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On February 19, 2021, Huuuge Inc.'s first debut took place on the Warsaw Stock Exchange. Huuuge, Inc. acts as a free developer and publisher of digital games for mobile and web platforms. The company focuses on producing free-to-play games such as social casinos, casual games and other game genres. It mainly serves clients in the United States, Australia, Canada, Japan and South Africa. The article consists of several parts. In the first part, I will briefly describe the basic information about the offer, then I will show some factors that, in my opinion, influenced the IPO decision of the American company on the Polish Stock Exchange.
Huuuge IPO Highlights
Company:
Huuuge Inc. operates as a free-to-play games developer and publisher of
digital games on mobile and web platforms. The company focuses on social
casino, casual and other games. The most important titles in the company's portfolio are "Huuuge
Casino", "Billionaire Casino", "Star Slots" and
"Traffic", which currently have a total of around 5 million users[1].
The debut enjoyed enormous interest of investors, especially individual
investors. The price on the primary market was PLN 50 per share (both for
individual and institutional investors) and was equal to the maximum price set
in the prospectus.[2]
The value of the offering by Huuuge amounted to PLN 1.67 billion
(approx. USD 442 million) and represents the largest IPO of a gaming sector
company in the history of the Warsaw Stock Exchange and the largest mobile
gaming IPO in Europe. The Company has raised approximately USD 150 million (PLN
565 million) in gross proceeds from the offering, which will be used for
potential acquisitions and to fund the Company’s continued long-term future
growth[3]. After
deducting the value of the offering costs, the company obtained over PLN 500
million from the issue of new shares.
The funds raised from the issue are to be used[4]:
-
Activities related to the acquisitions of other
businesses and investments in other businesses or assets (90 – 95%) - As a
rule, the Company expects to focus on activities related to the acquisition of
entities with 20-300 million valuation for purposes other than those related to
publishing, 0.5-20 million USD in case of possible acquisition targets entities
with whom agreements have been concluded before publishing, or $ 0.5-10 million
for possible acquisition targets with complementary competency or
technology.
-
Funding for further long-term growth.
Financial Data:
The scale of the company's operations is also significant. The table
below presents the shortened Balance Sheet and Profit and Loss Account.
Table 1. Profit and loss account
|
mln USD |
2018 |
2019 |
LTM 3Q 2020 |
|
Revenue |
236.1 |
259.4 |
315.6 |
|
Gross Profit |
164.3 |
180.2 |
220.5 |
|
EBIT |
7.6 |
20.7 |
64.7 |
|
EBITDA |
8.1 |
22.7 |
67.1 |
|
Net Profit |
3.0 |
4.3 |
29.7 |
Source: Huuuge
Inc. Prospectus, p. 90-92.
In less than
two years, the company's revenues increased by almost 34%, and the gross profit
increased as well. On the other hand, the profitability of the activity
increased significantly - the operating profit and EBITDA increased many times
(over 7 times) and the net profit almost ten times.
Table 2.
Balance sheet
|
mln USD |
2 018 |
2 019 |
30.09.2020 |
|
2 018 |
2 019 |
30.09.2020 |
|
Assets |
Liabilities |
||||||
|
Fixed Assets |
4.7 |
2.0 |
15.8 |
Equity |
-19.8 |
-9.5 |
9.2 |
|
Intangible Assets |
0.1 |
0.1 |
1.9 |
Liabilies and
reserves of liabilities |
72.9 |
63.1 |
117.3 |
|
Tangible Fixed Assets |
4.2 |
1.0 |
12.6 |
Reserves of liabilities |
0.0 |
0.0 |
0.0 |
|
Others |
0.4 |
0.9 |
1.4 |
Long-Term Liabilities |
50.1 |
47.4 |
74.8 |
|
Current Assets |
48.4 |
51.6 |
110.6 |
Current Liabilities |
22.8 |
15.7 |
42.5 |
|
Receivables |
22.1 |
16.6 |
28.4 |
Total Liabilities |
53.1 |
53.6 |
126.4 |
|
Cash |
26.3 |
35.0 |
82.2 |
||||
|
Others |
0.0 |
0.0 |
0.0 |
||||
|
Total Assets |
53.1 |
53.6 |
126.4 |
||||
Source: Huuuge
Inc. Prospectus, p. 102-103.
In less than two years, the company almost doubled its total assets,
with 2020 almost responsible for the entire increase. In Huuuge's balance
sheet, cash is the most important - it accounts for 2/3 of assets. Another important
information is that the company has upward equity as at September 30, 2020
Listing:
The debut of the company, which was already unusual in itself for
several reasons (non-standard listing start time, trading restrictions under American
law) was not a success[5] -
after an initial increase, it lost 1% at the close, although at times it lost
almost 8%. It has been falling steadily since then, as shown in the chart below
Chart 1. Quotes Huuuge Inc.
