Sea Ltd surprises with strong guidance for 2024
- Upgrade to BUY with a higher US$75 TP led by a significant turnaround in E-commerce in 2H24F
- 4Q23 group adj EBITDA of US$127m was above consensus’ US$51m on reduction of E-commerce losses
- GMV of US$23.1bn was higher than expectations of US$22.8bn
- Guidance for (i) E-commerce to turn adj EBITDA positive in 2H24F vs market expectations of continued losses (ii) Free-Fire to see double-digit growth in bookings in 2024 vs market expectations of 5% growth. In-app transactions on TikTok app could stop in Indonesia in our view
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4Q23 group adj EBITDA was US$127m (+259% q-o-q), well ahead of consensus’ US$51m, on lower losses in E-commerce. In 4Q23, Sea Ltd (SE) recorded group adj EBITDA of US$127m compared to consensus projection of US$51m, on lower-than-expected E-commerce losses which had more than offset the weaknesses in Gaming and Fintech segments. E-commerce adj EBITDA loss narrowed by US$121m to (US$225m), versus consensus expectation of (US$323m), on improvement in both Asia and Brazil markets. Asia market’s adj EBITDA loss was (US$193m), narrowing by US$113m, and Brazil’s adj EBITDA loss narrowed by US$8m to (US$32m). Adj EBITDA loss per order in 4Q23 stood at (US$0.09) vs (US$0.16) in 3Q23 and adj EBITDA as a % of GMV also improved to (1.7%) to (1.0%). E-commerce GMV in 4Q23 was US$23.1bn (+15% q-o-q, +29% y-o-y), ~2% ahead of consensus expectation of US$22.8bn. TikTok Shop has been absent in Indonesia for more than 2 months, a market where Shopee generates ~35-40% of its overall GMV. Gaming adj EBITDA was US$217m (-7.1% q-o-q), ~6% below consensus expectations on margin weakness, where adj EBITDA margin in 4Q23 stood at 47.6% versus 52.2% in 3Q23 (consensus expected 49.8%). Fintech adj EBITDA dropped by 10% q-o-q to US$149m, ~8% below consensus estimates of US$162m.
Gaming segment’s bookings witnessed a 1.9% q-o-q improvement to US$456m. Gaming segment saw its Quarterly Paying Users (QPU) declining 2.0% q-o-q to 39.7m. Gaming reported revenue of US$511m (-14% q-o-q) and Bookings, which is a more relevant metric, increased to US$456m (+1.9% q-o-q). Quarterly Active Users (QAU) in 4Q23 declined by 15.4m to 528.7m, while the QPU as a % of QAU was 7.5% (7.4% in 3Q23). For Garena, management is seeing improved user acquisition and retention trends for Free Fire. According to Sensor Tower, Free Fire was the most downloaded mobile game globally in 2023. In February, Free Fire achieved more than 100m peak Daily Active Users (DAU).
Fintech revenue rose by 5.9% q-o-q to US$472m, in line with consensus expectations. Fintech segment’s gross loans stood at US$3.1bn (+29% q-o-q) on rising consumer and SME loans. Of the US$3.1bn, US$2.5bn was paid from SE’s balance sheet and the remaining US$0.6bn were from channel arrangements with other financial lending partners. Consumer and SME loans’ active users in 4Q23, defined as credit users with loans outstanding was 16m (+28% y-o-y). Non-performing loan (NPL) ratio in 4Q23 was 1.6%, stable q-o-q.
SE provides guidance for E-commerce and Gaming for FY24F, which is ahead of consensus estimates. SE expects E-commerce to achieve adj EBITDA breakeven in 2H24F, compared to a loss projected by the consensus. SE expects E-commerce to record high-teens GMV growth in FY24F (6.5% y-o-y in FY23), compared to consensus forecast of 15% y-o-y. On Gaming, SE expects Free Fire to grow its user base and Bookings by double-digits y-o-y in FY24F compared to 3% and 5% growth by consensus.
