Brokers' take: UOBKH maintains 'buy' on Sea with US$370.76 target price

UOB Kay Hian (UOBKH) has maintained "buy" on Sea with a target price of US$370.76, despite removing the Nasdaq-listed company from the brokerage's list of alpha picks due to a lack of share-price catalysts in the near term just last month.

This makes it the second brokerage to double down on a "buy" call for Sea with an unchanged target price, even though the stock tumbled over 17 per cent by Wednesday's (Jan 5) close after China's Tencent trimmed its stake in the company from 21.3 per cent to 18.7 per cent.

In its latest report on the Singapore-based consumer Internet company on Friday (Jan 7), analyst Clement Ho stated 2 share price catalysts for the stock - its earlier-than-expected reduction in cash burn, and continued market share gains in e-commerce.

He also agreed with Maybank Research, which published its report on Wednesday, that Tencent's stake sale is unrelated to Sea's strong fundamentals.

"We view the move by Tencent as an attempt to reduce its control in various businesses, to avoid allegations of potential manipulative activities by the Chinese government," Ho said, noting that the Sea divestment follows the recent sale of Tencent's stake in JD.com.

Adding that the recent price correction for Sea, which owns e-commerce platform Shopee, is "healthy", he said: "(We) firmly believe that the growth momentum for Sea's main revenue driver - gross merchandise value (GMV) - to continue going forward."

The US$370.76 target price translates to 12.7 times the price-to-sales ratio the brokerage has estimated for Sea in FY2022, and represents a 100.7 per cent increase from its share price of US$184.72 as at Wednesday's close.

Ho said this valuation now looks "attractive" with Sea's recent share price correction, as the price-to-sales ratio of its e-commerce peers' average is at 2.9 times, with the ratio for Amazon.com and MercadoLibre standing at 3 times and 6.1 times, respectively.

The premium over peers' valuation is backed by Sea's stronger sales growth profile at a 3-year compound annual growth rate of 73.6 per cent over 2020 to 2023, compared with its e-commerce peers' average of 24.3 per cent, going by consensus estimates, he added.

Elaborating on his take on Sea's GMV, Ho said it "remains in solid growth momentum", pointing out that its third-quarter FY2021 results marked consecutive record highs on this front since its inception of the e-commerce segment in the first quarter of FY2016.

Furthermore, a research paper by Google, Temasek and Bain found that South-east Asia's Internet economy could reach US$1 trillion GMV by 2030, up from US$170 billion in 2021, given "seismic" shifts in consumer and merchant behaviour in the region, the analyst noted.

Based on the total addressable market of US$260 billion GMV, Ho added that Shopee is currently the undisputed leader in the region with 21.7 per cent market share, followed by Lazada with 8 per cent.

Ho, meanwhile, noted that Sea's generally accepted accounting principles (GAAP) revenue of US$2.7 billion, which went up by 121.8 per cent year on year, surpassed UOBKH's estimates due to strong takings in Shopee.

However, the group's adjusted earnings before interest, taxes, depreciation, and amortization deepened to -US$165.5 million from the continued rise in sales and marketing expenses in Shopee, he stated.

The analyst also noted that Sea's e-commerce revenue guidance was revised upwards twice.

From the earlier revision for segment revenue of US$4.7 billion to US$4.9 billion, Sea raised its 2021 guidance by 6.3 per cent, to between US$5 billion and US$5.2 billion, representing a year-on-year growth of 135.3 per cent at the midpoint of the revision.

Ho attributed this to strong momentum in the Indonesian market, an expansion of product categories including the sale of more groceries and fast-moving consumer goods, and expansion to Latin America.

READ MORE:

• Shopee CEO Chris Feng to help drive Sea's strategy as group president
• Sea's Q3 loss deepens to US$450.1m, revenue up 122%