Broker’s Call: Sea Ltd Shareholders Finally See Profits

March 15, 2023

Sea Ltd stock Shopee

CGS-CIMB Analyst take

Interest rates are high and likely to stay higher for longer. That means growth stocks that boomed in the “zero interest rate” era now have to prove they can actually make money.

One of those companies that Singaporean investors have been monitoring is Southeast Asia-focused e-commerce and gaming giant Sea Ltd (NYSE: SE).

That’s because it had an amazing 2020-2021, followed by last year – where its shares fell by 75%.

However, this year shares are up by just over 45%. Part of that has been thanks to a risk-on rally in growth stocks early in 2023.

Yet, Sea’s share price also popped by over 20% after it reported its Q4 2022 and FY2022 earnings last week.

The research team at CGS-CIMB Securities maintains our “ADD” recommendation on Sea Ltd and we adjust our target price upwards to US$105 (from US$75 previously).

For tech investors and Shopee lovers, here are some of the key points from Sea Ltd’s latest numbers.

Sea-ing is believing in blowout quarter

For Sea, there was a topline beat with GAAP revenue landing at US$3.5 billion, up 9% quarter-on-quarter and 7% year-on-year.

Sea saw this driven by stronger monetisation of Shopee’s platform, with a 1.6 percentage point increase in its take-rate over Q3 2022.

However, what really caught the eye for investors was the Q4 2022 net profit of US$271 million (stripping out exceptional items).

That was a surprise as we (US$506 million) and consensus expectations (US$433 million) had been expecting a sizeable loss.

Another couple of milestones for the e-commerce giant included adjusted EBITDA breakeven on both Shopee and digital financial service (DFS), also known as SeaMoney.

Discipline on costs leads to rapid improvement

The Q4 2022 adjusted EBITDA number of US$496 million was a huge improvement quarter-on-quarter, to the tune of US$853 million.

Management broke this out into two main buckets:

  1. Decisive pivoting to focus on business areas with the greatest potential while exiting/downsizing in non-core/unprofitable ones, and;
  2. Significantly improved unit economics for both Shopee and SeaMoney, stemming from raising commission rates, moderation of things like free shipping subsidies, and lower logistics costs.

Overall, a fair portion of it could be put down to a enormous cut in Sales & Marketing (S&M) expenses as these fell sharply to US$474 million for the quarter.

That was down 42% quarer-on-quarter and a whopping 61% year-on-year, further emphasising management’s focus on costs.

Sustainable growth is the name of the game in 2023

With all the macro headwinds buffeting the global economy, Sea’s focus for FY2023 is to drive sustainable topline growth.

As for Shopee, the priority for its e-commerce arm is to really solidify efficiency gains and optimise the cost structure.

By doing so, management believes it can further expand its reach to underserved buyers and sellers – powering its long-term total addressable market (TAM).

As for SeaMoney, the company plans to further enhance its offerings with the launch of InsurTech and WealthTech products, while simultaneously deepening its penetration of consumer credit products.

Finally, in gaming (which had been its traditional profit engine), Sea acknowledges near-term challenges. The company plans to focus on core games and promising projects to improve margins in FY2023.


Disclaimer: CGS-CIMB Securities SMID Analyst KC Ong doesn’t own shares of any companies mentioned.