Source: www.stooq.pl [accesed March 4, 2021]
Huuuge's IPO was unsatisfactory for new investors, but exited investors
and the company that raised funds for the transaction may be very pleased with
the valuation obtained.
IPO Valuation
I will try to measure the level of "effectiveness" of the
offer through the multipliers obtained. There are no entities on the Polish
stock exchange that conduct similar activities on such a scale, so I had to
expand my search to international markets. Ultimately, I was able to find six
listed companies with revenues between 100 and 500 million euros listed in
different markets. Information on these companies and data on these companies
are presented below.
Table 3.
Listed social casino company description
|
Company Name |
Ticker |
HQ |
Business Description |
|
The Rank Group Plc |
LSE:RNK |
United Kingdom |
The Rank Group Plc, offers a range of casino table games,
including roulette, blackjack, baccarat, and poker; electronic roulette and
slots machine games; and community games, such as bingo, as well as sports betting
and food, drink and live entertainment. It also operates digital channels,
including live casino; social and bingo clubs; and online digital card games.
The company was founded in 1937 and is based in Maidenhead, the United
Kingdom. The Rank Group Plc is a subsidiary of Guoco Group Limited. |
|
888 Holdings plc |
LSE:888 |
Gibraltar |
888 Holdings plc owns
proprietary software solutions that provide a range of virtual online gaming
services over the internet, including casino and games, poker, sport, bingo,
and social games. It also provides payment services, customer support, and
online advertising services, as well as licenses its brand on third party
platforms. 888 Holdings plc was founded in 1997 and is headquartered in
Gibraltar. |
|
DoubleUGames Co., Ltd. |
KOSE:A192080 |
South Korea |
The company offers W. Casino, a social
casino game, as well as table games and slot machines. It also operates one
source multiplatform, as well as offers PC and mobile games. DoubleUGames
Co., Ltd. was founded in 2012 and is based in Seoul, South Korea. |
|
SciPlay Corporation |
NasdaqGS:SCPL |
United States |
The company’s social casino games include
slots-style game play, as well as table games-style game play; and casual
games blend slots-style or bingo game play with adventure game features. It
also offers titles and content from third-party licensed brands. The company
was formerly known as SG Social Games Corporation and changed its name to
SciPlay Corporation in March 2019. SciPlay Corporation was founded in 1997
and is based in Las Vegas, Nevada. SciPlay Corporation is a
subsidiary of Scientific Games Corporation. |
|
ME2ZEN Limited |
KOSDAQ:A950190 |
Hong Kong |
ME2ZEN Limited develops and
operates social casino and card games. It develops mobile casino games and
solitaire games. The company is headquartered in Kwun Tong, Hong Kong. |
|
Rush Street Interactive, Inc.
|
NYSE:RSI |
United States |
Rush Street Interactive,
Inc. operates as an online casino and sports betting company. It offers
real-money online casino wagering, online and retail sports wagering, and
social gaming services. The company was founded in 2012 and is headquartered
in Chicago, Illinois. |
Table 4.
Market multipliers at 19/02/2021
|
Company Name |
Market Capitalization (mln euro) |
LTM Revenue (mln euro) |
LTM EBITDA (mln euro) |
EBITDA Margin |
EV/Revenue (x) |
EV/EBITDA (x) |
|
The Rank Group Plc |
774.7 |
492.3 |
-100.2 |
(20.4%) |
2.2x |
NM |
|
888 Holdings plc |
1 264.3 |
549.7 |
77 |
14.0% |
1.9x |
12.6x |
|
DoubleUGames Co., Ltd. |
754.2 |
463.1 |
171.3 |
37.0% |
1.9x |
5.2x |
|
SciPlay Corporation |
407.1 |
483.4 |
138.4 |
28.6% |
1.1x |
3.9x |
|
ME2ZEN Limited |
246.2 |
83.4 |
37.4 |
44.8% |
2.1x |
4.7x |
|
Rush Street Interactive,
Inc. |
734.5 |
171.3 |
-85.8 |
(50.1%) |
4.3x |
NM |
|
Average |
696.8 |
373.9 |
39.7 |
9.0% |
2.3x |
6.6x |
|
Median |
744.4 |
473.3 |
57.2 |
21.3% |
2.0x |
5.0x |
|
Huuuge, Inc. |
915.6 |
262.1 |
54.4 |
20.7% |
3.4x |
16.0x |
Source:
Company Financial Statement, Yahoo Finance, Internet
As we can see above, listed companies' multipliers are much lower than
those obtained by Huuuge's IPO, only one entity has a higher EV / Revenue
multiplier, but it brings significant losses (Rush Street Interactive). Below,
I try to find factors that may explain why investors agreed to such IPO
conditions.
Reason 1: The popularity of gaming IPOs on the WSE.
