Singapore-based Sea Ltd outshines Alibaba, JD.com in US stock market

Singapore

OPTIMISM fuelled by e-commerce gains has more than trebled the stock value of New York-listed Sea Ltd in 2019 - despite its US$1.18 billion net loss for the nine months ended Sept 30, 2019.

Previously known as Garena, Singapore-based Sea has seen its shares climb 244.61 per cent in the year to Dec 23, outperforming the S&P 500 index, which only rose 28.5 per cent in the same period.

This puts the firm - which operates gaming arm Garena and e-commerce platform Shopee - on track to close out the year as the top-performing foreign stock on the US stock exchange, beating Chinese corporate giants Alibaba and JD.com.

Sea's inflection point came in end-February this year, when it posted its Q4 2018 adjusted earnings that beat consensus estimates by 33.4 per cent. The stock rose by 34.94 per cent to close at US$21.86 the day after results were released, driven by heavy trading. The market currently values the company at US$18 billion.

Garena continued to see strong traction in 2019, aided by its Free Fire growth and the consistent performance of online game Arena of Valor.

The latest release of first-person shooter game Call of Duty in end-October should see sales ramp up into 2020, while PC games hold steady, wrote Bloomberg Intelligence analyst Matthew Kanterman in a report on Oct 7.

Sea's Garena gaming arm will continue to see sales benefit from more spending on PC and mobile games in South-east Asia, especially in its key markets of Indonesia and Taiwan, he said, adding that the region's gaming market is expected to reach US$8.6 billion in 2021.

However, analysts estimate that growth from digital entertainment might cool to about 10 per cent in 2020 barring the release of a hit game. As such, eyes are now on e-commerce platform Shopee to drive revenue.

First launched in 2015, the platform is now widening its lead over peers by number of downloads and active user count among South-east Asia's biggest shopping apps.

This, says Mr Kanterman, will position it favourably to achieve the scale it needs for a competitive edge.

"Shopee is quickly becoming the leader in Taiwan, Singapore, Thailand, Indonesia, Malaysia, Vietnam and the Philippines," he said in the report, adding that scale is the determining factor for e-commerce success in any market.

However, a rapidly rising e-commerce gross merchandise volume (GMV) will not guarantee Shopee's profitability in the long-term.

While Sea's stock has soared over the past year, the company has not turned a profit since listing in 2017, continuing to book greater losses each year.

The company booked a US$560.5 million net loss in 2017 and a US$961.2 million net loss in 2018.

Even so, the market's general wariness towards loss-incurring companies did not seem to apply here. Analysts remain bullish about Sea, expecting its e-commerce arm to be the key share price driver next year.

According to data from Bloomberg, seven out of eight analysts issued a buy or overweight rating on the stock, citing strong e-commerce revenues, growth in digital payments and an expansion of its Garena gaming business.

"We forecast e-commerce revenues to increase nine times from 2018 to 2021," wrote JP Morgan analyst Ranjan Sharma in a report on Dec 4. He expects Shopee to increase fees for its merchants and buyers.

Sea's revenue from e-commerce and other services grew 233.65 per cent year-on-year to US$526.1 million, for the nine months ended Sept 30. This contributed to 37.63 per cent of the company's revenue.

However, e-commerce and other services recorded a gross loss of US$86.7 million. The company also registered US$627.8 million in its sales and marketing expenses, a 26.18 per cent rise from the year before. Its aggressive marketing strategy has seen Korean girl group Blackpink and football superstar Cristiano Ronaldo among its spokespeople. Shopee also dishes out cashback promotions and discounts to encourage users to buy from their platform.

Despite such high costs, analysts believe the platform's rising take rate - the percentage of transaction value it gets to keep as revenue - and improving margins hint at a sustainable business.

"Shopee's GMV may rise about 70 per cent this year while Sea's take rate climbs, fuelling sales growth of almost 200 per cent," wrote Mr Kanterman. Shopee started monetising its GMV in the second quarter of 2017, and has seen its take rate rise steadily, reaching a record of 4.3 per cent in the first quarter of 2019, he added.

JP Morgan analysts also expect a reduction in losses as sellers pay for a larger part of their shipping costs.

However, Mr Kanterman noted that Sea will still need to pay attention to its expense accounts. "The company needs to show progress on slowing marketing expenses to improve e-commerce margins," he said.