DBS Group Research has downgraded its call on technology firm Sea Group from “buy” to “hold”, at a revised target price of US$233 ($308.97). This is up US$5 or 2.2% from its previous US$228 call, analyst Sachin Mittal says in a Jan 14 note.

Explaining how the target price was arrived at, Mittal says that a fair value of US$107 per share was assigned for the e-commerce business on the basis of a 1x price to FY2021 gross merchandise value while its gaming business was priced at US$105, based on 24x DY2021 price-to-earnings ratio. 

Its digital financial services segment was priced at a fair value of US$13 per share.

Moving forward, Mittal reckons that Sea Group’s e-commerce segment – which comes from Shopee – could see gross merchandise value slow to 50% in FY2021, as opposed to the 102% growth.

This is, as a survey from Blackbox Research and consumer intelligence platform Toluna shows that consumers from Singapore, Malaysia, Thailand, Indonesia, Philippines and Vietnam, are “dissatisfied with their shopping experience with various e-commerce players in the region”.

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“Despite the boom in e-commerce sales accelerated by Covid-19, a vast majority of e-commerce players have taken growth for granted at the expense of delivering a positive customer experience,” says Mittal.

This comes amid concerns over delivery costs, product reliability and the authenticity of in-app product reviews.

Against this backdrop, Mittal envisions a cutback in consumer online spending in 2021.

Meanwhile, things appear rosier for the Garena, the group’s digital entertainment segment. Specifically, its self-developed and published game Free Fire has become the “undisputed leader in [the] Battle Royale category of gaming”.

The game had been the top mobile games by worldwide downloads till 3QFY2020 ended September, but slipped to second place in recent months after online multiplayer party game, Among US succeeded it.

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The appeal for the game had surged during the lockdowns imposed globally as the internet became the only medium of entertainment. 

Mittal believes that it will remain in demand post-Covid due to localised, new content and features and continued collaboration with high profile celebrities. For instance, the game offers Indian players costumes inspired by their local cricket league, while its Thailand version includes features inspired by Thai folk traditions.

Things have also been looking up for SeaMoney – Sea Group’s digital financial services arm. On Jan 13, the company acquired Indonesia’s PT Bank Kesejahteraan Ekonomi (BKE), after buying stakes from existing shareholders PT Danadipa Artha Indonesia and PT Koin Investama Nusantara through its subsidiary Turbo Cash Hong Kong Ltd.

“Sources familiar with the matter have indicated that Sea plans to ultimately transform Bank BKE into a digital bank,” mulls Mittal.

He adds that the move comes hot on the heels of the Facebook- and Paypal Holdings-backed Gojek acquiring a 22% stake in Bank Jago. The way he sees it, this would help the group to increase Shopee’s market share in Indonesia, thereby accelerating the company’s growth across the greater southeast Asian region.

SEE: Digital full bank licence to 'accelerate growth' of SeaMoney: DBS Group Research

Looking ahead, Mittal’s FY2020/2021 revenue predictions for the company are 12/15% above consensus.

“Sea might burn more cash in the e-commerce business to raise its market share while gaming might also register strong growth,” he explains.

As such, Mittal believes that revenue from the gaming segment in FY2021 will come in 24% higher than previously expected due to increased contributions from the Free Fire game. This is as the annual active user base is slated to reach around US$503.2/629.0 million in FY2020/2021.

In this time, e-commerce growth revenue may inch down by 10% as FY2021’s gross merchandise value is slated to slow by 15% to US$53.5 billion “amid slower than expected ramp up in e-commerce”.

Shares of Sea Group closed at US$229.66, up US$2.88 or 1.27% on Jan 14.