Brokers’ take: DBS raises Sea’s target price after Indonesia bans social e-commerce

DBS Group Research on Thursday (Sep 28) raised its target price on Sea to US$78 from US$66 after Indonesia banned e-commerce transactions on social media platforms.

The move, which came into effect on Wednesday, aims to protect offline merchants and marketplaces, said Indonesia’s government. It added that predatory pricing on social media platforms is threatening small and medium-sized enterprises.

Such restrictions could throw a spanner in the works regarding the potential success of TikTok Shop in Indonesia.

TikTok would have to prove its e-commerce business is separate from its social media platform, with no data sharing from the backend, DBS said.

This could mean applying for a separate licence to operate, and having a clear source of funding for e-commerce losses – previously funded by TikTok’s advertising business, the research team added.

“Even if it can secure the licence, operating as a standalone app may still be challenging. Given that most of its purchases are impulse buys, the need to log into a separate app might lead to a high drop-out rate.”

This could impede the further conversion of its 125 million local monthly active users into shoppers, Maybank said in a report on Wednesday. It added that this could benefit Sea’s Shopee platform, which also relies on the beauty and personal-care consumer segments for most of its domestic sales.

Indonesia’s new regulation also requires e-commerce platforms in the country to set a minimum price of US$100 for certain items directly purchased from overseas, Reuters reported. This might not bode well for TikTok Shop, which relies more on imported goods than its competitors.

Citi believes any disruptions to TikTok Shop’s seller experience during any possible transition would likely benefit Shopee and other traditional e-commerce platforms in the coming months.

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That being said, implementation of the regulation or transition could take time, given the large size of TikTok Shop’s seller and affiliate creators base, said Citi analyst Alicia Yap.

DBS has maintained its “buy” recommendation on the Internet giant, as did Maybank, which retained its US$80 target price on the Nasdaq-listed counter. Citi Research, meanwhile, has a “neutral” call on Sea and a target of US$50.

Sea’s shares ended 4.8 per cent or US$1.94 higher at US$42.09 on Wednesday following the news of the social e-commerce ban. The counter was up 0.2 per cent to US$42.18 in after-hours trading.

The change in DBS’ target came after it raised its adjusted group earnings before interest, taxes, depreciation and amortisation estimations for FY2024 by 19 per cent to US$2.2 billion, and by 10 per cent to US$2.6 billion for FY2025.

It did not change its FY2024 and FY2025 gross merchandise value projections for Shopee due to potentially lower cross-border business in Indonesia. It estimates that around 8 per cent to 10 per cent of Shopee’s business in the country is cross-border, which could fall by 80 per cent to 90 per cent due to the new regulations.

Citi’s Yap said: “The regulation will also affect livestreaming activities offered by Shopee; nevertheless, we believe Shopee (Sea) will still be the net beneficiary from the latest regulatory decision by the government.”

Shopee will also likely see further upside in the overall competitive landscape if regulators in other Asean countries consider similar restrictions and bans, Citi noted.