Brokers' take: Maybank KE starts Sea at 'buy' with US$378 target

MAYBANK Kim Eng has commenced coverage on Sea Ltd with a "buy" call and a US$378 price target on the belief that the consumer Internet group is one of the best proxies to ride the Asean digitisation wave.

This is considering Shopee's position as the region's top e-commerce app as it paves the way for user conversion into digital finance, commented analyst Lai Gene Lih in an initiation report last Friday.

"Growth in these segments (e-commerce, digital entertainment and digital financial services) appear at an early stage, and investments are funded by cash-generative Garena via the Free Fire franchise," said Mr Lai.

In particular, he believes Sea's self-developed mobile game Free Fire is still in its early stages of its lifecycle with the potential to be a major intellectual property (IP) franchise.

"In 2Q FY2021 Free Fire was the highest grossing mobile battle royale game in the US for the second consecutive quarter. The game remains extremely popular in Southeast Asia, Taiwan, Latin America, and India," he noted.

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Despite noting strong growth momentum and stickiness in Free Fire and Shopee's core markets, Mr Lai observed that a key risk to his projections include a decline in popularity of such offerings and the emergence of regulatory risks.

"Sea faces strong competition in all the verticals and geographies that it participates in, and a loss in appeal and/or accessibility of its products can be easily replaced by competitors', thereby resulting in market share loss of Sea's offerings," he said.

Based on his expectations of broad-based growth across all segments of the group, the analyst is projecting revenue growth of 102 per cent, 50 per cent and 34 per cent for FY2021, FY2022 and FY2023 respectively. These estimates have factored in Sea's fundraising of 11 million new American depository shares (ADS) as well as US$2.5 billion of convertible bonds.

Mr Lai is forecasting Sea to break even in FY2023 with net profit of US$346 million, and for its cash and cash equivalents to grow to US$14.7 billion.

However, he cautions that the anticipated turn to profitability could potentially be delayed should the group invest more than expected to grow its e-commerce and digital financial services prospects.

"As we expect Sea to continue its aggressive expansion mode, in particular for Shopee and SeaMoney, we anticipate sales, marketing and research & development expenses to remain elevated in coming years," said the analyst.

Shares of Sea ended US$2.90 or 0.9 per cent higher at US$325.50 at Friday's close on the New York Stock Exchange.

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