Took a glimpse at IGG (HKEX 799)

Introduction

IGG might be unfamiliar to Singapore Investors but this company has its headquarters based in Singapore.

While the company might be more unknown, its games such as Lords Mobile and Castle Clash would ring a bell more in mobile gamers or those that frequent app stores more often.





Lords Mobile was launched in 2016 and Castle Clash back in 2013.

Valuations (Based of closing price as of 24 June 2020)

Price: 6.1
PE: 5.87
PB: 2.6
Dividend Yield: 5%
Dividend Payout: 30%

As per most game companies, the price to book exceeds 1 and similar to game companies that are of small caps, the PE is usually a single digit.


Financials




As of end 2019, the company had cash minus liabilities of 205 million USD, which equates to roughly 1.27 Hkd, 20% of the current market cap of the company.

In this aspect, the company is definitely in good financial health


The 'Nah' Factors

1) Revenue Decline in its games since January 2018. 
As the more famous games in IGG (Namely Lords Mobile and Castle Clash) has been around for sometime, they have experienced a 'natural decline' and as such revenue has been falling.
This is a concern as Lords Mobile accounted for 81% of revenue while Castle Clash accounted for 11% of revenue.
Despite currently trading at 6 PE, it seems like a 10-20% decline in its game revenue yearly is likely.


2) Lack of new flagship games. 
As of June 2020, there has not been any blockbuster hits from IGG this year, they have primarily focused on improving Lords Mobile with a new huge update in March 2020 but apart from that it is all quiet on the new games front. 
Having spent 92.5 million USD in R&D in 2019, the investment is quite hefty and there is some concerns over the lack of a new blockbuster launch.

The 'Yay' Factors

1) Gaming revenue should at least be stable if not increase this year.
 Due to covid concerns, there should be an increase in gaming revenue as people stay home and play games. Furthermore, Lords Mobile has done well in Sensortower rankings this year. Coming in top 10 each month.

2) Company Headquarters in Singapore 
As such, the company should benefit from the Jobs Support Scheme that the Singapore Government has rolled out. 
In fact the company has received higher government grant in 2019 compared to 2018. 
This should increase in 2020.

3) New Business Segment churning out good initial results
In 2019, the company has added 'Global Investments' in its slides as part of the business strategy of the company. This segment has generated 25 million USD increase in fair value in 2019. 
The amount of such investments amounted to 71.4 milion USD in 2019, which is equivalent to 7.3% of its market cap or 44 cents HKD.
While not much has been disclosed on the companies it has invested in, one of the companies[XD Inc (HKEX: 2400) ] made its debut on HKEX in 2019.  As of June 24, the company's share price has increased largely since January. As such, IGG which owns 24 648 000 shares will likely record another fair value increase.
Whether this is blind luck or investing foresight in similar game companies remains to be seen....but a good start is always well appreciated.


Closing Thoughts

At current valuations i feel that its a fair price to buy and should a blockbuster game comes out, the value will increase further. 
Even if it does not, the revenue this year should be largely helped by the unexpected tailwind of Covid concerns and at 6 PE i do not think that this is fully priced in. 
This is due to the fact that there has not been much reporting on Lords Mobile revenue. 
On top of that, its hard to use other game companies good quarterly results to compare to IGG as the game offering differs and different game has different stage of the life cycle as well. 

I feel that travelling and playing games probably is a trade-off. U can't increase doing 1 and increase the other at the same time. Hence a rightly timed sector rotation could be a decent play.