SEA Ltd: Gaming’s top and bottom lines are benefitting from AI
- Over the last 12-months, Gaming has pipped E-commerce as the key share price driver while Loan-book growth has also begun to drive the share price
- Gaming is a big beneficiary of AI and could surprise in FY26F if “Free City” performs well; Fintech is the fastest growing business with higher adjusted EBITDA than E-commerce
- BUY with a higher TP of USD241 (prev: USD204) led by higher growth and valuation of Gaming & Fintech
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Gaming Revenue pips E-commerce as a share price driver in the last 1-year with loan book growth also joining as a driver
Over the last 12-months, Gaming has pipped e-commerce as the key share price driver. During 2020-22, share price used to move with e-commerce Gross Merchandise Value (GMV) growth solely ignoring revenue and profitabilty. Since early 2023, SE’s share price has shown much higher correlation with E-commerce revenue growth followed by Gaming revenue growth. With shrinking Gaming revenue in FY23 and FY24 each, the market has been concerned about long-term sustainability of “Free-Fire”, so a pick-up in Gaming growth in the last four quarter, has excited the market.
Loan-book growth has also begun to influence the share price. Loan book growth was also gradual in the past as SE had not started its transition from Buy-Now-Pay-Later (BNPL) to cash loans. Typically, cash loans are much bigger in magnitude than BNPL loans and only disbursed to selective BNPL accounts with superior track record. This has led to a major growth in loan-book almost doubling from USD3.5bn in 2Q24 to USD6.9bn in 2Q25 leading to a 55% y/y rise in fintech adj EBITDA to USD255bn.
AI enables new features more frequently while reducing costs in the Gaming business. Advances in AI-assisted coding, automated testing, and industry toolchains are enabling faster content creation and iteration without necessitating higher expenditure. For instance, Tencent’s Hunyuan3D and VISVISE has significantly compressed 3D asset creation from five days to just two hours. Similarly, NVIDIA ACE automates lip sync and speech for interactive characters, while Epic’s MetaHuman Animator converts iPhone video into production-ready facial animation in near real time. These tools empower Garena to deploy richer updates, develop more realistic non-playing characters, and conduct frequent live operations, thereby sustaining player engagement while holding costs steady. This trend is evident in Garena’s financials: research and development expenses were essentially flat y/y in 2Q25 at USD297.4mn, following a modest decline in 1Q25, demonstrating how these efficiencies are offsetting the growth in content volume.
Self-developed “Free City” could lead to a positive surprise in gaming bookings in FY26F, not reflected in current projections. Beyond live operations on Free Fire, Garena is broadening its gaming portfolio with Free City, which soft-launched in Argentina in December 2024 and is now undergoing soft launch across Southeast Asia (SEA) and the Middle East and North Africa (MENA) regions on both iOS and Android. Early positioning appears favourable, with media framing it as a Grand Theft Auto (GTA)-style open-world title for mobile, with co-op quests and city activities such as bank heists, firefighting, and bumper-car battles, plus broad character and vehicle customisation.
Pre-registration in Vietnam has already garnered strong community engagement and positive feedback, particularly regarding its mobile-optimised graphics, dynamic lighting, and open-world gameplay. Momentum continues to build through official pre-registration campaigns across SEA & MENA offering exclusive rewards. An App Store listing confirms the iOS rollout alongside Google Play. Together, the game’s design, which focuses on long, social sessions, coupled with its widening distribution footprint, strongly supports the case for Free City to become Garena’s next franchise pillar.
E-commerce margin expansion to be gradual due to intense competition in Brazil (10%-15% of e-commerce GMV). Competitive intensity in Brazil has notably increased, with significant players such as MercadoLibre reducing its free shipping threshold from BRL79.0 to BRL19.0. Furthermore, it plans a substantial investment of BRL34bn in 2025 (up from BRL23bn in 2024) across logistics, technology, and marketing. Amazon is also improving its delivery infrastructure and coverage, boasting roughly 200 local hubs, same-day service in more than 200 cities, and next-day service in about 3,600 others. This collective effort by incumbents heightens market competition in terms of both service and price. Meanwhile, cross-border entrants such as Temu are stepping up user acquisition efforts and offering subsidised shipping, further exacerbating promotional pressure in the market. Despite these headwinds, Shopee’s e-commerce EBITDA is projected to increase to USD1.2bn in 2025, and further expand to USD2.6bn by 2027, while EBITDA as a percentage of GMV is forecast to rise to 1.7% by 2027. This trajectory highlights that operating leverage is still strengthening over the medium term
Service quality and logistics continue to drive e-commerce differentiation. YouTube Shopping with Shopee is now live across key Southeast Asian markets, with creators tagging products in millions of videos and directing viewers straight to checkout, which enlarges the top of the sales funnel and supports higher conversion rates for merchants. Sea is also expanding the use of AI in commerce, leveraging it for personalised search, automated customer service, and smarter ad and merchandising tools, which should enhance spend efficiency and increase basket sizes.
At the same time, SPX Express is adding capacity and expanding its last-mile coverage density, offering faster next-day and same-day delivery commitments across major cities. This improves delivery reliability for its customers while lowering its unit fulfilment costs. Together, these initiatives are designed to expand market reach, raise conversion rates, and improve unit economics, thereby supporting continued growth and profitability in the e-commerce segment.
