TikTok-GoTo partnership takes away Indonesian group’s burden, pressures Sea: analysts

THE partnership between TikTok and GoTo will hurt Sea’s margin, but relieve the Indonesian tech giant’s cash-burning burden, said analysts on Monday (Dec 11).

DBS Group Research has slashed the target price for Shopee owner Sea to US$42 from US$62 with a downgrade to “hold” from “buy”.

This was following the deal announcement, as the research house expects Shopee to suffer greater losses amid heightened competition in e-commerce space.

DBS analyst Sachin Mittal revised down the forecasts of adjusted earnings before interest, taxes, depreciation, and amortisation (Ebitda) of Sea’s e-commerce business. He expects losses for FY2024 to widen by 25.1 per cent as compared to the previous estimate.

“We also delay the e-commerce adjusted Ebitda turnaround from FY2025 to FY2026,” Mittal added, noting that Ebitda forecast for FY2025, at a loss of US$252 million, was revised into the red from black.

As a result, Mittal lowered the group earning forecasts down by 8.4 per cent for FY2024 and 21.8 per cent for FY2025, valuing Sea’s gaming and fintech business.

He emphasised that the e-commerce competition will remain elevated in the next two years. While TikTok and Shopee grapple for market share in South-east Asia, online fast fashion retailer Shein and Boston-based marketplace Temu could also join the fight.

Citi Research, meanwhile, expects the negative impact on Shopee, which is already struggling for profitability, to be more severe than for other e-commerce peers such as Lazada.

While TikTok’s initial US$1.5 billion commitment into the combined Tokopedia entity will force Shopee and Lazada to enhance their investments to defend market shares, pressuring their profit margins, Shopee faces a higher risk given “lack of visibility on the effectiveness of recent investments”.

“We expect Sea’s share price to remain under pressure with possible downside revisions to financial outlook in the coming quarters, if TikTok and Tokopedia prove to further pressure Shopee’s gross merchandise volume growth and market share,” said the Citi bank’s research house.

Similarly, Morningstar Equity Research expects Sea to face depressed margin with increased operating expenses in the medium term, as the group has indicated it will reinvest resources into the struggling Shopee to keep up with competitors.

The research house, at the same time, increased its fair value estimate for GoTo to 78 rupiah from 63 rupiah as the deal is a loss-cutting move for the company.

Morningstar noted that Tokopedia, the e-commerce unit of GoTo, had “limited visibility”, and its profitability was burdened with heavy cash burn.

Selling off the unit means GoTo is saved from incurring significant spending.

“Despite the loss of upside from the selloff, we believe this should allow GoTo to better allocate its resources and save on corporate costs and marketing expenses in the long run,” said Morningstar, noting that GoTo will be in a better position to run its on-demand business.

The team also noted that the operating margin of the entity resulting from the combined Tokopedia and TikTok Shop Indonesia will likely be negative in the short term, amid existing intense competition in the region, which still includes Sea’s Shopee and Alibaba’s Lazada.

It also highlighted the market share of Indonesia’s e-commerce space by the enlarged platform is likely to reach 40 to 45 per cent.

However, UOB Kay Hian said the deal is negative for GoTo in the long term as giving away a major ownership of Tokopedia “with sizeable upside in terms of take rate, faster growth and with substantial potential long-term profit” to TikTok means potential profit loss for GoTo.

The brokerage added that its calculation indicates GoTo’s long term net profit after tax, starting from 2026, could be reduced as much as 40 per cent.

“We believe at the very least GoTo should get a larger stake in the enlarged entity,” said the brokerage, noting the significance of the Indonesian market for TikTok Shop.

It also downgraded GoTo to “sell” with a lower target price of 75 rupiah from 121 rupiah.