It took us a while...
We were trying to understand why some of the mobile gaming companies listed in Hongkong* are valued so cheaply. The forward PE is less than 10 and the ROE is more than 25%.
After looking through, the only logical conclusion is that the market seem to be worried on their positioning and the longevity of their gaming titles. We will cover a them below.
FriendTime which has a stronghold on a certain particular niche and had seen rapid growth in their new game but rapid decline in their legacy games. An alternative view is that their new game revenue may overtake all their legacy games?
IGG lack of new blockbuster title and the continued decline of their 2016 Lord Mobile may just shows their inability to conjure up another one. Or maybe their discipline between returning capital and developing new games is a case for investment?
ZenGame is operating in the boardgames and card mobile game space in the casual mobile game space is in a space with high competition. The change in their revenue from sales of virtual item to “in-game information” is drastic and a tad worrying? But could revenue diversification be seen as good thing?
A portfolio of Mobile Gaming Companies?
Individually they are viewed as not diversified enough for investment. What if we take a small stake in everyone of them and view them as a single company?
That would somewhat diversified out some of the risk while retaining the upside of owning a set of niche mobile game developers which are enjoying a valuation of PE < 10 and a ROE > 25%.
For this case, we would have to admit that the market seems to valuing these companies correctly considering the risk profile attached to them.
Another way to invest in the sector would be to invest in Tencent which dominates the market but is trading at high multiples.
For portfolio diversification, investors could consider adding FriendTime, IGG and Zengame to the mix but we do not believe that the risk/reward is sufficiently skewed. For now, we will keep to our Tencent/Netdragon Position.
Do hit the comment button if you have any thoughts on this.
* Other mobile gaming companies listed on HKEX:
CMGE has a lot of mobile games but their IPs are mostly licensed which makes their gross margins thinner. Their PE is at around 20x despite a lower ROE which indicate that the market is giving it a higher PE based on its more diversified gaming titles.
XD Inc which is newly listed owns the popular Taptap gaming review platform. This ownership makes them seem more diversified. Do note that IGG owns 5.76% of XD Inc.
Disclosure: At the time of publishing Wee Hiang has a position in Netdragon Websoft and Tencent. Holdings are subject to change at any time. This report, and disclosure, should not be considered to be a recommendation.