In-Depth Analysis of Winking Studios Limited
Date: August 26, 2024
Broker: KGI Securities (Singapore) Pte. Ltd.
Introduction to Winking Studios Limited
Winking Studios Limited, a prominent player in the media sector, is making waves with its strategic growth initiatives. This analysis delves into the company’s financial performance, strategic direction, and market positioning, as reported by KGI Securities on August 26, 2024.
Strategic Growth through M&A and Market Expansion
Winking Studios has been on an impressive growth trajectory, primarily driven by its strategic mergers and acquisitions (M&A) approach. Since its Initial Public Offering (IPO), the company has expanded its footprint in Asia by acquiring two art outsourcing studios in Taiwan and Malaysia. These acquisitions align with its broader strategy of bolstering its market leadership in the art outsourcing industry. The successful placement of new shares further underscores its commitment to enhancing market position through strategic acquisitions.
Organic Growth in the Japanese Market
The company has also achieved notable organic growth, particularly in the Japanese market. In the first half of 2024, revenue increased by 7.1% year-over-year, reaching US\$15.2 million, up from US\$14.2 million in the same period of 2023. This growth was fueled by a surge in orders from both its Art Outsourcing and Game Development segments. Notably, revenue from Japan in the Art Outsourcing segment nearly tripled to US\$1.5 million. This growth has contributed to a more balanced geographical revenue mix, enhancing the company’s resilience against economic fluctuations.
Strategic Dual-Listing on the London Stock Exchange
Winking Studios is actively pursuing a dual-listing on the London Stock Exchange (LSE), which is expected to provide several advantages. The fungible share transfers between the Singapore Exchange (SGX) and LSE would offer greater flexibility for shareholders in both markets, potentially increasing trading volume and enhancing market liquidity.
Financial Performance and Valuation
The company’s first half of 2024 financial review highlights a 7.1% year-over-year growth in revenue, reaching US\$15.23 million. This increase was driven primarily by a 6.6% growth in the Art Outsourcing Segment and an 8.1% growth in the Game Development Segment. Despite a slight decline in gross profit to US\$4.24 million, the gross margin remained stable at 30.0%. The profit before tax decreased by 23.7% to US\$1.007 million, attributed to acquisitions, increased marketing expenses, and ongoing listing expenses.
APAC Art Outsourcing Market Trends
The APAC art outsourcing market is experiencing rapid growth, driven by the increasing demand for cost-effective, high-quality solutions from game development companies. The market is projected to reach US\$4.5 billion by 2027, with a CAGR of 14.4%. As gaming hardware supplies improve and game launch delays shorten, the overall gaming market is expected to grow to US\$317.6 billion by 2027. Winking Studios is well-positioned to capitalize on this expansion, thanks to its strong financial performance and strategic focus on the gaming industry.
Investment Recommendation and Future Outlook
KGI Securities recommends an OUTPERFORM rating for Winking Studios with a revised target price of S\$0.35, based on a Discounted Cash Flow (DCF) analysis. The valuation incorporates a terminal growth rate of 2.0% and a cost of equity of 11.9%. As the company continues to expand its art outsourcing segment and drive sales through its business development efforts, sustained revenue growth is anticipated to support this positive outlook.
Risks and Exposure
Key risks include exposure to currency fluctuations due to denomination in USD, margin pressure from competition, and lower-than-expected new order wins.
Financials & Key Operating Statistics
The report provides detailed financial projections and key operating statistics for the years 2022 to 2026. These include revenue, PATMI, EPS, net profit margin, and ROE, among others.
Inorganic Growth Strategy
Winking Studios’ inorganic growth strategy focuses on strategic acquisitions to expand its market reach and service offerings. The company has successfully acquired 100% of the issued share capital in On Point Creative Co., Ltd. in Taiwan and the business of Pixelline Production Sdn. Bhd. in Malaysia. These acquisitions are expected to strengthen its position in the art outsourcing market and enhance its ability to serve a broader range of clients.
Organic Growth Strategy
The company’s organic growth strategy focuses on enhancing operational efficiency, expanding service offerings, and strengthening client relationships. By optimizing production processes and leveraging advanced technologies, Winking Studios aims to reduce costs and improve turnaround times. The integration of AI capabilities in its art outsourcing segment is also being explored to automate tasks, improve efficiency, and enhance output quality.
Commitment to High-Quality Gaming Services
Winking Studios is committed to delivering high-quality and cost-effective gaming services, crucial for maintaining its competitive advantage. The company aims to continue providing exceptional value to its customers by focusing on project management and execution.
Global Gaming and Art Outsourcing Market Outlook
The global gaming and art outsourcing market is poised for continued growth, driven by the increasing demand for high-quality gaming content and the outsourcing of artistic services. The global games market is expected to generate US\$187.7 billion in 2024, with the number of global players reaching 3.42 billion. The rise of PC and mobile gaming underscores the growing demand for diverse and immersive gaming experiences.
Industry Breaking News
The success of Black Myth: Wukong is set to catalyze a shift in the Chinese gaming industry towards AAA game development. As more studios invest in ambitious projects, the demand for art outsourcing services is expected to rise, positioning Winking Studios as a key partner for studios seeking visually stunning and technically sophisticated games.
Valuation and Key Catalysts
The report concludes with a recommendation of an OUTPERFORM rating for Winking Studios, with a revised target price of S\$0.35 per share. Key catalysts include a strong second-half pipeline, potential dual listing on the LSE, and future acquisitions. These strategies, combined with strong shareholder support, underscore confidence in Winking’s ability to deliver sustained value to shareholders.
