September 13, 2021

Southeast Asian Champion

ASEAN super-app in the making. Initiate BUY

We believe Sea is one of the best proxies to ride the ASEAN digitisation theme, given Shopee’s position as the top e-commerce app regionally, which paves the way for user conversion into digital finance. Growth in these segments appear at an early stage, and investments are funded by cash generative Garena via the Free Fire franchise. Initiate BUY with SOTPbased TP of USD378. Key risk is revenue concentration, as we think Free Fire accounts for a significant portion of current gross profitability.

Garena Free Fire still early in its lifecycle

We forecast 2020-23E revenue CAGR of 59.4%, driven by growth across digital entertainment (38.1%), e-commerce (75.3%) and digital financial services (118%). In 2Q21, Free Fire was the highest grossing mobile battle royale game in the US for the second consecutive quarter. The game remains extremely popular in Southeast Asia, Taiwan, Latin America, and India. Garena quarterly active users (QAU) saw a 1Q17-2Q21 CQGR of 16.2% to 725m, and we believe Free Fire is still in its early stages of its lifecycle with the potential to be a major IP franchise.

Shopee is the top e-commerce app in Southeast Asia

Shopee is the top e-commerce marketplace by visits, time spent (Android) and downloads in Southeast Asia. GMV saw a 1Q17-2Q21 CQGR of 20.3% to USD15b. We believe Shopee’s strengths are in its i) localisation, ii) userfriendliness, iii) and aggressive marketing strategies. Current take rates are around 6-8%, and Sea sees high-single-digit or low-teens percentage of GMV (our FY23E: 10.3%) is achievable in the long run. Sea is also excited about SeaMoney’s prospects via Shopee and other avenues in reaching the 74% of population in Southeast Asia that are underbanked or unbanked.

Forecasting profit in FY23E

We forecast Sea to achieve EBITDA/ net profit of USD1.7b/USD236m in 2023E, largely driven by economies of scale. A factor that could delay Sea’s turn to profitability is if we have underestimated sales & marketing and R&D expenses as it has historically prioritised user acquisition and retention to maximise monetisation opportunities down the road. We have factored Sea’s fundraising of 11m new ADS and USD2.5b of convertible bonds into our forecasts.

Value Proposition

§ Sea is a Singapore-founded internet company with businesses in digital entertainment, e-commerce, and digital financial services.

§ Sea is a beneficiary of accelerated digitisation in a postCovid-19 landscape (e.g. increased usage and stickiness of e-commerce and digital payments).

§ Sea believes in prioritising user acquisition and retention through aggressive marketing and providing compelling product proposition, so that it can maximise monetisation later on.

§ Sea’s strength is also in its ability to adapt for local preferences, which helps it excel in regions with heterogeneous cultures such as in Southeast Asia.

§ We believe that Sea has a strong competitive advantage due to the network effects of its products – which are already leaders in their respective verticals.

Financial Metrics

§ We forecast FY20-23E revenue CAGR of 59.4%, driven by broad based strength.

§ We also expect for Sea to turn profitable in FY23E on both EBITDA and net profit levels.

§ We expect Sea to continue being in net cash position through FY23E, and for expansion needs to be funded by the digital entertainment business.

Price Drivers

1. Strong 4Q18 and 1Q19 results on continual success of Free Fire

2. 2Q19 loss widened despite results beat

3. Sea was beneficiary of Covid-19, and share price rallied alongside e-commerce peers.

4. Global tech sell-off as a result of interest rate rising fears

5. Stronger than expected 2Q21 results, driven by Garena and Shopee, and company raising guidance

Financial Metrics

§ We forecast FY20-23E revenue CAGR of 59.4%, driven by broad based strength.

§ We also expect for Sea to turn profitable in FY23E on both EBITDA and net profit levels.

§ We expect Sea to continue being in net cash position through FY23E, and for expansion needs to be funded by the digital entertainment business.

Swing Factors 

Upside

§ Stronger than expected user growth (across all businesses)

§ Stronger than expected GMV/TPV growth for ecommerce/ digital financial services.

§ Stronger than anticipated monetisation rates across its businesses

Downside

§ If investors are impatient with any delay in Sea’s profitability turnaround.

§ Slowing user growth metrics, especially if this is due to increasing competition across Sea’s offerings.

§ Signs of Free Fire losing market share, especially if Garena remains heavily reliant on Free Fire to drive revenue growth

BUY by Maybank Kim Eng Securities Research. Share price closed at US$326.52.