SE - Sea Limited: No More TikTok - $8.4B Of GMV Up For Grabs

2023-09-29 14:00:00 ET

Summary

• SE's prospects in Indonesia are highly promising, due to the immediate ban on TikTok's presence, with the platform's estimated 2023 GMV of $8.4B up for grabs.
• The ban may benefit pure-play e-commerce companies like SE's Shopee, especially since it commands 36% or the equivalent of $18.6B of Indonesia's e-commerce GMV in 2022.
• For now, SE's stock is still trading at depressed levels despite the regulatory update, but we believe these also provide opportunistic inventors with the chance to ride the upside rally.
• If Mr. Market opts to rerate the stock nearer to its normalized valuations, we may see the stock's potential nearly double to $79.82 as well.

The SE Investment Thesis Is More Promising Here, Thanks To The TikTok Ban

We previously covered Sea Limited (SE) in August 2023, discussing its more than decent FQ2'23 performance, with improved cash monetization and expanded EBITDA margins.

However, it also appeared that Mr. Market had expected a lot more, with the stock still plunging afterwards, charting a new bottom in August 2023. While we had ended the article with a Buy rating, we had also urged patience since its recovery prospects remained uncertain.

In this article, we will be discussing SE's excellent tailwinds in Indonesia, thanks to the government's new regulation on social media e-commerce, potentially putting an end to TikTok's (BDNCE) growing presence in the country.

For context, Indonesia comprises approximately 42% of TikTok's Global Merchandise Value [GMV] at $4.4B in 2022, according to a Singapore-based consultancy Momentum Works.

In addition, TikTok expects to achieve a drastic expansion in its global GMV to $20B in 2023 (+354.5% YoY), "banking on rapid growth in Southeast Asia," implying an approximate regional GMV of $8.4B, assuming a similar ratio in 2022.

These numbers are not overly aggressive in our opinion, since TikTok boasts over 100M monthly users in Indonesia, with them spending an average of 100 minutes daily and $7 per transaction on the platform

However, following a well-publicized and well received trip by the TikTok CEO to Indonesia in June 2023, the government has opted for a drastic reversal in regulatory sentiments, with "social media companies banned from doubling as e-commerce platforms to prevent misuse of public data."

With the ban including Meta's (META) Facebook and Instagram, it is unsurprising that pure-play e-commerce companies, including SE's Shopee and GoTo's ( GOTO-INDONESIA ) Tokopedia, may potentially benefit moving forward.

For example, SE commands 36% or the equivalent of $18.6B in Indonesia's e-commerce GMV in 2022, nearly neck to neck with GOTO at 35%/ $18.1B, respectively.

Statista also expects the country's e-commerce market size to grow from $45.28B in 2023 to $67.30B in 2027, expanding at an impressive CAGR of +10.41%. As a result, we believe that the ban is good for Shopee indeed, likely to super charge the platform's GMV growth moving forward.

While the SE management has opted to "provide certain GMV spot disclosure from time to time," it is apparent that consumer demand has been recovering at "double-digit increase in gross orders QoQ " in FQ2'23 as well, compared to +5.2% QoQ/ +42.8% YoY in FQ2'22 .

With the ban effective immediately as of September 29, 2023, and TikTok given only one week of grace period to comply (deadline approximately on October 04, 2023), it appears that there is no turning back to the social media e-commerce platform model for Indonesia indeed.

While TikTok Shop may still flourish as a stand-alone app in Indonesia, we believe its growth may have been temporarily stunted, with it remaining to be seen if the new platform may regain its previous virality and popularity.

In addition, depending on the regulatory stance in other South East Asian countries, there is also a chance that the ban may be potentially adopted regionally, triggering further tailwinds to SE's growth prospects.

As a result, we maintain our belief that the SE stock has a great potential for upward rerating from these bottom levels, providing opportunistic inventors with the chance to ride the upside rally.

So, Is SE Stock A Buy , Sell, or Hold?

SE Valuations

For now, SE's valuations are still impacted compared to its 1Y means and its e-commerce peers such as MercadoLibre (MELI) at FWD EV/ EBIT of 35.41x/ FWD P/E of 65.13x, and Amazon (AMZN) at 49.26x/ 57.44x, respectively.

Then again, it is also apparent that the SE stock is still trading at notable baked-in premiums compared to the sector medians, suggesting Mr. Market's confidence on its profitable growth cadence.

SE 1Y Stock Price

Despite the supposedly optimistic regulatory update from Indonesia, the SE stock continues to trade at these depressed levels, implying that the bulls may have adopted a wait and see attitude for now.

Investors looking to add must also be aware of its elevated short interest of 6.39% at the time of writing, suggesting that any gains may be easily wiped out by short sellers moving forward.

However, due to the attractive risk/ reward ratio, we continue to rate the SE stock as a Buy, with a long-term price target of $56.85, based on the FWD P/E of 18.52 and the consensus FY2025 adj EPS estimates of $3.07.

If Mr. Market opts to rerate the stock nearer to its normalized valuations of 26x, we may see the stock's potential nearly double to $79.82 as well.

However, investors that add here must also be patient for its eventual reversal, since it may take longer than a few quarters, depending on when bullish support materializes.

Only time may tell.

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