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commented on a stock09/13/2022 10:48

CGS-CIMB maintains ‘hold’ on Sea as it pushes for profitability

$CGS(06881.HK)$ has maintained its “hold” call and target price of US$92 ($128.64) on Sea after the company's e-commerce arm Shopee scaled back its presence in Latin America.
CGS-CIMB maintains ‘hold’ on Sea as it pushes for profitability
ChickenLayoffs are expected to impact dozens of employees, but CGS-CIMB analysts Ong Kang Chuen and Kenneth Tan believe that Shopee will continue to leverage its cross-border operations to maintain its presence in Chile, Colombia and Mexico.

ChickenThe move leaves Poland as Shopee’s last “test market”, while Brazil is unaffected, as it was reclassified as a core market in March.

ChickenIn their report, Ong and Tan note that Shopee entered Chile, Colombia, Mexico and Argentina in 2021 and they are currently at nascent stages, estimating that they account for a “low single-digit” of Shopee’s gross merchandise value (GMV) as of 2QFY2022 ended June, and an even lower sales contribution, as there are higher subsidies given out in new markets.

ChickenHowever, by maintaining its presence in the three markets through cross-border operations, they believe Sea is not ruling out the potential re-establishment of local operations in those markets should the macro environment improve.

ChickenThey highlight that the scaled-back presence could potentially save US$40 million a year, or 1.6% of Shopee’s FY2022 adjusted ebitda.

ChickenOng and Tan add that, “Generally, we believe the move is-line with Sea’s latest strategic direction to prioritise profitability and cashflow management. We expect Sea to break even on adjusted ebitda by 2HFY2023, and non-GAAP profitability by FY2024.”
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