Shopee parent Sea needs more than good earnings to sustain 175% comeback rally

Hong Kong – Singapore-based Sea’s shares have rallied 175 per cent from their January low, but South-east Asia’s top online-shopping company faces a high bar to impress investors with its upcoming third-quarter earnings report.

Sea is expected to deliver solid results on Nov 12, 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 per cent 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 per cent following the results.

Sea’s rally appears to have priced in strong revenue for the latest quarter, Morgan Stanley analysts wrote in a note in October. 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”.

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

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 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 per cent compared with a year earlier.

“We’re keen to see more evidence of commission rates rising, and less competitive intensity,” said fund manager Sat Duhra 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 is now trading at 22.9 times forward enterprise value (EV) to earnings before interest, taxes, depreciation and amortisation (Ebitda), 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 per cent gain so far this year, outpacing a 13 per cent rise in the Straits Times Index comprised solely of locally listed stocks. Still, the e-commerce firm’s American depositary receipts remain 74 per cent below their pandemic-driven peak in 2021.

Morgan Stanley analyst Divya Gangahar Kothiyal Duhra said the stock can gain further on “any positive surprise” in the results.

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