Edgewise: DBS and Sea: Two ends of a barbell?
On May 21, the market value of New York-listed consumer Internet company and aspiring digital bank Sea overtook that of traditional bank DBS Group Holdings, which has been calling itself the “digital bank of Singapore”. The latter is trading at a P/E of less than nine times and is guiding for a consistent 33 cents per quarter dividend payout, which implies a yield of 5.64%. On the other hand, bank wannabe Sea remains at US$280.8 million ($392 million) in the red for the most recent 1Q ended March. It also recently tapped investors for more money via a US$1 billion convertible bond issue.
Sea publishes games via Garena, runs e-commerce sites via the Shopee brand, and operates the SeaMoney e-wallet. Meanwhile, DBS issues loans and credit cards, manages wealth for the rich while issuing recommendations on stocks.
On July 2, as part of its on–going equities coverage, DBS Group Research downgraded its call on Sea from “fully valued” to “sell”, on slower-than-expected e–commerce sales volume, higher losses in the e-wallet business, unfavourable regulations in Indonesia, where it is staking a big claim and, rich valuation as well. The target price of US$72.50 remains the same.
Following DBS’ call, Sea’s share price continued rising to as high as US$122.50 on July 6 before closing at US$112.90 on July 8, scoring a year–to–date gain of 182%. On July 8, DBS’s own share price closed at $21.79, down 16.5% year to date, and giving this stalwart of Singapore’s economy a market value of $55.87 billion, versus Sea’s US$53.32 billion market cap.
In recent months, as economies grapple with the fallout of the pandemic, tech companies have enjoyed a good run, as demand for internet services, digital entertainment and so on grew or held steady. DBS’s chief investment officer Hou Wey Fook, for one, is urging investors to stay put in US tech stocks even though they’ve done better than the broader market (see page 21).
Morgan Stanley, in a June 21 report, observes the same trends for this region. “One of the consequences of the lockdowns across Southeast Asia has been the significant acceleration in online activities. This includes e–commerce and e–payments,” it says.
In upgrading its target price for Sea from US$78.50 to US$119, Morgan Stanley believes the kicker for this stock will come not from games and e–commerce but the growth of Fintech services such as e–payment to remittance. “The next big debate among investors is can Sea win the Fintech market and become a Super App.” According to Morgan Stanley, the Latin American e-commerce giant
MercadoLibre is the reference playbook for Sea, especially in Indonesia, a market with plenty of potential. First, build up the ecommerce platforms, then draw in both consumers and merchants, and following which, focus more on the previously underserved consumers, and offer instalment plans where some form of interest can be charged.
Bain estimates that the Southeast Asia FinTech revenue will hit US$4 billion by 2025, up from US$400 million in 2019. Morgan Stanley assumes Sea can win 20% revenue share, or US$800 million, by 2025. A separate report by JP Morgan estimates revenue of US$1 billion by 2024, although interim losses are expected as Sea sticks to the fast-growth strategy typical of young tech companies, where developing new markets takes priority over earnings.
Sea is already generating earnings from its games business but it needs to continue investing to grow Shopee and its the FinTech arm. The company has also yet to guide when it might turn profitable, but investors do not seem to be too bothered as they look very forward.
For more than a year, DBS’s Hou has urged investors to adopt a barbell strategy. On one hand, put outsized bets on tech companies riding irreversible growth trends. on the other, invest also in a solid clutch of income-generating assets that can weather short–term volatility. Sea and DBS itself might just be the two ends of this barbell.