Gaming has significantly gained more popularity as a form of entertainment in the digital era. In 2023, the global gaming industry reached a staggering $396.2 billion, compared to the movie industry’s $283.5 billion and the music industry’s $69.2 billion.

According to HTF Market Intelligence, the game outsourcing services sector is predicted to experience a mind-blowing CAGR of 31.9% between 2024 and 2030. This translates to a market size increase of a jaw-dropping US$32.2 billion by 2030.

This forecast highlights the immense potential and lucrative opportunities within the game outsourcing service sector.

Notably, it was recently reported that one of European largest PE conglomerate, EQT, is in advanced talks to takeover the world’s largest gaming services group, AIM-listed Keywords Studios, for S$3.8 billion.

With the skyrocketing demand for services outsourcing in the gaming industry, this is the perfect timing for the world’s 4th largest game art studio (Asia’s 3rd largest gaming art studio) – Winking Studios to make their mark.

About Winking Studios Limited

Headquartered in Singapore and recently listed on the Singapore Stock Exchange in November 2023, Winking Studios is one of the world’s largest game art outsourcing and game development studio.

With over 25 years of experience, the Group provides a complete of end-to-end art outsourcing and game development services across various platforms for the video games industry.

Winking Studios operates a network of eight studios strategically positioned in Nanjing, Shanghai, and Taipei.  Their workforce of over 800 employees is heavily weighted towards talented designers and artists, allowing them to foster strong relationships with 21 of the top 25 game developers worldwide (such as Activision, NetEase Games, Nexon, NC Soft, Ubisoft, Tencent Games, Nintendo)  over the past two decades, leveraging its reputation and connections to secure new projects.

On top of that, a notable strength of Winking Studios is its majority 59% ownership by Acer Group. This strategic shareholding brings about significant advantages due to Acer Gaming’s established industry relationships and strengthens Winking Studios’ ability to deliver top-tier services to clients around the world.

Financial Performance

Winking Studios’ revenue breakdown shown above demonstrates a balanced geographic distribution. While mainland China and Hong Kong contribute 41% of total revenue, the remaining revenue is spread relatively evenly across Taiwan, Korea, and the United States.

Next up, Winking Studios boasts a strong track record of revenue growth where it more than doubled  from US$14.5 million in FY2020 to US$29.3 million in FY2023. This translates to a compound annual growth rate (CAGR) of 26.4%.

This impressive growth coincides with a significant increase in their workforce, with the number of employees expanding from 354 to 652 during the same period (CAGR of 22.6%), mirroring the booming APAC game art outsourcing market, which has witnessed a CAGR of 23.0%.

It is worth noting that with more employees, their revenue has increased correspondingly and it is aligned with the Group’s business strategy to accelerate their expansion via M&A activities.

Winking Studios possesses a strong cash position thanks to a 171.1% increase in cash and cash equivalents, primarily fuelled by their recent IPO. This healthy financial standing is further bolstered by the growth in trade receivables reflecting increased business activities and rising contract assets due to revenue expansion.

Despite a modest 8.4% increase in liabilities, it’s important to note the company has no borrowings at all! This solid financial foundation positions Winking Studios well for future growth and the ability to pay dividends – which they recently announced a special dividend of 0.5 Singapore cents for FY2023.

Growth Prospects

Looking ahead, Winking Studios is focusing on growth both organically and via opportunistic acquisitions.

For the former, they aim to further expand their talent pool and actively explore the use of artificial intelligence (AI) to improve operational efficiency.

As for the inorganic growth, Winking Studios has been actively pursuing its acquisition strategy since its IPO as illustrated below:

All these, combined with planned expansion and upgrades to regional offices and supporting infrastructure, will help Winking Studios capitalize on the projected CAGR of 14.4% for APAC game art outsourcing between 2023 and 2027 (as per a China Insights Consultancy report).

Valuation

According to Bloomberg, Keywords Studios PLC (KWS LN) stands out as the undisputed leader in the game art outsourcing market with an extensive network spanning over 25 countries with more than 70 studios, employing a massive workforce of over 12,000 people worldwide.

Thus, this makes it the most relevant comparison for Winking Studios.

However, we also have other peers like Toei Animation Limited – which I often recall  as the anime-focused studio, Reallusion and Pole to Win Holdings.

With that in mind, when we compare their forward P/E ratio, we can see that Winking Studios is expected to be the cheapest among the 5 of them with a decent 27.7% expected earnings growth rate.

Conclusion

The video game industry is booming, and the demand for game art outsourcing is expected to rise alongside it.

This bodes well for Winking Studio’s future growth potential – and KGI Securities and UOB Kay Hiay has recently initiated coverage with 47 cents and 35 cents target price respectively, reflecting their bullish sentiment.

Accelerating their growth plans ahead, the Group has announced a S$27 million share placement exercise and in addition, the Group has announced dual listing plans on the AIM market of the London Stock Exchange.

With Keywords Studios being acquired by EQT at a valuation of S$3.8 billion (close to 100 times PE), it seems logical that Winking Studio is pursuing an AIM listing. It would also appear that their M&A playbook is similar to Keywords Studios.

In addition, Winking Studios has demonstrated a consistent record of profitability, complemented by a strong balance sheet and operates in a promising industry with a strong backer – Acer Group.

If the team at Winking Studios execute their plans accordingly in the next few years, it looks like SGX may have a global, market-leading, billion-dollar market cap Company on its bourse.

That being said, investors should always conduct their own research and consider their risk tolerance before making investment decisions.