Tencent-backed Sea’s 112% rally has reasons to run

SEA shares have more than doubled since November, boosting optimism that the tech conglomerate is on the path to a sustainable recovery from a devastating slide that started in late 2021.

The bull case for the Tencent Holdings-backed firm was bolstered this week when it announced a 5 per cent pay increase for employees, and founder Forrest Li said its cash balance has started growing rather then shrinking, months ahead of target. The Singapore-based company is expected to report a second quarterly profit when it announces results on Tuesday (May 16).

“Sea could report an earnings beat for the first quarter of the financial year as it continues its strong cost-efficiency execution,” Ong Khang Chuen, an analyst at CGS-CIMB Securities in Singapore, wrote in a note published on Monday. “This is likely to be a year of fine-tuning for Sea as it looks to drive sustainable topline growth and profitability.”

Despite their recent doubling, the rally in Sea’s shares still looks like just a tiny blip on a longer-term price chart. The firm’s American depositary receipts had surged to a record US$366.99 in October 2021 before a bursting of the pandemic-era tech bubble saw them crash to just US$40.92 in November. They closed at US$86.71 on Thursday, extending gains from last year’s low to 112 per cent.

Sea – whose businesses span e-commerce website Shopee, Internet services firm SeaMoney and gaming division Garena – will report first-quarter net income of US$223 million next week, versus a loss of US$580 million in the same period a year ago, according to the average estimate in a Bloomberg survey. The firm reported its first-ever quarterly net profit in March, about 14 years after its founding.

Total overhaul

The improving numbers are the result of an overhaul made last year, which included cutting thousands of jobs, exiting markets such as India, and trimming more than US$700 million from quarterly sales and marketing expenses.

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“We see broad stability in top-line metrics and continued focus on profitability, with market share positioning largely intact,” Sanford C Bernstein analysts including Venugopal Garre in Singapore and Ankit Agrawal in Mumbai wrote in a note on Monday. “A return of growth, which may still take more time to pan out, will be the next important catalyst,” they said, reiterating their outperform rating.

Analysts are generally positive, with 30 having a buy rating, 11 recommending a hold and just one telling clients to sell, data compiled by Bloomberg show. The average 12-month price target is US$96.48, about 11 per cent higher than the latest close.

One part of Sea’s businesses that analysts remain wary of is the gaming unit, which is seen dragging down first-quarter earnings.

There will be further moderation in the gaming business as the current title “Free Fire” matures and no new games have been released, the Bernstein analysts wrote. “Game segment data suggests that the year-on-year decline will continue,” they said.

Longer-term, most analysts are positive the broader upward momentum will be sustained.

“Sea’s rapid improvement in cost structure should enable it to net a profit for full-year 2023, while it might take rivals such as Grab and GoTo another one or two years to achieve the same,” Bloomberg Intelligence analyst Nathan Naidu in Hong Kong wrote this month in a note.

“Sea’s e-commerce expansion in Latin America could kick sales growth back into high gear after a deliberate slowdown to achieve breakeven, which should happen this year,” he said. BLOOMBERG