SAC Capital is keeping an optimistic stance on art outsourcing studio Winking Studios. In an unrated report dated Jan 15, analysts Daniel Ng and Matthias Chan are upbeat on the group’s growth trajectory that is supported by a robust acquisition pipeline, enhanced by funds raising through the recent placement and anticipated benefits from the dual listing.
“With the company’s strong financial position and focus on expanding its global footprint, we are optimistic on the company,” say Ng and Chan.
Currently, Winking is the third largest art outsourcing studio in Asia and the fourth largest in the world, The company provides a range of services including 2D and 3D modelling, game development and animation, servicing renowned game developers such as Ubisoft, Tencent and NetEase.
In 1HFY2024 ended June 30, 2024, Winking reported revenue of US$15.2 million ($20.8 million), reflecting a 7.1% y-o-y growth. This was primarily driven by strong contributions from the art outsourcing and game development segments, with new contracts in Japan and South Korea. Gross profit decreased slightly by 2.8% y-o-y to US$4.2 million, with gross profit margin decreasing from 30.7% to 27.9%. This was mainly impacted by the deferment of various projects to 2HFY2024 due to customers’ requirements and the integration of newly acquired studios. Excluding these integration effects, gross margin remained stable at 30.0%.
Net profit fell by 28.0% y-o-y to US$0.9 million, impacted by increased marketing and promotional expenses, along with ongoing listing expenses. Adjusted for one-off expenses, the group’s adjusted net profit stood at US$1.2 million, a decrease of 34.1% y-o-y. As of June 30, 2024, Winking is in a net cash position of US$11.6 million in cash and no borrowings, representing approximately 10% of its market capitalisation.
Ng and Chan like the stock for three investment theses.
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Firstly, they like the group’s plans for inorganic growth as a key growth driver, beyond organic growth driven by the group’s training and hiring efforts. Since its IPO in Singaore, the company has expanded geographically and boosted client capacity with the acquisitions of On Point Creative in Taiwan and Pixelline Production in Malaysia. In July 2024, the company raised $26.5 million through a placement, which will be allocated primarily for strategic acquisitions.
Secondly, Winking’s dual listing in London will provide it with exposure to a broader investor base, further supporting its future growth plans. “We anticipate acquisitions to follow,” say Ng and Chan.
Thirdly, Acer Group’s majority stake of 64.2% in Winking not only strengthens its s operational capabilities but also opens doors to Acer’s extensive network in the global gaming and art outsourcing industries. Leveraging Acer’s resources, Winking collaborates on innovative projects such as AI-driven 3D animation software and the conversion of classic titles for Acer’s True Game platform. “This synergy positions Winking as a growth leader in the rapidly expanding gaming sector, enhancing its scalability and market penetration across developed and emerging markets,” say the analysts.
On the outlook, the global gaming market is projected to grow at a compounded annual growth rate (CAGR) of 8.9%, reaching US$317.6 billion by 2027, driven by increasing popularity of online games, esports and immersive gaming experiences, according to an independent market report by China Insights Industry Consultancy Limited. The demand for outsourcing art services is projected to grow at a CAGR of 13.4%, reaching US$6.3 billion by 2027. As one of the largest game art outsourcing companies, the analysts believe that Winking is well-positioned to capture this growth.
On that note, the analysts note that a significant portion of the group’s revenue id denominated in various currencies, making the company vulnerable to exchange rate fluctuations, which can potentially impact profitability. Additionally, the company’s aggressive acquisition strategy poses integration risks, particularly in maintaining operational efficiency and preserving profit margins during the initial stages of mergers.
Shares in Winking closed at 29 cents on Jan 15.
