Brokers’ take: Analysts cut targets on Sea, mixed on e-commerce growth pursuits

ANALYSTS have cut their target prices on Internet company Sea, amid mixed sentiment over the group’s ability to resist intense competition and reap the fruits from planned investments to bolster its e-commerce segment.

On Tuesday (Nov 14), the group posted a US$143.9 million loss for the third quarter of 2023, sinking into the red after three quarters in the black. The results missed an analyst consensus of US$102 million in profit, and came as the company shifted its focus to growth for its e-commerce business.

Sea plans to pursue growth with a focus on maintaining financial discipline and a strong balance sheet for the long term. It noted that any investment made to achieve this would be done within its means and at its pace.

Maybank on Wednesday lowered its target price by 22.5 per cent to US$62 from US$80, after cutting Shopee’s growth outlook in view of increased expenses. The move affected its net profit forecasts for FY2023-25, which are now down by 31 per cent to 42 per cent.

Similarly, OCBC Investment Research revised its fair value estimate on Sea to US$64 from US$70 after fine-tuning its assumptions. It said that Sea’s management is adopting the right strategy for long-term growth, as e-commerce penetration remains low in the markets it currently operates in – suggesting significant growth potential.

“However, given the inevitable short-term fluctuations in Sea’s financial performance as a result of prioritising growth, we continue to expect near-term volatility in its share price, and reiterate that investors will need to remain patient with this stock,” OCBC noted. It has a “buy” call on the counter.

Citi has also reduced its target on Sea to US$44 from US$49, and retained its “neutral/high-risk” rating on the counter. It explained that any further aggressive spending could drag on the timing of Shopee’s profitability, even if there is initial success in attracting users and sellers amid stiff competition.

Maybank analyst Kelvin Tan said: “In our view, South-east Asian platforms have been disrupted and are gearing up for another phase of intense competition, exemplified by Shopee’s spending on livestreaming and consignment model.”

He believes this could spur quicker regional e-commerce penetration in the medium term, although margins could continue to come under pressure.

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Maybank maintained “buy” on Sea as it continues to see significant longer-term potential for the business given its market-leading position, ecosystem of services across e-commerce and financial services, and favourable regional dynamics. That being said, Tan expects near-term share price consolidation for the group, given the uncertainty over Sea’s ability to counter intense competition and the effectiveness of its investments to re-accelerate Shopee.

DBS Group Research, meanwhile, holds the view that the negatives have already been priced in as Sea is trading at around eight times the consensus adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) for FY2024, following the more than 20 per cent drop in its share price after the release of its Q3 results.

Sea’s shares finished 22.1 per cent or US$10.16 lower at US$35.87 on Tuesday, and were up 0.4 per cent to US$36 in after-hours trading.

DBS has maintained “buy” on Sea with an unchanged target price of US$70, implying a potential upside of 94.4 per cent. It expects Shopee to be less aggressive in the first half of 2024 after gaining market share from the TikTok Shop ban in the fourth quarter of 2023, save for continued investment in livestreaming.

However, if Shopee continues to be overly aggressive in the first half of 2024 due to any potential partnership between TikTok and Tokopedia in Indonesia, there could be a 10 per cent to 12 per cent downside risk to the consensus group FY2024 adjusted Ebitda, DBS estimated.

That being said, Shopee could still see an opportunity to up its e-commerce market share as GoTo focuses on overall adjusted Ebitda breakeven in the next two to three quarters. “We would like to remind our readers that TikTok Shop was successful not just due to livestreaming in the same app, but also due to huge logistics subsidies, which may be difficult to offer for any potential TikTok partner in our view,” DBS said.

Like DBS, UOB Kay Hian maintained its “buy” call and target price of US$72.25, implying a potential upside of 100.7 per cent. It believes Sea would be able to turn black in six to 12 months as it solidifies its market leadership in the e-commerce industry. It also maintained its earnings forecast of US$306 million for FY2023, US$745 million for FY2024, and US$1 billion for FY2025.

However, the research team acknowledged that there could be potential for Q4 to remain in the red if gross merchandise growth fails to offset the rise in sales and marketing expenses during the period.