Monday 22 October 2018

IGG Inc: Owning A Game Company Just Got Complicated

This write up is overdue as I bought IGG in May 2018. Owning a game company just got Complicated due to China's freeze in new game approval.

As a gamer and now an investor, owning piece of a game company is a great idea, since I can't make or work in one. I have looked around US and Japan. I probably miss some companies in my watch-list but not all game companies are doing great (sega, konami, capcom, nintendo). Those that are doing well (Squarenix, Activision Blizzard) are overvalued.

During a stockcafe's screener in May, the result gave me an interesting list. I looked through all of them and an mobile gaming company appears in it. IGG inc, I GOT GAME is a mobile game developer, just like Tencent. 

The Gaming Industry
The Global gaming market are expect to grow at a CAGR of +10.3% between 2017 and 2021 with China the biggest market followed by US and Japan. Mobile segment will have the greatest growth as basically everyone owns a smartphone. (Source)

In Southeast Asia the market is also gaining momentum as PC Online and mobile gaming revenue hit over $2.2 billion in 2017 with expectations that it will reach over $4 billion by 2021. The number of PC online and mobile gamers in SEA is projected to reach 300 million by the end of 2017, rising to more than 400 million by 2021. (Source) [This why Singtel want a piece of the pie]



China Freeze on New Games
In August, China has halted approval of new games while the regulators are amid an internal restructuring. Twitch was banned in the following month and of any e-sport broadcast. All these in order to control the addiction and health of the minors. 

Ironically, China sent a team to the 18th edition of the Asian Games held in Jakarta, Indonesia and won quite a number of medals. The 2022 Asian Games is also to be held in Hangzhou.

Impact of China Limited
Logically, halting  of new games won't stop the growth of the China gaming market. There are still popular games in the market, gamers just need to choose from the current library.  Hence the market can still grow just that the gamers can't access to new games. However I doubt China will freeze indefinitely. Especially so that the 2022 Asian Games will be held in Hangzhou.

How can China control the access to games? Unless the regulator can control the hours a person can get access to a game as they had mentioned.  But can the regulator implement that? There will be tons of loopholes, like using another person devices, fake profiles, etc.

In terms of global growth, China represent 28% of the market, there is still 72% unaffected. E-sport is also gaining popularity in South East Asia. Although some game stocks are down, they are still trading near/higher than 20x PE.









IGG successfully transited for a browser based/client based game developer to a mobile game developer that focuses on developing, producing and licensing  games that are free to play with revenue generation coming from in-app purchases and also live streaming service.


IGG first ported games from browser/client based game to mobile and their R&D produced 30 to 50 games a year. In 2013 IGG produced it first hit game Castle Clash, after 4 years is still generating stable revenue.

In 2016, IGG's mega hit , Lord Mobile gain tremendous popularity. A result of IGG's marketing into worldwide. IGG's registered IP address from over 200 countries, playing their games.

IGG diversify by marketing and producing its games into different languages, to different countries and tap into different talent pool. Limiting its reliance/exposure any country or region. IGG is headquartered in SIngapore.

Some of IGG games, all have good ratings

Growth Factor
I believe Lord Mobile still has room to growth as it has not plateau yet like Castle Clash.Up coming games such as Castle Clash 2 will help with growth. IGG empathizes on/setup R&D in different regions should helps build on their success to produces to produce better quality games. Lord Mobile was launched 3 years after Castle Clash. Let's hope IGG can repeat the same success.

Growth: Live Streaming
I had read the past 6 years of the annual reports but not a word was mentioned of the live streaming subsidary. I only discovered that IGG owns a live-streaming subsidiary when I read the only analyst that is covering IGG at Seeking Alpha. The subsidiary is call PocketSocial, the live-streaming platform is called StreamCraft. StreamCraft was just released in early 2018. According to the Google Play Store, it has over 100,000+ downloads and over 5,000 reviews with a 4.5 star average.

As per article mentioned, most investors like myself will miss out this potential catalyst if not for reading the article. Just like Twitch, if successful, provide recurring income from advertisement, subscriber just like Twitch. Hence this part of IGG's business is likely not priced in IGG’s current stock price.


Streamcraft


StreamCraft



Business Risk
Risk involve making a hit games that may or may not happen as the gaming market is highly competitive, the app store drowned with games. Even though a game became a hit, how long the can the game remain relevant as gamers get bored remain to be seen. However IGG has manage to make 2 hit games so far in their 6th year as a game developer

IGG's first hit, Castle Clash well into its 6th years, extending its lifespan by regularly introducing new game features, rapidly resolving technical issues, and consistently providing excellent customer service, to build a large community of loyal gamers.

Business Moat
Popular, fun games with loyal gamers is a moat for any games. Once a gamer is devoted into a game, he will stick around for a long time. Especially truth for pay to win, If gamers(like me) who will only play for free will totally avoid or quit the game in a short period of time. As long there is new content and the gamers are happy, the game will be keep alive and hence recurring revenue.

However this moat may not last long, depend on the game popularity, like World of Warcraft, 14 years running (Apparently starting to fail with crappy content being released). But if IGG is able to build on a library of popular games that can last 14 years, recurring income will be huge, IGG as a mobile developer is only 5+ years old.
A Youtube Search Tell You How Popular the Gamer Is
 

Temasek Holdings
Temasek Holdings owns IGG through Vertex since pre-IPO. It has stake of about 9.1%, read from a 2014 article. Not sure if they are still holding on to it.

Conclusion
IGG is a relatively young company consider that is transited to a mobile developer in 2013, till now is only 5+ years. Compare to well known brands and IP like Blizzard, Capcom, Final Fantasy, there is no wonder IGG is seen as higher risk, hence the low PE. However, IGG is generating a lot of FCF, paying a nice dividend yield of 5.56% at current price of HKD8.81. It also has a strong balance sheet with no debt, current ratio is way above 1x. Riding on the growth of mobile gaming market, I believe IGG will continue to grow with the current hit, Lord Mobile and up coming games such as Castle Clash sequel. I will need to pay attention to its performance.

You can read Seeking Alpha analyst report on IGG here.




Vested @ HKD10.43

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