Broker's take: CGS-CIMB lifts Sea's target price on Free Fire, Shopee Premium optimism

CGS-CIMB has reiterated its "add" call and increased its target price on Singapore-based, New York-listed consumer Internet company Sea Ltd to US$185.30, from US$158.20, as it sees sustained growth ahead.

Shares of Sea rose US$3.98 or 2.4 per cent to close at US$167.42 on Wednesday in the US.

The brokerage believes Sea continues to gain "strong traction" in the gaming and e-commerce segments, analysts Ngoh Yi Sin and Darren Ong wrote in a note dated Wednesday.

Its gaming arm Garena may potentially gain market share from the PUBG Mobile ban in India, they added. Meanwhile, the e-commerce business Shopee is set to officially launch a new shopping category for higher-end brands this weekend, and has also made gradual monetisation efforts.

The higher target price for the stock was due to an increased price-to-gross-merchandise-value (P/GMV) multiple of 1.4 times for the online shopping segment, up from 1.1 times previously, CGS-CIMB said.

"We expect valuation multiples to stay elevated amid a low interest rate environment," it added.

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On Garena, the analysts believe its battle-royale game Free Fire, which is already gaining traction in India, will be well-positioned to grow further given the ban of similar hit video game PUBG in the country. PUBG Mobile was one of 118 Chinese apps that the Indian government blacklisted recently over national security concerns.

CGS-CIMB projects that if Free Fire captures a 10 per cent market share of PUBG Mobile India's 40 million active users, that will result in Garena's gaming revenue increasing by about 1 per cent.

This, coupled with Free Fire's new in-game crossover with the Money Heist TV series, recurring e-sports events and potential new gaming licences from Tencent, will pose upside to the analysts' estimates of Sea's gaming earnings before interest, tax, depreciation and amortisation (Ebitda) for FY20-22, they said.

Over in the e-commerce space, CGS-CIMB sees the new Shopee Premium - which features higher-end brands such as Sulwhasoo, Ralph Lauren, Calvin Klein, Skin Inc and L'Occitane - as a positive, as it will help to acquire more merchants and customers, especially millennials and Gen Z, to boost gross merchandise value (GMV) and gross orders.

Shopee Premium will initially operate in five markets: Singapore, Vietnam, Malaysia, Thailand and Indonesia. It allows brands to tap its digital marketing tools and core engagement features to reach out to customers, particularly the growing millennial and Gen Z audiences for premium goods.

The research team also found that the group has gradually hiked its fees to sellers in some markets including Taiwan, Vietnam and the Philippines. This will translate into higher take-rate in the coming quarters, it noted.

The analysts forecast Shopee's GMV to record a compound annual growth rate of 45.6 per cent for FY19-22, and the take rate to improve to 8 per cent in FY22 from 5.4 per cent in FY19.

Earlier this week, UBS initiated coverage on the stock with a "buy" rating and a Street-high price target of US$200, stating that Sea's gaming and e-commerce platforms will benefit from a strong secular shift online, The Motley Fool wrote on Tuesday.

However, not all analysts are bullish on the Asian tech play. Tellimer initiated coverage on Sept 29 with a "sell" rating and a target price of US$101, which implied a 35 per cent downside at the time.

Tellimer head of consumers equity research Nirgunan Tiruchelvam wrote that Sea "is chronically cash-destructive and looks grossly overvalued on every fundamental metric".

He argued that Sea's elevated valuation does not reflect what he sees as "serious difficulties". For one thing, its e-commerce arm is not cash flow positive even with the boost from the Covid-19 pandemic.

The GMV spike from the pandemic was also lower than other e-commerce players such as Alibaba, Jumia Technologies and Mercado Libre, according to Tellimer. "This suggests that the e-commerce opportunity is far more limited in South-east Asia, which is a dispersed region. There are logistical issues that may constrain e-commerce growth," the analyst said.

Besides, Sea's Ebitda generation is dominated by the gaming business, which has vulnerabilities, he added. Garena is largely an agency business, which means most of its games are not its intellectual property, in contrast to regional gaming giants such as Tencent, NetEase and Activision.

Also, close to a quarter of its gaming revenue comes from a single game - Free Fire. "Gaming loyalty is fickle and fashions can change quickly," Mr Tiruchelvam said.