Brokers' take: Maybank maintains US$379 target for Sea despite 17.3% tumble on Tencent stake sale

MAYBANK Research doubled down on its "buy" call and US$379 target price for Sea, although the stock lost one-sixth of its value, closing at US$184.72 on Wednesday (Jan 5), since Tencent's move to pare its stake in the company from 21.3 per cent to 18.7 per cent.

This means the brokerage's take on the Singapore-based gaming and e-commerce company, which owns Shopee and Garena, remained unchanged from mid-November when the stock was still trading above US$300 on the New York Stock Exchange.

Analyst Lai Gene Lih stressed in a report on Wednesday that Tencent's stake sale is "unrelated to fundamentals".

"Sentiment for pre-earnings stocks tend to be fragile and this move adds to the overhang. Nevertheless, this does not take away long-term growth prospects given Shopee's position as Asean's top e-commerce player and potential from Garena Free Fire Max," he said.

He reiterated that Sea's balance sheet is "robust", with about US$12 billion of cash expected in FY2021 through FY2023.

He also said Shopee continues to be the top-ranked shopping app by monthly active users and total time spent in Asean, including Indonesia, and Taiwan, while e-commerce penetration in Asean remains low as compared to mature countries like China and the US.

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Sea shares closed at US$223.31 on Monday before the announcement.

After Tencent said late on Tuesday that it sold the shares at US$208 each to raise US$3 billion, the stock tumbled 11.4 per cent to close at US$197.84. The counter continued to fall by another 6.6 per cent to reach US$184.72 at Wednesday's close.

The US$379 target price would thus represent a 105.2 per cent upside.

Apart from Sea's growth prospects, Lai also focused on Tencent's intention to use the proceeds raised to fund other investments, while retaining a majority of its stake to benefit from Sea's future growth.

He mentioned as well that the Chinese tech giant is restricted from selling more Sea shares in the next 6 months.

Nevertheless, he pointed out that Sea's share price could be volatile in the near term, given that Tencent's share sale is "likely to create short-term sentiment overhang".

As for Sea's drastic decline from a 52-week high of US$366.99, clocked on Oct 19, to under US$200 currently, Lai said the drop is likely due to concerns over normalising growth for its mobile game Garena Free Fire, as well as a rotation away from pre-earning growth stocks.

A near-term risk to the share price, he noted, could be some wider-than-expected losses, especially as Sea deploys the US$6 billion it raised in 2021 to fund growth.

Meanwhile, the key risk would be slower-than-expected e-commerce gross merchandise value, digital entertainment bookings and revenue growth, he pointed out.

While acknowledging that Free Fire's growth is normalising post-Covid, Lai expects Free Fire Max to continue delivering growth, largely from new markets.

These are likely to be from more affluent countries, which may drive up the average revenue per paying user, as Free Fire is already a top grossing mobile battle royale game in emerging markets like Asean, Latin America and India, he said.

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