Brokers’ take: CGS-CIMB slashes Sea target to US$42, downgrades to ‘hold’

CGS-CIMB has cut target price of Internet company Sea to US$42 from US$61 on its earnings risks, given the heightened competition in Indonesia’s e-commerce sector.

The target cut, together with a downgrade to “hold” from “buy”, followed the news of a potential return of rival TikTok’s live-commerce into the market, said the brokerage on Wednesday (Dec 6).

CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan quoted Bloomberg news on Tuesday that ByteDance’s TikTok had reached an informal agreement to invest in Indonesian technology company GoTo’s Tokopedia.

Both parties will cooperate on e-commerce services.

GoTo was formed via a merger between Indonesia’s ride-hailing giant Gojek and e-commerce firm Tokopedia in 2021.

As the investment by the Chinese video app in the Jakarta-listed unit could revive its e-commerce business, after the ban in its biggest market, the deal could prolong the intense competition in the e-commerce space. The analysts subsequently cut the FY2024 forecast of e-commerce’s enterprise value-to-sales multiple to 0.75 times.

They also noted that Sea’s valuation is undemanding, with current share price implying a 0.5 multiple to the forecast FY2024 sales of Shopee, below the median multiple of its e-commerce peers of 2.2.

They added: “But we believe share price could stay volatile and be news-flow-driven in the next three to six months. According to Bloomberg news, the final details are still being hammered out and could change before an official announcement on the collaboration.”

The analysts also noted that the deal could lead TikTok Shop to re-emerge stronger, with the potential for cross-pollination of user and local merchant base, as well as to navigate regulatory challenges better.

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“Given TikTok Shop’s ability to benefit from strong organic traffic generation by TikTok, we think Sea’s Shopee would have to keep its investments elevated until TikTok Shop rationalises its spending,” said the analysts, noting that they expect Sea’s adjusted earnings before interest, taxes, depreciation, and amortisation (Ebitda) losses for the fourth quarter to be US$480 million, and US$892 million for the next financial year.

However, the analysts highlighted that Sea is in a stronger position to defend its market share with its group-level adjusted Ebitda and operating cash inflow of the third quarter in positive territory, supported by steady cash generated from the gaming and fintech segments. They added that Sea’s cash position of US$7.9 billion as at the end of Q3 FY2023 would allow for more growth-focused strategies.