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Will an ecommerce rebound help turn the tide for Sea shares?

As ecommerce continues to rebound, the tide is turning for Singaporean company Sea. While consumer spending isn’t surging in China, Alibaba is poised to be a key beneficiary from the country’s recovery following its major restructuring.

- The Sea founder is hoping that its Q4 2022 results weren’t a one-off and the company can continue trending upwards.

- China’s ecommerce logistics activity for March logged steady growth; Alibaba is expected to benefit from the recovery.

- The Global X Ecommerce ETF [EBIZ] holds Alibaba, Mercado Libre and Sea, and is up 8.15% year-to-date.

Ecommerce and gaming giant Sea [SE] turned a corner when it reported its first-ever profit last month.

Sea’s founder, chairman and CEO Forrest Li is hopeful the fourth quarter (Q4) 2022 results were not just “a momentary blip”, but rather “the start of a long-term trend”, according to a staff memo seen by Bloomberg. Nevertheless, the company laid off almost 500 employees at the ecommerce unit Shopee in Indonesia following the earnings report.

“I want to assure you that, assuming no major shift in our external environment, our large-scale changes are complete, and we do not foresee further major changes,” wrote Li, adding that the challenge for the company will now be to deliver consistent profits over the long term.

Despite being down 24.6% in the past 52 weeks, the Sea share price has surged 57.7% year-to-date and 9.7% in the past month. The Alibaba [BABA] share price is up 20.3% in the past month, while the Mercado Libre [MELI] share price is up 10.6% in the same period. 

Ecommerce offsets digital entertainment weakness

Sea’s ecommerce revenue increased 50.5% in the last three months of 2022, and 63.5% for the full year. In comparison, its digital entertainment segment saw sales slump 32.9% and 10.3% in the respective periods. Ecommerce accounted for 62.9% of Q4 revenue and 60.5% of full-year revenue.

DBS Group analyst Sachin Mittal reiterated his ‘buy’ rating on Sea following the earnings, according to a research note seen by The Edge Singapore.

Mittal wrote that ecommerce’s turnaround will be a key share price catalyst which will “outweigh potential digital entertainment weaknesses owing to high inflation, which might hurt discretionary spending on games”.

At the time of writing, Sea’s share price was trading at around 2.8 times enterprise value to the end of 2023 revenue, Mittal noted. The company’s south-east Asia ecommerce peers were trading at 10 to 20 times 12-month forward enterprise value.

Alibaba to gain from China’s continued recovery

Industry data published over the weekend shows that China’s ecommerce logistics activity, on both the supply and demand side, remained stable in March.

The survey, conducted by the China Federation of Logistics and Purchasing and JD.com [JD], has forecast that the gauge will rise in April, especially as China’s economic recovery picks up pace. Alibaba should be well-placed to benefit from this recovery—following the company’s surprise restructuring, the only entity that will be wholly-owned is its ecommerce business, Taobao Tmall Commerce Group.

Latin American ecommerce giant Mercado Libre announced in March that it’s to invest $3.6bn in Brazil, including on logistics. Senior vice-president of ecommerce in Brazil, Fernando Yunes, told Reuters that the boom in online shopping sparked by the pandemic had created a “great opportunity”.

To capitalise on this, Mercado Libre will be building new distribution centres and expanding its transport capacity.

Funds in focus: Global X Ecommerce ETF

Singapore’s Sea is the biggest holding in the Global X Ecommerce [EBIZ], with a weighting of 5.86% as of 11 April. Mercado Libre is the second-biggest, with a weighting of 5.22%, and Alibaba has been allocated 3.69% of the portfolio. The fund is up 8% year-to-date and up 3.6% in the past month.

Mercado Libre and Sea are the top two holdings in the FMQQ The Next Frontier Internet & Ecommerce ETF [FMQQ], with weightings of 10.57% and 10.50%, respectively, as of 10 April. The fund is up 5.4% year-to-date and up 5.4% in the past month.

Alibaba is the second-biggest holding in the HANetf EMQQ Emerging Markets Internet & Ecommerce UCITS ETF [EMQQ.L], with a weighting of 8.55% as of 31 March. Mercado Libre and Sea are the third- and eighth-biggest, making up 5.81% and 4.71% of the portfolio, respectively. The fund is up 4.4% year-to-date and up 4.1% in the past month.

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