Equity Analysis /

Sea Ltd: All at sea

  • We cut our SOTP derived target price to US$52 implying 19% downside

  • The digital entertainment (gaming) segment is under pressure. We expect FCF losses to worsen

  • Sea Ltd's is overvalued compared to its peers and needs to be derated

Sea Ltd: All at sea
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Tellimer Research
30 August 2022
Published byTellimer Research

We reiterate our Sell recommendation on Sea Ltd and cut our SOTP-derived target price to US$52, implying 19% downside.

Sea Ltd: Result Summary

Gaming: Free Fire in freefall

We cut our earnings forecasts due to the weakening operating performance of the Digital Entertainment Segment (Gaming). Bookings in the gaming segment were down 40% yoy in Sea's Q2 22 results and we fear the worst when it comes to the prospects for this segment. Sea is over-reliant on a single game – Free Fire – which is declining in demand. There are restrictions on its use in India and other key markets.

Sea Ltd: Digital Entertainment

E-commerce: a long way from cash flow positive

Management has withdrawn e-commerce GMV and take-rate guidance. This suggests a lack of confidence in GMV growth in new markets such as Latam, even though the e-commerce segment is prospering in the core market of ASEAN. In Q2 22, GMV in the e-commerce segment was up 31% yoy and gross orders were up 42% yoy.

Latam is a nascent segment that is unlikely to be cash flow positive for several years.

Sea Ltd: E-commerce

The bull case for Sea is evaporating

The bull case for Sea Ltd has been driven by the combination of the e-commerce and gaming segments. E-commerce provided the valuation and gaming provided the cash flow. With the projected weakness in gaming, we expect FCF losses of US$4.1bn and US$3bn in FY22 and FY23, respectively.

We adjust our SOTP valuation of Sea Ltd as follows:

Sea Ltd: SOTP

Sea is trading at 2.2x Price/Sales. However, if one accounts for implied revenue growth in FY23 – when it is expected to grow by 24% yoy – Sea Ltd is overvalued versus its peers.

Sea Ltd: Revenue Gowth
Sea Ltd: Comparables
Half year result as a % of our FY22 forecast

Sea Ltd: Income statement

Sea Ltd: Balance sheet

Sea Ltd: Cash flow statement