Daily Brief Equity Bottom-Up: Sea (SE US) – Into the Looking Glass and more

• Sea Ltd’s 1Q2023 results showed its ability to sustain profitable growth with a vibrant performance from e-commerce and fintech, offset by slower digital entertainment but with visible stabilisation.
• E-Commerce showed strong performance in Asia, with Brazil making significant progress towards profitability, whilst digital financial services were boosted by a sizable loan book and more diversified funding costs. 
• Sea Ltd continues to demonstrate its cost leadership and ability to expand its total addressable market while sustaining profitability through better infrastructure and user experience rather than pure promotional spending. 

• Alibaba’s revenue from physical stores decreased year over year for the first time.
• The operating margin declined despite that Alibaba cut losses in minor businesses.
• We conclude an upside of 15% and a price target at HK$101. Downgrade to Hold.

• Alibaba (ADR) (BABA US)‘s 4QFY23 OP beat consensus by around RMB 2.5bn (20% beat) through cost cutting, but YoY revenue growth remained sluggish at 2.0%.
• Consensus expectations of Alibaba achieving an OP of RMB 150bn by FY25 may be overly optimistic due to declining dominance of Taobao and Tmall, and lack of profitable alternative businesses.
• Alibaba Group (9988 HK) would need to excel to reach RMB100bn OP, resulting in a high FY+2 EV/OP of 14.0x. This seems steep for a company with minimal earnings growth.

• Tencent’s latest financial results are in line with expectations, with revenue and non-IFRS profit of 2.5%/(2.1%) vs cons. While we anticipate weak growth in the gaming sector,
• We suggest that advertising presents several catalysts for Tencent, including the recovery of Ecommerce and gaming, WeChat Video Account’s growth, and inter-connections with Baba and Mihoyo. 
• We maintain a BUY rating with an unchanged target price of HK$433, implying 34X PE in 2023.

• After a multi-year drop in ownership, UK fund exposure in HSBC Holdings is on the rise. 
• Over the last 6-months, average fund weights have increased by +0.33% as new positions outnumbered closing positions by a factor of 2.
• With increasing active fund ownership and rising benchmark weights, UK Equity funds need higher conviction to omit HSBC from their portfolio.

• The Keepers Holdings (KEEPR PM) reported solid revenue growth of 33% YoY for Q1 2023, but profitability disappointed our expectations coming in a 26.5% YoY(vs. >50% our expectation).
• The primary reason for the disappointment was Bodegas W&H coming in with a 6mn peso profit in Q1 due to seasonality, one-offs, and cost increases (Vs. 100mn peso Q42022 profit).
• While trends remain strong on the core business, with the stock trading at 8.3x/7.1x FY23e/24e, with a 4.7/5.5% dividend yield, Bodega’s performance is an eyesore that we will monitor. 

• Tencent (700 HK) reported 1Q2023 results. Revenue grew 10.7% YoY and beat consensus estimate by 2.3% while reported operating profit was 2.25 below consensus estimates.
• Key highlight was the YoY growth in domestic game revenue (+6%) which was mainly driven by strong performance of newly launched titles.
• There has been strong recovery across all business segments during the quarter and current valuations are still at a discount to historical trading multiples and offer a good entry point.

• Medipal Holdings (7459 JP) announced strong FY23 result, with year-over-year improvement in sales and profit. While sales were just 1% ahead of forecast, net profit exceeded the guidance by 16%.
• Outperformance was mainly driven by PALTAC business. Revenue from PALTAC increased 6% YoY to ¥1,104B, 2% ahead of forecast of ¥1,080B, fueled by 14% growth in OTC pharmaceutical products.
• Medipal has guided for accelerated revenue growth of 3% YoY for its pharmaceutical wholesale business in FY24. In FY23, the business recorded revenue growth of 0.6% YoY.

• ZTO reported C1Q23 top-line, IFRS EBIT, and non-IFRS net income (3.1%), 30%, and 30% vs. our est. ZTO raised volume est. to 20-24% YoY; 
• Margin beat as parcel cost was (8%) vs. our est., but we suggest also due to (1) parcel mix improvements, (2) output-based pay, and (3) lower % of KA customers; 
• Maintain BUY and raise TP to US$ 38 due improving gross profit per parcel and an end in-sight for CAPEX spending. Our TP implies 24x P/2023E.

Dentsu Group had demanding Q123 on Q122 comparisons and, with the acquisition contributions, we are not too concerned about the read-across for the rest of FY23, with performance skewed to H2. Progress in Customer Transformation and Technology (CT&T), up 6.7% in Q123 and now 35% of group net revenue, should buoy medium-term growth. Tag, the acquisition announced in March and expected to complete in early Q323 (subject to regulatory clearances), is another step towards the 50% CT&T target. We anticipate a return to margin expansion in FY24 as one-off factors retreat, the transition progresses and cost benefits from the ‘One dentsu’ initiative start to flow. The valuation remains at a marked discount to global peers.