Quality-first, Business-perspective Strategy, Urbem (HK) Limited

Steven Chen

Quality-first, Business-perspective Strategy

Equity Bottom-Up

<ul>
<li>The Shenzhen-based game developer trades at an attractive valuation;</li>
<li>Meanwhile, the business has been growing at a nearly triple-digit rate while maintaining an above 30% return on equity and invested capital;</li>
<li>Should investors buy into this (seemingly quality) growth story?  We want to take a deep dive.</li>
</ul>


The Shenzhen-based game developer trades at an attractive valuation;
Meanwhile, the business has been growing at a nearly triple-digit rate while maintaining an above 30% return on equity and invested capital;
Should investors buy into this (seemingly quality) growth story?  We want to take a deep dive.


European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

Codemasters Group Holdings PLC / Event-Driven

Electronic Arts agreed on 14 December a reported £945 mn cash counter-offer for Codemasters (604p per share) to disrupt Take-Two's £759 mn already accepted cash and shares offer.
<ul style="list-style-type: disc;">
<li>
For an implied EV of £892.15 mn (Codemasters has £50.747 mn of net cash).
</li>
<li>
The deal represents 7.4x EV/Fwd Revenue, 28.5x EV/Fwd EBITDA and 31.5x P/Fwd E.
</li>
<li>The court meeting and the EGM are expected to be held on December 21, 2020. The transaction is expected to close in Q1 2021.</li>
</ul>
<ul>
<li>
Codemasters shares went up by almost 20% to 640p, above the 604p offer price, suggesting market believes in the possibility of an increased bid by Take-Two. 
</li>
<li>
Take-Two has $2.2 bn of net cash.
</li>
</ul>
No longer the main objective is to sell the largest number of consoles, but to accumulate the largest number of players. Electronic Arts is interested in the racing games business of Codemasters. The move feels defensive because Take-Two is one of its main rivals and many of Electronic Arts' franchises are weakening relative to leaders.
A deal with Electronic Arts would bring under the same umbrella EA's sports and driving games (FIFA soccer and Need for Speed franchises) and Codemasters’ racing simulators.
By using a blended average of the median multiples of EV/Fwd EBITDA and P/Fwd E, a valuation up to 720p per share could be justified, c. 10% upside to current levels (and 19% over EA's bid). Recommendation is LONG Codemasters, TP 720p.
<ul>
<li>an equity value of £1,098 mn (EV of £1,047 mn).</li>
</ul>
Codemasters shares closed at 658p on 16 December, c. 9% above EA's offer.
A shareholder meeting to consider the offer has been scheduled for next Monday.

Electronic Arts agreed on 14 December a reported £945 mn cash counter-offer for Codemasters (604p per share) to disrupt Take-Two's £759 mn already accepted cash and shares offer.


For an implied EV of £892.15 mn (Codemasters has £50.747 mn of net cash).


The deal represents 7.4x EV/Fwd Revenue, 28.5x EV/Fwd EBITDA and 31.5x P/Fwd E.

The court meeting and the EGM are expected to be held on December 21, 2020. The transaction is expected to close in Q1 2021.



Codemasters shares went up by almost 20% to 640p, above the 604p offer price, suggesting market believes in the possibility of an increased bid by Take-Two. 


Take-Two has $2.2 bn of net cash.


No longer the main objective is to sell the largest number of consoles, but to accumulate the largest number of players. Electronic Arts is interested in the racing games business of Codemasters. The move feels defensive because Take-Two is one of its main rivals and many of Electronic Arts' franchises are weakening relative to leaders.
A deal with Electronic Arts would bring under the same umbrella EA's sports and driving games (FIFA soccer and Need for Speed franchises) and Codemasters’ racing simulators.
By using a blended average of the median multiples of EV/Fwd EBITDA and P/Fwd E, a valuation up to 720p per share could be justified, c. 10% upside to current levels (and 19% over EA's bid). Recommendation is LONG Codemasters, TP 720p.

an equity value of £1,098 mn (EV of £1,047 mn).

