Singapore's new lockdown set to boost Sea Ltd

  • Singapore reimposed strict Covid restrictions following a rise in infections
  • As was the case last year, the latest restrictions could spur strong sales for Shopee – Sea Ltd’s e-commerce platform
  • We are bullish on the stock ahead of its 18 May results; reiterate Buy
Singapore's new lockdown set to boost Sea Ltd

Singapore announced the return to a lockdown-like situation following a rise in Covid infections. The month-long restrictions, which will start on Sunday, include limiting social gatherings to two people and the closure of restaurants. As was the case last year when lockdown measures were in place, the restrictions could spur strong sales for Shopee – Sea Ltd’s e-commerce platform.

We are bullish on the stock

We reiterate our Buy recommendation on Sea with a target price of US$295, implying a 45% upside. 

Although SE US has fallen victim to the recent tech sell-off – it is down 28% from its peak for 2021 – we are bullish on the stock ahead of its 18 May results for the following reasons:

  1. Bloomberg consensus expects SE US to register 119% yoy revenue growth in Q1 21 – we expect the company's revenue to rise 83% yoy in FY 21. All three segments in the company (gaming, e-commerce and payments) could register strong growth. Shopee, the e-commerce arm, is expected to generate growth from increased online shopping as the pandemic has transformed consumer spending. Garena, the gaming arm, could see a doubling of bookings in FY 21 as the popularity of its mobile game Free Fire surges. Meanwhile, Sea's payment segment is gaining vast traction as consumers switch from cash to digital payments.

  2. Singapore's return to lockdown announced today could drive e-commerce sales in one of Shopee's major markets. In Q4 20, Sea's GMV grew by 17% qoq and revenue by 36% qoq.

  3. The cash burn will ease. Despite the growth in revenue and GMV, the company continued to burn cash as EBITDA losses grew by 42% qoq in Q4 20. EBITDA losses from e-commerce and digital financial services cumulatively clocked in at US$599mn. But we expect the cash burn to ease from FY 21-24.

    Moreover, SE US raised US$3bn in a 3% equity issue in December, which will give it enough ammunition to fund its cash burn, as well as acquisitions. SE US has moved higher on our proprietary Cash Sustainability Index (CSI) with revised forecasts and the recent fundraising.

  4. Sea seems undervalued. We have adopted the DCF valuation methodology in recognition of the increased cash flow positivity. Other metrics such as SOTP and EV/user support our valuation. It is only cheap on an SOTP basis.

Sea Ltd: FCFF valuation

Sea Ltd: Comparative valuation table

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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...

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