Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up: Sea Ltd, Tencent, JD Logistics, Siam Commercial Bank Pub Co and more

In today’s briefing:

  • Sea Ltd (SE US) – The Runway Just Got Longer
  • China Gaming Restrictions Redux – Market Seems to Be in Denial
  • Tencent Holdings – Modern Day Opium War
  • JD Logistics (2618 HK): Higher Growth, Higher Loss
  • SCB: Largest Retail Loan Portfolio Amongst Big Banks

Sea Ltd (SE US) – The Runway Just Got Longer

By Angus Mackintosh

Sea Ltd (SE US), South-East Asia’s largest market cap company, has announced that it aims to raise US$6.3bn in the largest equity offering of 2021. The deal will allow the company to accelerate its global expansion and give the company the financial firepower for potential acquisitions.

The company will offer 11m shares or a stake worth about US$3.8bn at the close on 8th September plus it intends to issue US$2.5bn in equity-linked debt to bring the total funds raised to circa US$6.8bn. 

Apart from continuing to grow its business in South-East Asia, the company is now expanding its e-commerce presence in South America, with a focus on Brazil, Mexico, Chile, and Colombia. 

According to local press reports, Shopee may also look to enter Eastern Europe, with Poland as its first target market.  Shopee has also launched a recruitment campaign for vendors to sell on what it called “Shopee India” and is ramping up hiring in the country. It has also been looking for office space in the country.

Sea Ltd (SE US) continues to grow its ShopeeFood business both in Indonesia and Vietnam and has seen a very strong performance and positive reception from users as well as driver communities in both markets. There has also been some talk of the company expanding food delivery into Malaysia, as it has already been advertising for drivers.

Assuming the completion of this fundraising goes smoothly Sea Ltd (SE US) will have a war chest of around US$13bn at its disposal to finance its ongoing expansion, though it is not yet clear what it needs this money for.

This may be seen as opportunistic fundraising in some camps but given its aspiration to expand globally into other emerging markets plus growing its digital finance and food delivery arms quite aggressively, this will certainly give the company the financial firepower to do so. 

We continue to take a positive view on Sea Ltd (SE US) which currently trades on 16x FY21E EV/Sales, 10.4x FY22E EV/Sales, and 7.8x FY23E EV/Sales, justified by sales growth of +105% YoY in FY2021, +47% YoY in FY22E, and +32.8% YoY growth in FY2023. 


China Gaming Restrictions Redux – Market Seems to Be in Denial

By Mio Kato

We said a couple of weeks ago that the restrictions on the gaming sector imposed by China were far more severe than the market reaction indicated. However, our view was mostly a call on the long-term impact of the gaming time restrictions on minors. The latest updates suggest that even the short-term outlook could get dire fast.


Tencent Holdings – Modern Day Opium War

By Thomas J. Monaco

*Being “Seriously Dealt” With: No sooner than Tencent Holdings’ (700.HK) [Tencent] virtual call ended with a competitor dismissing new gaming restrictions did the mainland Chinese regulator haul in gaming industry executives for a complete dressing down. It’s probably fair to say, Tencent’s recent hubris was their Jack Ma moment. It kind of makes one wonder what the authorities have planned next for Tencent. As the screws continue to tighten, the question becomes whether or not Tencent can narrow the regulatory discount, or whether these issues will remain a persistent overhang?; 

*As We’ve Just Learned – Ignoring It, Doesn’t Make It Go Away: Mainland China’s crackdown on capital markets activities has rapidly expanded under the broad narrative of “financial stability”. There remains no doubt, in our view, that Tencent will follow Alibaba Group (BABA.US) [Alibaba] in the formation of a financial holding company. It’s pretty surprising that Tencent refuses to discuss this matter when financial services are the largest component of earnings and growth; and 

*Prior To The War On Gaming, Results Have Already Deteriorated: Tencent’s 2Q21 GAAP net income declined CNY 5.2 bn (10.8%) linked quarter – and were of poor quality. Results were challenged by: cost of revenue increase; operating expense increase; losses in associates; higher impairment charges; and weaker online games. Were it not for the artificially lower tax rate, results would have been even more challenged.    


JD Logistics (2618 HK): Higher Growth, Higher Loss

By Ming Lu

  • We believe integrated supply chain is more meaningful to the long-term growth.
  • We also believe JD.com provides half of JD Logistics (JDL)’ revenue.
  • We believe JDL has the incentive of expansion but does not have the incentive of profitability.
  • We set a downside of 13% for the end of 2022.

SCB: Largest Retail Loan Portfolio Amongst Big Banks

By Research Group at Country Group Securities

We initiate coverage on SCB with a BUY rating, based on a target price of Bt 124.50. Our target price derived from 0.99xAVG PBV (target ROE at 8.2% and long term growth at 2%), implying 5-years trading average of Thailand banks.

The story:

• Potential loan growth post-COVID with better quality

• Strong recurring non-interest income amid Covid-19 crisis

• Improving asset quality

Risks:

• Higher NPLs that would cause higher provisions set aside

• Prolong low interest rate would decrease NIM

• Delay in vaccine roll-out


Related tickers: Sea Ltd (SE.N), Tencent (0700.HK), Tencent (0700.HK), Siam Commercial Bank Pub Co (SCB.BK)

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