Codemasters shares closed at 658p on 16 December, c. 9% above EA's offer.
A shareholder meeting to consider the offer has been scheduled for next Monday.

Electronic Arts' Disruptive Counter-Offer

<ul>
<li>IGG looks like an unusual beaten-down stock, as the industry that the company operates is actually benefiting from the pandemic and booming;</li>
<li>Is Mr. Market misunderstanding any of the business fundamentals, or is he correct in terms of any possible value trap?</li>
</ul>


IGG looks like an unusual beaten-down stock, as the industry that the company operates is actually benefiting from the pandemic and booming;
Is Mr. Market misunderstanding any of the business fundamentals, or is he correct in terms of any possible value trap?


TMT & Consumer Independent Equity Research Analyst, Obex Capital Research

Aaron Gabin

TMT & Consumer Independent Equity Research Analyst

TMT & Consumer Independent Equity Research

Obex Capital Research

“Obex” is Latin for Barriers to Entry. Obex Capital Management’s investment philosophy is driven by an intense focus on which business model’s Barriers to Entry are able to withstand the ever increasing competitive disruption in the TMT and Consumer Sectors.

The TikTok saga is far from over. Heck, by the time you read this, China or Trump may have nixed the deal on national security concerns, national dignity concerns, or just on a whim. We sketch out updated thoughts on valuation and the companies affected by the deal. Hint: We like Microsoft's ZeniMax acquisition. <div class="content-highlight">Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.</div>

The TikTok saga is far from over. Heck, by the time you read this, China or Trump may have nixed the deal on national security concerns, national dignity concerns, or just on a whim. We sketch out updated thoughts on valuation and the companies affected by the deal. Hint: We like Microsoft's ZeniMax acquisition. Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

TikTok: Microsoft's "Console-Ation" Prize

Julie Lee

August video game industry sales was solid, up 37% yoy, after having modest slowdown in June and July. 
Recent correction on video game companies such as Activision Blizzard, Electronic Arts, and <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony Corp (6758 JP)</a> may offer buying opportunities given continued positive industry growth, new releases of PS5 and Xbox X/S, and potential price hike of games. Valuation of video game companies are relatively attractive compared to other major global tech companies despite solid long term growth prospect and strong cash flow. 
We will provide further analysis on potential positive impacts of PS5 on Sony, which is currently underestimated by the street.

August video game industry sales was solid, up 37% yoy, after having modest slowdown in June and July. 
Recent correction on video game companies such as Activision Blizzard, Electronic Arts, and Sony Corp (6758 JP) may offer buying opportunities given continued positive industry growth, new releases of PS5 and Xbox X/S, and potential price hike of games. Valuation of video game companies are relatively attractive compared to other major global tech companies despite solid long term growth prospect and strong cash flow. 
We will provide further analysis on potential positive impacts of PS5 on Sony, which is currently underestimated by the street. 

Accelerating Video Game Sales Growth in August and Strong Pre-Sale Interest for PS5

United States

Electronic Arts Inc. develops, publishes, and distributes branded interactive entertainment software worldwide for video game consoles, personal computers, handheld game players, and cellular handsets. The Company also provides online game-related services.

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Electronic Arts (EA US)

Fire Rock: A Value Play or Value Trap?

Another superior-return, fast-growing gaming business trading at an attractive level. Should investors buy into this (seemingly quality) growth...

Steven Chen

Electronic Arts' Disruptive Counter-Offer

A bidding war is likely. A valuation up to 720p per share could be justified (c. 10% upside to current levels). Recommendation is LONG Codemasters.

Jesus Rodriguez Aguilar

IGG: Deep Value or Value Trap?

Is Mr. Market being too pessimistic about IGG, which operates in a booming industry benefiting from the pandemic, or is he correct in terms of any...

Steven Chen

TikTok: Microsoft's "Console-Ation" Prize

The TikTok saga is far from over. Heck, by the time you read this, China or Trump may have e

Aaron Gabin

Accelerating Video Game Sales Growth in August and Strong Pre-Sale Interest for PS5

August video game sales was so

Julie Lee

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