DBS Group Research is maintaining its ‘buy’ call on technology firm Sea, at a revised target price of US$204 ($274.70).

This is up US$14 from its previous US$190 call and is expected to give the counter a 20% upside from its US$170.60 price on the NASDAQ stock exchange on Nov 17, analyst Sachin Mittal says in a note.

His move follows a surge in popularity for Free Fire – an in-house game developed under Garena, its digital entertainment arm.

“Free Fire continues to benefit from movement restrictions due to Covid-19 and the PUBG ban in India – one of PUBG’s largest markets,” explains Mittal. The PUBG game has been banned in India as the government found its activities to be prejudicial to sovereignty and integrity, defence and security.

Mittal notes that the mounting cash flows from its gaming business provides Sea a competitive edge in: consolidating its leadership position in the e-commerce business and kick-starting the growth of its nascent payment business.

This reaped good returns, with adjusted revenue for the segment expanding by 32% quarter-on-quarter and 110% year-on-year to US$945 million in 3Q2020 ended September, due to the success of Fire Fire. 

Mobile analytics platform App Annie notes that Free Fire continued to be the highest grossing mobile game in Latin America and Southeast Asia in 3Q2020. 

See: Sea Group reports net loss of US$425.6 million in 3Q2020 despite stronger performance of digital entertainment and e-commerce segments

Meanwhile, Shopee, its e-commerce platform logged an adjusted revenue of US$697 million in 3Q2020, up 37% from the previous quarter. 

Its adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation) came in at a loss of US$302, down from US$306 in the quarter before.

Mittal says it’s financial exceed consensus estimates of a 17% increase in revenue and an EBITDA loss of US$319 million.

Overall, the group’s EBITDA was up 98.7% to US$120.4 million, from the US$30.8 million in losses reported in the previous year.

“Sea improved on its adjusted EBITDA breakeven achieved in 2Q20 of US$7.7 million with 3Q20 adj. EBITDA of US$120 million on the back of a sharp rise in EBITDA from Digital Entertainment offsetting flattening loss in e-commerce,” observes Mittal.

To him, the gaming segment beats expectations, while the performance of e-commerce is “in line”.

In this time, Mittal observes that SeaMoney also continued to show strong growth, with its adjusted revenue surging 21% quarter-on-quarter and 766% year-on-year to US$14.4 million in 3Q2020.

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Looking ahead, he expects the group’s adjusted revenue to growth to normalise to 15% in FY21F from 76% in FY20F. 

In this time, Mittal is looking at the adjusted revenue from gaming rising by 15% in FY20F, following a strong uptake in the contribution of Free Fire in the current 4Q2020 ending in December. 

A boost is likely to come from Garena “replica[ting] its success” with Free Fire in its recently launched car game, Speed Drifters as well as Call of Duty: Mobile, a mobile version of the acclaimed first person shooting gaming franchise, he adds.

“Increasing free cash flow from gaming is Sea’s big competitive edge in the e-commerce business as many competitors face funding pressure,” says Mittal who projects an adjusted revenue compound annual growth of 34% for the segment.

Shares of Sea closed down US$5.46 or 3.20% at US$165.16 at 5.30am on Nov 19 (Singapore time).