Sea could see further margin improvement, CGS-CIMB keeps 'add'

The analysts have lifted Sea’s FY2023-FY2024 EPS by 1.3%-25.6% on higher e-commerce margin assumptions.

CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan have kept “add” on Sea Ltd with a target price of US$105 ($139), highlighting the firm’s strong footing in capturing long term tailwinds from Asean digitalisation.

Sea will be reporting its 1QFY2023 ended March results on May 16. The analysts expect Sea to report further margin improvement in 1QFY2023 as well as adjusted ebitda and generally accepted accounting principles (GAAP) net profit of US$508 million and US$259 million respectively. This is driven by further monetisation and cost-control measures for Shopee and SeaMoney, which CGS-CIMB believes would more than offset the weakness in Garena.

“While near-term gross merchandise value (GMV) growth could remain dampened by various cost-cutting measures, our 1QFY2023 GAAP revenue forecast of US$3.16 billion remains higher versus Bloomberg consensus’ US$3.02 billion as we assume higher take rate,” the analysts add.

Ong and Tan highlight that Shopee is continuing to lead monetisation in the Southeast Asian e-commerce industry, carrying out multiple commission rate and service fee adjustments across its Asian markets. Amid peer Tokopedia’s focus on achieving adjusted ebitda positive by 4QFY2023, the analysts believe Shopee can continue to scale back on sales and marketing spend while maintaining its market leadership position.

CGS-CIMB forecasts Shopee’s marketplace take rate to expand to 10.8% in 1QFY2023, bringing its segment adjusted ebitda to US$235 million.

On the back of higher e-commerce margin assumptions, the analysts have lifted Sea’s FY2023-FY2024 EPS by 1.3%-25.6%.

Moving forward, Sea’s gaming segment is expected to see further sequential declines in booking in 1QFY2023 as it continues to be impacted by post-Covid-19 normalisation in gaming activities and a weaker macro economy. Due to this, the analysts have lowered their adjusted gaming revenue forecasts, leading to a lower adjusted ebitda for FY2023 to FY2025.

The adjusted ebitda margin for the gaming segment is expected to hold at around 45%-47.5% for FY2023-FY2025, with cost-cutting measures offsetting weaker game spend, Ong and Tan add.

Shares in Sea closed US$1.17 higher or 1.37% up on May 11 at US$86.71.

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