Reliance On Proven Game Formulas Will Limit Innovation And Potentially Affect Future Earnings

Key Takeaways

• Aggressive marketing and diversification strategies may impact profit margins due to increased costs and competition in the SLG market.
  
• Heavy CapEx and focus on growth could pressure short-term earnings, with profitability reliant on successful scaling in the APP business.
  
• IGG's diversified portfolio and strategic pivots indicate financial resilience and potential growth, supported by AI adoption and strong shareholder value actions.

Catalysts

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

• The company is planning a more aggressive marketing and promotion strategy for games like Doomsday and Viking Rise in December, which could result in increased costs, potentially impacting net margins in the near term.
  
• While there are plans for rapid growth and diversification through new games and the APP business, increased competition in the SLG overseas market could lead to slower revenue growth or require higher spending on user acquisition and marketing, thereby impacting gross profit margins.
  
• IGG's emphasis on diversifying its product portfolio with new SLG games involves inheriting concepts from existing successful games, but the heavy reliance on proven formulas might limit innovation and potentially affect future earnings if newer titles do not resonate with users as anticipated.
  
• The significant increase in CapEx by 30% to 35% for the headquarter building development suggests a substantial outlay that might not immediately translate into revenue growth, thereby pressuring short-term financial metrics like earnings and cash flow.
  
• The APP business is experiencing rapid growth; however, profit margins are currently being suppressed as resources are funneled back into growth rather than profitability. This strategy could impact earnings in the short term if scale is not achieved swiftly or if competitive pressures intensify.

IGG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IGG's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.9% today to 8.6% in 3 years time.
• Analysts expect earnings to reach HK$578.7 million (and earnings per share of HK$0.53) by about February 2028, down from HK$763.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, up from 6.7x today. This future PE is lower than the current PE for the HK Entertainment industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 1.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

IGG Future Earnings Per Share Growth

Risks

• IGG's diversified portfolio with titles beyond Lords Mobile, such as Doomsday and Viking Rise, has reached significant billing milestones, indicating potential for sustained revenue growth.
  
• The company's strategic pivot to focus on both new and existing games, coupled with a strong performance in the APP business, demonstrates improved gross and net profit margins, suggesting financial resilience.
  
• IGG's decision to allocate a portion of profits towards share buybacks and dividends could enhance shareholder value, reflecting confidence in its earnings stability and potential growth.
  
• The adoption of AI to cut R&D expenses and increase efficiency could bolster net margins, indicating a proactive approach to operational cost management.
  
• With a robust cash position and a strategic focus on future game releases and market diversification, IGG's financial health appears solid, lowering risks to revenue and profit forecasts.

Valuation

• The analysts have a consensus price target of HK$4.569 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$5.45, and the most bearish reporting a price target of just HK$4.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be HK$6.7 billion, earnings will come to HK$578.7 million, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of HK$4.51, the analyst price target of HK$4.57 is 1.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.