Fintech profitability set to rise. SE’s loan book grew 94% y/y to USD6.9bn in 2Q25, much faster than Grab’s 78% y/y growth to USD0.71bn. This growth was primarily led by a rise in on-book loans, which reached USD5.9bn (vs. USD4.9bn in 1Q25) and supported by USD0.9bn in off-book loans (similar in 1Q25). The segment reported GAAP revenue of USD882.8mn (up 70% y/y) and adjusted EBITDA of USD255.3mn (up 55% y/y), slightly ahead of the consensus estimate of USD247mn.
Notably, in Malaysia, the loan book surpassed USD1bn, making it the third market, following Indonesia and Thailand, to achieve this milestone. Brazil is beginning to scale up its SPayLater and personal cash loans. Consequently, our fintech adj. EBITDA projections are revised up by +3%/+19% for FY25F/26F. We project revenue growth of 60%/38% over FY25F/26F, and a rise in EBITDA from USD1.1bn in FY25F to nearly USD2.0bn in FY27F.
SE is scaling up cash loans by cross-selling to its existing SPayLater customers while also expanding its SPayLater customer funnel beyond Shopee through QR code integration. Outstanding personal cash loans have almost doubled y/y, driven by successful cross-selling to SPayLater users with good repayment trends. Off-Shopee SPayLater usage continues to gain traction, now accounting for over 20% of the SPayLater portfolio in Malaysia, supported by integration with the national QR network, DuitNow, and a similar launch in Thailand via PromptPay. This integration allows customers to scan a merchant's QR code using the Shopee app, select SPayLater as their payment method, choose an installment plan, and complete the purchase.
We revise FY25F/26F adj. group EBITDA estimates by -1%/+3%, with upward revisions to gaming and fintech partly offset by cuts in e-commerce. For gaming, we raise our FY25F/26F adj. EBITDA estimates by +12%/+5%, which are +4%/+1% above consensus, supported by management’s upgraded guidance of >30% bookings growth for FY25F, a larger paying-user base, and momentum from new content and the Free City launch pipeline.
We revised up our fintech, adj. EBITDA by +3%/+19% in FY25F/26F, with our estimates +5%/+11% ahead of consensus, driven by loan book growth of >50% and expanding adoption of SPayLater and small and medium enterprise (SME) lending across multiple markets alongside healthy non-performing loan (NPL) ratios.
For e-commerce, we revised our adj. EBITDA forecasts down by -17%/-9% in FY25F/26F to reflect the competitive pressure in Brazil, though our estimates remain +14%/+5% ahead of consensus. With competition remaining benign in Southeast Asia, we continue to project GMV growth of 20% y/y in FY25F, in line with management’s 20% guidance and the 21% consensus, along with a gradual rise in take rates to 13.3% and 13.7% in FY25F and FY26F from 12.4% in FY24, which should partially offset near-term margin pressure.
Maintain BUY with a higher TP of USD241 (prev. USD204). We raise our TP by 18% on the back of +8%/+11% revision to our combined gaming & fintech EBITDA for FY25F/26F, while also rolling forward our valuation. Our combined value for SE’s gaming & fintech businesses stands at 18x 12-month EV/EBITDA (prev. 15x), versus a peer average multiple of 18x (prev. 16x). E-commerce revenue is valued at 4.8x 12-month EV/revenue (prev. 4.5x), a 40% premium to the peer average of 3.4x, considering SE’s e-commerce revenue CAGR of 17% over FY25F-27F, vs. the peer average of 11%. We factored in USD4.1bn (unchanged) in net cash.
| FY Dec | 1Q2024 | 4Q2024 | 1Q2025 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Revenue | 3,734 | 4,950 | 4,841 | 29.6 | (2.2) |
| Cost of Goods Sold | (2,181) | (2,745) | (2,605) | 19.5 | (5.1) |
| Gross Profit | 1,554 | 2,205 | 2,236 | 43.9 | 1.4 |
| Other Oper. (Exp)/Inc | (1,483) | (1,900) | (1,780) | 20.0 | (6.3) |
| Operating Profit | 71.1 | 306 | 456 | 542.0 | 49.3 |
| Other Non Opg (Exp)/Inc | (94.9) | (56.5) | 9.47 | nm | (116.8) |
| Associates & JV Inc | 2.21 | (7.18) | 1.53 | (30.8) | (121.3) |
| Net Interest (Exp)/Inc | 77.4 | 84.7 | 79.7 | 3.0 | (5.8) |
| Exceptional Gain/(Loss) | 0.00 | 0.00 | 0.00 | - | - |
| Pre-tax Profit | 55.8 | 327 | 547 | 881.2 | 67.4 |
| Tax | (78.8) | (89.2) | (136) | 73.1 | 52.8 |
| Minority Interest | (0.66) | (0.28) | (7.72) | (1,063.7) | 2,616.5 |
| Net Profit | (23.7) | 237 | 403 | nm | 69.9 |
| Net profit bef Except. | (23.7) | 237 | 403 | nm | 69.9 |
| EBITDA | 173 | 402 | 545 | 214.5 | 35.7 |
| Margins | |||||
| Gross Margins (%) | 41.6 | 44.6 | 46.2 | ||
| Opg Profit Margins (%) | 1.9 | 6.2 | 9.4 | ||
| Net Profit Margins (%) | (0.6) | 4.8 | 8.3 |
Source: DBS, Company
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