Brokers’ take: UOBKH initiates coverage on Sea with ‘hold’
Renald Yeo
UOB Kay Hian (UOBKH) has initiated coverage on Sea Ltd with a “hold” call and a target price of US$58.77, on concerns of slower growth from Sea’s digital entertainment and e-commerce segments.
Chief among the brokerage’s concerns are potential headwinds for its digital entertainment arm, Garena, along with cautions on e-commerce platform Shopee’s profitability, and a risk of divestment by major shareholder Tencent.
Although Sea’s share price has recovered about 50 per cent after a narrower than expected net loss in the third quarter of this financial year, UOBKH remains doubtful that Sea’s on-going cost rationalising exercises could continue to improve profitability, the brokerage said in a report on Tuesday (Dec 13).
Analysts at UOBKH noted Garena’s “heavy reliance” on its marquee game, Free Fire, which made global headlines at the start of the year when India banned the game on security concerns.
Meanwhile, Sea’s lowered booking guidance in its Q3 financial reports implies a 26 per cent quarter-on-quarter decline in Q4 2022 for its digital entertainment segment, UOBKH said. The brokerage added that it expects further deterioration in Garena’s revenue and profitability, as users spend less time and resources on gaming with global economies continuing to re-open at a quicker pace.
While Shopee’s Q3 results had shown significant improvements, analysts at UOBKH were cautious on the slower sales growth, weaker consumer spending power and potential loss of market share in the segment as potential headwinds.
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The brokerage also highlighted indications of higher customer acquisition costs at Shopee, with sales and marketing expenses for each new order in Q2 2022 soaring to US$6.70, up from US$1.40 in Q1 2020.
A potential divestment by major shareholder Tencent – which holds 18.6 per cent of Sea, the second-largest shareholder after founder and chairman Forrest Li – should not be taken lightly, its analysts added. They cited Tencent’s divestment of JD.com shares, and the subsequent drop in JD.com’s share price, as an example of divestment risks.
Additionally, with some US$1.1 billion of convertible notes due in 2025 and a further US$2.9 billion due in 2026, Sea’s financial strength is weaker than it appears even at a reduced burn rate from 2023 onwards, UOBKH said.
The brokerage was however more optimistic about SeaMoney’s growth prospects, with forecasted total payment value climbing to US$126 billion in 2025, up from US$17 billion last year. This is due to the large monetisation base from the Shopee platform, along with potential growth from Sea’s digital banks in Singapore and Malaysia, they added.
In the report, UOBKH analysts derived its target price of US$58.77 on a sum of the parts valuation basis, with Garena valued at eight times its 2023 forecasted price to earnings ratio, Shopee at 1.8 times its 2023 forecasted price to sales (PS) multiple, and SeaMoney at 3.5 times its 2023 forecasted PS.
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