TikTok Shop might not be a major threat as anticipated earlier due to the regulatory compliance. Following the merger with Tokopedia, we expected that TikTok Shop might pose a major threat to Shopee’s GMV, denting its market share. As per media reports, GoTo and TikTok would be fully complaint with Indonesian regulation by mid-March. Indonesia regulations ban in-app transactions on social media. Without in-app transactions, there could be a significant drop in TikTok Shop’s conversion rates due to the nature of impulse shopping. More importantly, without proper data sharing between the e-commerce platform and the social media app, TikTok Shop might find it challenging to compete in the e-commerce sector.
Our group adj EBITDA ex E-commerce losses are 5%/10% below consensus. We have factored in ~10% y-o-y growth for Gaming bookings, considering management expectations and the positive momentum in Free Fire. We project a moderate 5%/6% growth in Gaming and Fintech adj EBITDA (group adj EBITDA ex E-commerce) in FY24F/25F. We have factored in 16% y-o-y growth for Shopee GMV (management expectation of high teens) in anticipation of Shopee moving away from market share focus to profitability focus. We have lowered E-commerce adj EBITDA losses by US$253 in FY24F, while project a full year turnaround to adj EBITDA of US$528m in FY25F.
Big change in E-commerce adj EBITDA in FY24F/25F while overall adj group EBITDA to rise sharply in FY25F
PREVIOUS | REVISED | ||||||
FY23 | FY24F | FY25F | FY26F | FY24F | FY25F | FY26F | |
Digital Entertainment | 2,172.0 | 2,274.9 | 2,388.7 | 2,412.6 | 2,179 | 2,258 | 2,281 |
E-commerce | 9,000.8 | 10,874.0 | 12,595.8 | 14,376.7 | 10,382 | 11,730 | 13,435 |
Digital Financial Services | 1,759.4 | 2,021.8 | 2,243.4 | 2,467.7 | 1,795 | 1,866 | 1,960 |
Other Services | 131.3 | 90.1 | 100.9 | 111.0 | 147 | 165 | 181 |
Total GAAP Revenue | 13,064 | 15,261 | 17,329 | 19,368 | 14,502 | 16,019 | 17,857 |
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| |||||
Digital Entertainment | 920.9 | 999 | 1,041 | 969 | 950 | 967 | 999 |
E-commerce | (213.8) | (544) | (252) | 288 | (291) | 528 | 1,344 |
Digital Financial Services | 550.1 | 799 | 852 | 938 | 646 | 709 | 784 |
Other Services | (44.9) | (63) | (61) | (55) | (103) | (99) | (91) |
Unallocated expenses + Share based compensation | (33.2) | 0 | 0 | 0 | (30) | (30) | (30) |
Total Adjusted EBITDA | 1,179 | 1,191 | 1,581 | 2,138 | 1,172 | 2,076 | 3,005 |
Total Adjusted EBITDA ex E-commerce losses | 1,393 | 1,735 | 1,833 | 1,851 | 1,463 | 1,548 | 1,662 |
Source: Company, DBS Bank Ltd
Our FY24F/25F group adj EBITDA ex E-commerce losses are 5%/10% narrower than consensus
REVISED | Consensus | |||||||
FY23 | FY24F | FY25F | FY26F | FY24F | FY25F | FY26F | ||
Digital Entertainment | 2,172.0 | 2,179 | 2,258 | 2,281 | 2,049 | 2,080 | 2,110 | |
E-commerce | 9,000.8 | 10,382 | 11,730 | 13,435 | 10,341 | 11,824 | 14,152 | |
Digital Financial Services | 1,759.4 | 1,795 | 1,866 | 1,960 | 2,227 | 2,561 | 2,871 | |
Other Services | 131.3 | 147 | 165 | 181 | 121 | 134 | 156 | |
Total GAAP Revenue | 13,064 | 14,502 | 16,019 | 17,857 | 14,683 | 16,544 | 19,107 | |
