• 2Q23 revenue missed expectations marginally due to increased shipping subsidies. Earnings were in line. 1H23 revenue/PATMI was at 46%/103% our FY23e forecasts. We expect break-even in 2H23 due to increased incentives and investments.
• Garena looks to have bottomed out, posting an 8% QoQ increase in operating income after 5 quarters, with an 11%/15% sequential uptick in QAU/QPU.
• Increasing shipping subsidies and marketing spend for Shopee GMV growth to impact both top and bottom line, with potential of operating losses in the near-term.
• We cut our FY24e revenue/PATMI by 3%/3% to reflect increasing shipping subsidies and marketing spend, and we raise our outstanding share denominator by 8% due to share dilution. We maintain BUY with a reduced DCF target price of US$87.00 (prev. US$100.00), with an unchanged WACC of 7.6%, and a terminal growth rate of 3.0%. We still believe SE is well-positioned to capture e-commerce growth in many emerging markets due to increased digitalisation.

The Positive

+ Garena likely to have bottomed out. After several quarters of weakness following its Free Fire ban in India last year, Garena finally posted a sequential increase in its segment operating income. 2Q23 operating income grew 8% QoQ to US$296mn (-41% YoY), driven by an increase in higher margin Free Fire bookings. User metrics QAU and QPU also ticked up 11% QoQ and 14% QoQ, respectively, indicating some improvements in user retention and monetization. Garena operating margins have remained relatively high compared to its peers at 56%. And with the release of its new game, Undawn, we should be able to see sustained improvements in most gaming-related metrics moving forward.

The Negatives

– Shopee a slight disappointment due to increased shipping subsidies. Even with orders increasing >10% QoQ, Shopee revenue grew by only 2% QoQ (21% YoY) from ramping up shipping subsidies recorded in its GAAP revenue line. In addition, a sequential US$100mn rise in marketing spend resulted in a -43% QoQ decline in e-commerce operating income. Shopee’s 2Q23 operating margin was 3% (1Q23: 6%).

– Spending more for growth. Throughout its 2Q23 earnings call, management reiterated its stance to ramp-up investments to boost e-commerce growth, citing a stronger base and improved cost efficiencies as reasons for the resumption of investments. SE also said that the ramp-up in investments will negatively impact its bottom line and could see the company move back into the red in the near term. Some of its key areas of focus include live streaming, short-form video, and affiliate partner programs.

GMV: Gross Merchandise Value, QAU: Quarterly Active User, QPU: Quarterly Paying User