Date: 2 October 2024
Broker: OCBC Investment Research (OIR)
Company Overview
Sea Limited is a global consumer internet company based in Singapore. It operates three core businesses: digital entertainment (Garena), e-commerce (Shopee), and digital payments and financial services (SeaMoney). The company is strategically focused on expanding its operations in Southeast Asia and Latin America, where it sees strong growth potential due to a shift toward digital economies.
Key Business Units
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Digital Entertainment (Garena):
Sea’s digital entertainment arm is mainly engaged in mobile gaming. However, recent performance has shown a decline in active users, with a year-on-year drop of 18% in 2Q24. Despite this, Garena continues to be a key contributor to the company’s revenue.
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E-Commerce (Shopee):
Shopee is Sea’s e-commerce platform and the largest contributor to the company’s revenue, accounting for 68.9% of FY23 revenue. Shopee has recently entered a partnership with YouTube, allowing users in Indonesia to purchase products via links on YouTube. This initiative is expected to expand to Thailand and Vietnam. Shopee has also raised commission rates, benefiting from a more rational competitive landscape.
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Digital Financial Services (SeaMoney):
SeaMoney, the company’s digital payments and financial services unit, continues to grow rapidly, contributing 13.5% of the company’s FY23 revenue. It provides financial services to the largely unbanked population in Southeast Asia, enhancing the competitiveness of Shopee by integrating digital financial solutions for users.
Financial Performance
Sea Limited has shown significant growth in revenue, with FY23 revenue of USD 13.06 billion, a 4.9% year-on-year increase. The company’s key financials for FY23 and projections for FY24 and FY25 include:
- Revenue:
FY23: USD 13.06 billion
FY24E: USD 15.90 billion
FY25E: USD 18.60 billion
- Adjusted EBITDA:
FY23: USD 1.18 billion
FY24E: USD 1.94 billion
FY25E: USD 2.68 billion
- EPS (Diluted):
FY23: USD 0.29
FY24E: USD 0.91
FY25E: USD 2.02
Share Price and Valuation
Sea Limited’s share price hit a new 52-week high of USD 97.49 on 1 October 2024. The company’s stock has risen by 20.3% since August 2024, and year-to-date (YTD) it has delivered a 140.7% return. The fair value (FV) estimate for the stock has been revised to USD 110 from a previous estimate of USD 98. This reflects positive momentum driven by strategic initiatives in e-commerce and favorable market conditions.
Risks and Competition
The competitive landscape in Southeast Asia remains a concern, with platforms like Temu expanding into key markets such as Thailand and the Philippines. However, Shopee is well-positioned to maintain its competitive edge due to its logistics infrastructure and integrated financial services. Regulatory pressures and execution risks in new markets are potential risks for Sea Limited’s long-term growth.
ESG Considerations
Sea Limited has faced challenges regarding its environmental, social, and governance (ESG) practices. The company lags behind its peers in terms of talent management and has no disclosed targets for carbon emission reductions. These weaknesses could pose future risks as global ESG standards continue to tighten.
Future Outlook and Catalysts
Sea Limited’s outlook remains positive, supported by key catalysts such as:
- Improvement in competition within the e-commerce sector
- Growth in self-developed games
- Stronger-than-expected growth in gross merchandise value (GMV) for Shopee
The company’s management has set a goal to achieve positive adjusted EBITDA for e-commerce starting in 3Q24 and expects GMV growth to reach mid-20% in FY24. Continued execution of its strategic initiatives is critical to unlocking further shareholder value.
Conclusion
Despite short-term challenges, Sea Limited is well-positioned for long-term growth across its key business segments. The revised fair value estimate of USD 110 reflects the potential for further upside, provided the company successfully navigates its competitive and regulatory risks. Investors are advised to be patient as the company undergoes a strategic transformation.
