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Why one analyst believes Sea’s entry into digital banking will ‘magnify’ its problems

The parent company of Garena, Shopee and SeaMoney continues to see its shares struggle in a new week of trading.

  • Sea’s share price finished 1.7% lower on Monday (21 December) following reports of a new Covid-19 variant in the UK
  • The e-commerce, gaming and fintech group’s stocks had managed to recover by 3% last Friday
  • Shares were being sold off previously, after the company announced the sale of new securities
  • Despite being awarded a digital full-bank licence in Singapore, analysts are split on the stock’s future

Sea’s shares continue to waiver

Sea Limited’s shares closed 1.7% lower on Monday (21 December 2020), as market sentiment waned on reports of a new coronavirus strain discovered in the UK over the weekend.

Last week, the e-commerce, gaming and fintech group’s stocks managed to finish up nearly 3%, after having started proceedings on a back foot thanks to news that it was issuing new securities.

Between Monday (14 December) and Tuesday (15 December), Sea’s share price fell 2.8% to hit a two-week low of US$188, as investors sold off the stock amid news of the equity dilution.

Share price was already declining even prior to the announcement. Between 08 December and 10 December, Sea’s stock price fell 3.4%.

What are analysts’ ratings for Sea?

Sea - Singapore’s most valuable company by market cap - received an average 12-month target price of US$202.42 from Wall Street analysts, as of 07 December 2020.

Earlier this month, TFI Securities and HSBC each called Sea a “buy”, although Stifel recommended “hold” and Tellimer reiterated “sell”.

DBS Group Research, which had maintained a “buy” call on the stock alongside a higher target price of US$228, said Sea’s upcoming digital full-bank will accelerate regional growth in Sea’s digital financial services.

Adjusted revenue for SeaMoney, the digital financial services arm, should thus post a 124% compound annual growth rate for 2019-2022, based on DBS analyst Sachin Mittal’s projections.

On the other hand, Tellimer believes Sea’s entry into digital banking will magnify its vulnerabilities.

In Singapore’s ‘saturated’ sector, where incumbents such as DBS are also pushing into digital banking, the competition will be intense with higher-than-expected regulatory costs, said Tellimer analyst Nirgunan Tiruchelvam.

Last week, he estimated Sea may invest US$1.3 billion in three years into its digital bank, which could worsen its cash burn. The company is projected to post negative cash flow from operating activities for the next two years, Tiruchelvam said.

What has happened in December?

Sea was awarded one of the two coveted digital full-bank licences on 04 December 2020. According to the Monetary Authority of Singapore, a digital full bank will be able to take deposits and provide banking services to retail and corporate customers.

A week later, on 11 December, Sea proposed to issue 11 million new American Depositary Shares (ADS), each representing one Class A ordinary share, in an underwritten public offering.

The next day, it upsized the offering to 13.2 million ADS ‘to address strong investor demand’, pricing the new shares at US$195 apiece.

Proceeds from the offering, which closed on 15 December, would go into financing business expansion and ‘potential strategic investments and acquisitions’, Sea said.

According to Bloomberg Intelligence analysts, this new capital could also be used for the digital bank or to speed up its e-commerce and gaming investments.

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