Sea needs more than good earnings to sustain 170% comeback rally

Shopee has shown success this year in fending off rival services. (Photographer: Dimas Ardian/Bloomberg).
Shopee has shown success this year in fending off rival services. (Photographer: Dimas Ardian/Bloomberg).

By Charlotte Yang and Eduard Gismatullin

(Bloomberg) – After a peer-beating stock rally of more than 170% from its January low, Southeast Asia’s top online-shopping company Sea faces a high bar to impress investors with its upcoming third-quarter earnings report.

The Singapore-based firm is expected to deliver solid results next Tuesday, with its e-commerce arm Shopee moving into the black on an adjusted basis. Analysts forecast the value of goods sold by the division rose in the mid-20% range, in line with Sea’s guidance and confirming market expectations of easing competition with TikTok and Lazada.

With Sea’s US-listed shares trading at expensive levels, the market will be scrutinising details on its profitability as well as efforts in live-steaming and games. The options market implies the stock could move 12% following the results. The shares fell as much as 2.2% in New York trading on Friday.

Sea’s rally appears to have priced in strong revenue for the latest quarter, Morgan Stanley analysts including Divya Gangahar Kothiyal wrote in a note last month. Margins in the e-commerce business “may be lower than buy-side expectations, which may lead to the stock giving up some of the recent gains.”

Source: Bloomberg
Source: Bloomberg

Shopee has shown success this year in fending off rival services, from ByteDance’s TikTok and Alibaba Group Holding’s Lazada to Shein and PDD Holding’s Temu. That’s helped Sea win back investors after a two-year decline in its share price.

Shopee Food delivery riders in Vietnam. (Photographer: SeongJoon Cho/Bloomberg)
Shopee Food delivery riders in Vietnam. (Photographer: SeongJoon Cho/Bloomberg)

The market is eager to see signs of reduced spending on costly promotions and discounts to stay ahead of the competition. Shopee hiked the fees it charges merchants in many core markets earlier this year, one move that may help improve its profitability.

Sea has also been investing in live-streaming as a means to help drive momentum in its e-commerce operation. Its digital entertainment business – which is leaning heavily on its Garena game platform’s hit title Free Fire – is expected to post a third-quarter revenue decline of 20% compared with a year earlier.

“We’re keen to see more evidence of commission rates rising, and less competitive intensity,” said Sat Duhra, a fund manager at Janus Henderson Group. “Any visibility on live-streaming would be helpful, as they are growing but not yet profitable. Any update on new games to reduce reliance on Free Fire would be helpful too.”

With Sea’s big gain this year, it’s now trading at about 30 times forward enterprise value to earnings before interest, taxes, depreciation, and amortisation, above its three-year median level of 20.8 times. The Solactive E-commerce Index of global peers is at 10 times estimated EV to Ebitda.

Sea has helped power the MSCI Singapore Index to a 23% gain so far this year, outpacing the 13% rise in the Straits Times Index comprised solely of locally listed stocks. Still, the e-commerce firm’s American depositary receipts remain 74% below their pandemic-driven peak in 2021.

Duhra said his dividend-focused strategy holds shares in Sea even though it has a 0% yield. The stock can gain further on “any positive surprise” in the results, he said, adding that gains in China peers on expectations for a boost from stimulus could also help lift the Southeast Asian company’s shares.

“We feel this is a unique exposure,” he said. There is “plenty of choice for North Asia e-commerce names but nothing similar in Asean.”

(Adds Friday trading in third paragraph.)

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