Frozen War And Tycoon Master Will Drive Future Markets

Key Takeaways

• Strong synergies in the APP business, coupled with new game launches, present robust revenue and user engagement potential, enhancing profitability prospects.
  
• Strategic use of AI for cost reduction and focused financial policies like share buybacks could attract investors and drive efficient growth.
  
• IGG faces risks from uncertain new game success, heavy competition, and strategic investments, impacting revenue growth, profitability, and shareholder returns.

Catalysts

An investment holding company, develops and operates mobile and online games in Asia, North America, Europe, and internationally.

• The accelerated growth of IGG's APP business, with an MAU exceeding 62 million and revenue tripling within a year, indicates a strong revenue catalyst, driven by synergies with sectors like e-commerce and AI.
  
• Upcoming releases and upgrades of key flagship games such as Lords Mobile, Doomsday, and Viking Rise are expected to drive revenue and user engagement, which could enhance profitability.
  
• The planned launch of three heavyweight games, including Frozen War and Tycoon Master, demonstrates potential for significant revenue and monthly gross billing growth, as they target both casual and SLG game markets.
  
• Increased application of AI to reduce R&D expenses while enhancing user experiences and operational efficiencies is likely to boost net margins and overall earnings.
  
• Strategic share buybacks and maintaining a dividend policy of distributing 30% of profits could lead to increased EPS and attract investors by signaling confidence in future profitability growth.

IGG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IGG's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.1% today to 12.3% in 3 years time.
• Analysts expect earnings to reach HK$731.1 million (and earnings per share of HK$0.54) by about May 2028, up from HK$580.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, up from 7.4x today. This future PE is lower than the current PE for the HK Entertainment industry at 14.2x.
• Analysts expect the number of shares outstanding to decline by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.9%, as per the Simply Wall St company report.

IGG Future Earnings Per Share Growth

Risks

• IGG's reliance on expansion into new games like Frozen War and Tycoon Master adds execution risk, as the success of these games is uncertain and critical for sustaining revenue growth.
  
• There is a possibility that their explorations and applications of AI in games may not yield significant cost savings or user engagement increases, potentially affecting R&D expenses and profitability.
  
• Heavy competition in the casual games market, especially against large established players like Zynga, could lead to increased marketing costs and pressure on net margins.
  
• The decision to withhold dividends and retain more cash for game development and marketing highlights the necessity to invest heavily in successful product launches, which could impact immediate shareholder returns and overall profit allocation.
  
• Market dynamics, such as changes in user acquisition costs or fluctuations in app usage and engagement, could negatively impact user growth and revenue from their APP business, affecting overall revenue stability.

Valuation

• The analysts have a consensus price target of HK$4.707 for IGG based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$5.42, and the most bearish reporting a price target of just HK$4.14.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be HK$5.9 billion, earnings will come to HK$731.1 million, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 7.9%.
• Given the current share price of HK$3.74, the analyst price target of HK$4.71 is 20.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.