue investing in user acquisition both on and off the Shopee platform while remaining prudent in risk management. Sea has guided a similar steady growth rate in FY2024, says Wang.

Wang’s discounted cash flow (DCF) target price is raised to US$70 from US$61 previously with an unchanged weighted average cost of capital (WACC) of 7.6% and a growth rate of 3%.

Shares in Sea closed 12 US cents higher or 0.2% up at US$59.34 on March 7.

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