UOB Kay Hian (UOBKH) has initiated coverage on newly-listed Winking Studios, in anticipation of a surge in game popularity in the coming years and the group’s healthy operating cash flow. Analyst Heidi Mo has a “buy” call with a target price of 35 cents, representing a 32.1% upside.
Winking Studios, which launched on the Catalist board of the Singapore Exchange S68 (SGX) last November, operates as a game art outsourcing and game development studio in Asia. It provides character and environment concept design, and illustrations/posters; 3D modelling; in-game animation; and game development services.
Mo highlights three strengths of the stock. First, she notes that Winking Studios has a strong 25-year track record of delivering end-to-end art outsourcing and game development services for the gaming sector.
As the third-largest game art outsourcing studio in Asia and fourth largest globally, Winking Studios has 82% of its revenue derived from art outsourcing, where environment and characters are designed for games.
It has long-term working relationships with 19 of the top 25 game companies worldwide, and has been involved in internationally-renowned and award-winning projects like Assassin’s Creed and Genshin Impact.
As of March 31, Winking Studios operates seven studios in Nanjing, Shanghai and Taipei with over 700 employees, including 600 designers and artists.
Mo believes that Winking Studios is in a “strong position” to capitalise on the booming game art outsourcing industry. The company’s portfolio has over 1,400 and 25 completed art outsourcing and game development projects respectively.
The analyst expects this to grow exponentially on the back of higher demand for game art outsourcing services, driven by a staggering surge in the popularity of games.
Per China Insights Industry Consultancy, the market size of the global game art outsourcing market by revenue in 2022 was US$3.4 billion, and is expected to grow at a five-year compound annual growth rate (CAGR) of 13.4% to US$6.3 billion ($8.49 billion) in 2027.
“Given Winking Studios’ strong international brand recognition for quality work and services, we expect the group to experience healthy growth in revenue to US$32.4 million to US$37.7 million (three-year CAGR of 8.8%) and core earnings to US$4.3 million to US$5 million (three-year CAGR of 9.4%) respectively for 2024-2026,” says Mo.
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Finally, she cites Winking Studios’ strong backing by Acer Gaming and robust cash flow as factors that will make for ample headroom for the company to grow via acquisitions.
The company’s growth strategy is to pursue synergistic acquisitions and broaden its customer base, aiming to strengthen its global market presence. Its most recent acquisition of On Point Creative Co, a Taiwan-based art outsourcing studio, is a testament to its growth strategy.
“We think Winking Studios’ strong operating cash flow, which upon excluding US$2 million of initial public offering expenses tripled to US$5.4 million in 2023, will help support future acquisition opportunities,” says Mo. “Moreover, the group has strong backing from its major shareholder, Acer Gaming, which recently increased its deemed interest to 59.59% in March.”
Mo expects the group to continue achieving inorganic growth through strategic acquisitions as management remains on the lookout for suitable opportunities.
With that, MO initiates coverage on Winking Studios with a target price of 35 cents, pegged to a 17 times FY2024 P/E.
“We think Winking Studios deserves a rerating, given the group’s strong performance to date and growing talent and customer base. The stock is trading at 13 times FY2024 P/E, at around 50% discount to its peers’ average of 27 times FY2024 P/E,” she adds.
As at 1.17pm, shares in Winking Studios are trading flat at 26.5 cents.
