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Ride the new economy wave with SEA, says CGS-CIMB

Ng Qi Siang
Ng Qi Siang • 4 min read
Ride the new economy wave with SEA, says CGS-CIMB
The Covid-19 pandemic will help drive SEA Group's digital economy businesses.
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With Southeast Asia rapidly treading down the path of digital transformation, CGS-CIMB analysts Ngoh Yi Sin and Darren Ong believe that technology firm SEA group is the best vehicle with which investors can reap the profits of the future economy. The pair have thus issued an “add” call on the US-listed stock with a target price of US$126.90 ($174.10).

The company is divided into online gaming (Garena), e-commerce (Shopee) and digital financial services (SeaMoney) arms, expanding its presence in the internet world’s hottest business trends. The company has built on its mobile-led strategy, strong content localisation capabilities and backing from Chinese tech unicorn Tencent to build gross merchandise value (GMV) market share and diversify into new markets in India and Latin America.

The core of SEA’s growth comes from Garena, its most established business arm and a leading name in the regional gaming world. It is the exclusive operator and distributor of popular games, including Free Fire, Call of Duty: Mobile and the console version of Dauntless. Its success with Free Fire, -- its first self-developed gaming title developed in 2017 -- is a key positive for its gaming pipeline as it became the most downloaded mobile gaming title in 2019.

Garena benefits from the rapid growth of the regional gaming industry, which is projected to rise from US$5.1 billion in 2019 to US$8.3 billion in 2023. Expansion into new markets like India, Latin America, Russia and the Middle East could see its total addressable market size expand sixteen-fold to US$83.1 billion.

“We forecast Garena’s gaming revenue to grow 27% CAGR from US$1.1bn in FY19 to US$2.3bn in FY22F,” says Ngoh and Ong.

Another bright spot for the group is Shopee, Southeast Asia’s top e-commerce platform. Enlisting Portugese soccer superstar Cristiano Ronaldo as its brand ambassador in a show of intent, its market share in FY2019 was 46%. It ranks top in Southeast Asia in terms of monthly average users (MAU) and combined regional traffic and is number one in Taiwan in terms of both MAU and time spent on the app. Growing smartphone penetration in Southeast Asia has only fuelled its further expansion, with its GMV surging almost 15 times to US$17.6 billion in FY19.

But Shopee has yet to have been fully monetised and has yet to turn a profit; its present GMV is still below Amazon’s US$335 billion and Alibaba’s US$853 billion in 2019. “We forecast adjusted EBITDA loss per order for Shopee to reduce from US$0.86 in FY2019 to US$0.26 in FY2022F,” says the analysts, though they predict a positive EBITDA for FY2023.

Still, the company will benefit from growth in its ASEAN market, where GMV could reach US$153 billion by 2025, accelerated by the onset of the Covid-19 pandemic which has seen retail moves online.

SEA Group is also looking to the future with digital financial arm SeaMoney, which it has integrated with its Garena and Shopee platforms. This has allowed it to process a large amount of the revenue taken in by these platforms in Thailand, Vietnam and Indonesia, with 40% of Shopee’s gross orders in Indonesia for April 2020 paid through this medium. Having also provided micro-lending services, it has also applied for a digital bank license in Singapore and has been shortlisted to proceed to the next round of investment.

Ngoh and Ong see market consolidation as a positive for SEA Group as the region moves towards greater regulation and licensing for digital financial services. With the digital payments industry expected to grow from US$0.6 trillion in 2019 to US$1 trillion by 2025F, capturing an additional 10% market share could translate into an additional US$100 million of revenue. Still, the analysts estimate that SeaMoney’s EBITDA loss will widen from US$113.4million in FY19 to US$396.5 million in FY20F before tapering to US$295.5m in FY22F.

In the short-run, however, Garena’s strong earnings will unlikely make up for losses in SEA’s other business arms. The analysts anticipate net losses of US$1.3 billion per annum for FY2020-2021 before a reduction to US$369 million in FY2022. Fortunately, SEA has US$1.7 billion net cash as of 1Q20 to support at least two years of losses before achieving positive FCF in FY2022, with this money also aiding potential mergers and acquisitions.

“SE reports 2Q20 on 18 Aug, and we expect Shopee to record strong results similar to other marketplaces; Free Fire is still one of the top gaming apps globally in 2Q2020, according to App Annie. These increase the possibility of upward revision to SE’s FY20F revenue guidance for gaming (US$1.9billion-2.0billion) and e-commerce (US$1.7billion-1.8billion),” continue the analysts.

As of 3.30 pm, SEA group is trading 1.08 points higher at US$128 with a beta of 1.37.

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