253 | 780 | 1,056 | ||||||
Digital Entertainment | 920.9 | 950 | 967 | 999 | 944 | 968 | 995 | |
E-commerce | (213.8) | (291) | 528 | 1,344 | (218) | 560 | 1,456 | |
Digital Financial Services | 550.1 | 646 | 709 | 784 | 720 | 853 | 1,000 | |
Other Services | (44.9) | (103) | (99) | (91) | (154) | (152) | (255) | |
Unallocated expenses + Share based compensation | (33.2) | (30) | (30) | (30) | (65) | (32) | (106) | |
Total Adjusted EBITDA | 1,179 | 1,172 | 2,076 | 3,005 | 1,319 | 2,276 | 3,350 | |
Total Adjusted EBITDA ex E-commerce losses | 1,393 | 1,463 | 1,548 | 1,662 | 1,537 | 1,717 | 1,894 | |
Source: Company, Visible Alpha, DBS Bank Ltd
Upgrade to BUY with a higher TP of US$75 (prev US$42). We have lowered our group adj EBITDA (ex E-commerce losses) by 16% each in FY24F/25F, reflecting SE’s recent performance in Gaming and Fintech segments. However, we have reduced E-commerce losses by US$253m/US$780m in FY24F/25F on a turnround in E-commerce expected in 2H24F. We value the Gaming and Fintech business at 12.0x EV/EBITDA (peers trading between 12.0x - 17.0x). For E-commerce, we are assigning 2.0x EV/FY24F revenue (peers trading at 3.0x) compared to nil value previously, as there is more visibility on E-commerce turnaround. We have factored in US$4.1bn in net cash.
Sum-of-the-parts (SOTP) valuation
SOTP Valuation | FY24F adj EBITDA | EV/EBITDA | FY24F Revenue | EV/Revenue | Enterprise Value |
Group ex E-commerce | 1,463 | 12 | 17,555 | ||
E-commerce | N/A | N/A | 10,382 | 2 | 20,764 |
Total Enterprise Value | 38,319 | ||||
Net cash/(debt) | 4,100 | ||||
Equity Value | 42,419 | ||||
Number of shares (m) | 567 | ||||
Target Price (US$) | 75 |
Source: Reuters, Company, DBS Bank Ltd
12-month EV to Revenue for E-commerce peers
Amazon.com Inc | 2.83 |
Mercado Libre Inc | 4.39 |
eBay Inc | 2.29 |
Coupang Inc | 1.02 |
ETSY Inc | 3.31 |
Shopify | 10.60 |
Allegro.eu SA | 3.35 |
Average | 3.97 |
Average ex Shopify | 2.87 |
Source: Reuters, DBS Bank Ltd
| FY Dec | 4Q2022 | 3Q2023 | 4Q2023 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Revenue | 3,452 | 3,310 | 3,617 | 4.8 | 9.3 |
| Cost of Goods Sold | (1,754) | (1,869) | (2,092) | 19.2 | 11.9 |
| Gross Profit | 1,697 | 1,441 | 1,525 | (10.2) | 5.8 |
| Other Oper. (Exp)/Inc | (1,354) | (1,569) | (1,581) | 16.7 | 0.8 |
| Operating Profit | 343 | (128) | (56.5) | nm | (55.8) |
| Other Non Opg (Exp)/Inc | (8.55) | (32.0) | (49.2) | (474.8) | 53.7 |
| Associates & JV Inc | 1.54 | (0.44) | (9.86) | nm | 2,155.4 |
| Net Interest (Exp)/Inc | 43.5 | 77.9 | 80.8 | 85.7 | 3.8 |
| Exceptional Gain/(Loss) | 0.00 | 0.00 | 0.00 | - | - |
| Pre-tax Profit | 379 | (82.3) | (34.7) | nm | 57.8 |
| Tax | 43.5 | (61.7) | (76.9) | nm | 24.7 |
| Minority Interest | 3.96 | (5.24) | 1.88 | (52.7) | nm |
| Net Profit | 427 | (149) | (110) | nm | (26.5) |
| Net profit bef Except. | 427 | (149) | (110) | nm | (26.5) |
| EBITDA | 458 | (20.6) | 45.0 | (90.2) | nm |
| Margins | |||||
| Gross Margins (%) | 49.2 | 43.5 | 42.2 | ||
| Opg Profit Margins (%) | 9.9 | (3.9) | (1.6) | ||
| Net Profit Margins (%) | 12.4 | (4.5) | (3.0) |
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