Brokers' take: Analysts say Shopee's India exit raises Sea's prospect of profitability

SEA'S shutting down of its Shopee business in India could allow it to focus on other markets and raise its prospect of profitability, noted analysts.

Sea said on Monday (Mar 28) it will withdraw from India's retail market, citing "global market uncertainties". The statement covered only retail and not gaming activities.

The analysts, unsurprised by the move, said it was just a matter of time given the India ban of Sea's popular gaming app Free Fire in mid-February.

CGS-CIMB expects the move to quell concerns over the group's significant cash burn in India - which has been its most competitive market to date. This is especially so when its funding source in the country (Free Fire) has been impacted. Thus, the latest development removes the overhang from India.

"Given India's huge market size and challenging competitive landscape, Shopee's exit could put Sea on a firmer footing in its path to profitability," said CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan in a report on Tuesday.

They estimate at least US$60 million in savings per quarter from the India exit, assuming a conservative US$2 Ebitda (earnings before interest, taxes, depreciation and amortisation) loss per order for the nascent market entry.

BT in your inbox

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign Up

Sign Up

Meanwhile, Citi, in a separate report on Monday, expects limited or no revenue contribution from Shopee as it only started operations in October 2021 and is still at an early stage.

"We believe exiting India at an early stage will save quite a bit of future investment and will be positive to Shopee's overall profitability profile," Citi added.

Both research teams noted that the India exit would allow Shopee to focus its efforts on growing its core markets (South-east Asia and Latin America), or potentially quicken its pace of narrowing losses in coming quarters.

CGS-CIMB has an "add" call and an unchanged target price of US$202 on Sea, implying a potential upside of 72.7 per cent from the US-listed counter's Monday closing price of US$116.98. Meanwhile, Citi has a "buy" call and target price of US$221, implying a potential upside of 88.9 per cent.

CGS-CIMB said the latest development could also spur speculations that Free Fire India's ban is less likely to be lifted in the near term.

Garena - Sea's gaming arm - continues to engage with Indian gamers through Free Fire Max which remains accessible on the Google Play Store. Sea has guided for Garena's bookings to drop 30 per cent year on year at the midpoint in fiscal 2022.

Phillip Securities on Mar 22 initiated "buy" on Sea with a target price of US$196, implying a potential upside of 67.6 per cent. The research team expects Shopee to drive growth for Sea in the next 2 years, but also noted that the profitability of the group's digital entertainment business is concentrated on a single product.

READ MORE: Sea's e-commerce arm exits France a few months into Europe foray