Since October 2020, the Warsaw Stock Exchange is a world leader in terms
of the number of listed companies from the gamedev sector. After Huuuge's debut
on the Warsaw Stock Exchange, 58 gamedev companies are listed[6]. The
increase in the number of listed gamedev enterprises has become very dynamic in
recent years. The number of conducted IPOs is shown in the chart below.
Chart 2.
Gamedev IPO’s at WSE
Source: WSE and New Connect statistics, own study
Contrary to the general trend[7],
recent years have seen a dynamic increase in the number of listed gaming
companies. According to the calculations in the table below, in recent years,
IPOs of gaming companies account for nearly or more than half of such events.
Table 5. IPO’s
at WSE.
|
Year |
New listings |
% of Gamedev IPO |
|
2016 |
35 |
9% |
|
2017 |
34 |
6% |
|
2018 |
22 |
36% |
|
2019 |
22 |
36% |
|
2020 |
21 |
57% |
Source: WSE
and New Connect statistics, own study, Only new listings Gamedev companies.
The trend from
recent years will most likely continue in the near future - Many gamedev
entities are to be listed on the stock exchange[8]. Moreover,
many New Connect entities plan to transfer their listing to the main market,
even the largest private company, which has not been listed so far, is
considering entering the stock exchange market.
Reason 2: Successes of gaming company
The gaming sector is currently the most catchy sector on the Polish
Stock Exchange. One of the most important events in Polish business was the
release of Cyberpunk and the related expectations. The importance of the sector
on the WSE was reflected in the creation of the Wig.Games index. Wig.Games is
an index of computer game producers. The index was published on March 18, 2019.
It includes the largest game developers listed on the Warsaw Stock Exchange.
The chart below shows how the games index performed over time compared to the
WIG and NewConnect indexes.
Chart 3. Wig.Games
Source: www.stooq.pl [accesed March 7, 2021].
As we can see in the chart. In the analyzed period, the Wig.Games index
outclassed the competition. Only the New Connect index (which includes a
significant number of gamedev companies) achieved an increase. Throughout the
analyzed period, the value of the WIG index fluctuated at the level at the
beginning. Investing in such an index would double the value of the portfolio,
even after the losses caused by the significant decline in CD Projekt's shares.
Reason 3: Successes of gaming company
Investors' high confidence in game developers on the WSE is best
illustrated by the higher value of the multipliers of their multipliers with
the multipliers of top companies on February 5, 2021, which is the day when the
Huuuge share price was announced (These are the same companies that were
selected for the purpose of CD Projekt's share price analysis, except
Codemasters that has been acquired[9]). In
the table below, he will confront the multipliers of companies from the
Wig.Games index with the listed AAA game developers.
Table .Multipliers comparison
|
|
EV/Revenues |
EV/EBITDA |
P/E |
|
Listed AAA gamedev |
|||
|
Average |
8.3x |
29.3x |
63.2x |
|
Median |
6.6x |
27.7x |
43.9x |
|
Top 5 Polish gamedev |
|||
|
CI Games S.A. (WSE:CIG) |
3.2x |
9.4x |
16.9x |
|
CD Projekt S.A.
(WSE:CDR) |
42.5x |
92.5x |
105.9x |
|
11 bit studios S.A. (WSE:11B) |
12.0x |
19.0x |
26.5x |
|
PlayWay S.A. (WSE:PLW) |
25.4x |
34.0x |
21.0x |
|
Ten Square Games S.A. (WSE:TEN) |
7.0x |
21.4x |
24.4x |
Source: Own
study, entities financial statement
As we can see
in the table above, the largest listed Polish gaming companies have multipliers
at the same levels as the largest gamedev companies producing AAA games (EV /
Revenue multipliers are even higher in Polish gamedev companies), but it should
be remembered that the scale of operations is much smaller and there are no
generally known titles in the world.
Reason 4: WSE investors like Big Ipo’s
The second half of the second decade of the 21st century was not good
for investors, to put it mildly. During these five years, when the global stock
exchanges reached their historic highs, the Polish Stock Exchange fell into an
increasing apathy (e.g. the WIG index oscillated at the levels from 2016). The
best evidence for the validity of this theory is the data on delisting and new
listings - the companies came to the conclusion that it is not profitable to be
a listed company and incur costs and meet the imposed information requirements.
Another problem was the great importance of companies with State Treasury shareholding,
whose decisions were not liked by the investor, and the lack of high-profile
privatizations that attracted new investors.
In view of such problems on the capital market, from the beginning of
2016 to today, there were only six IPOs, which broke the capitalization of PLN
1 billion (Huuuge is on the podium behind Allegro and the already withdrawn
Play Communications, slightly ahead of Dino Polska).
However, when such events took
place, investors were very eager to buy shares of such companies. The table
below shows the reduction rate for these IPOs.
Table . Reduction
rate of the biggest IPOs
|
IPO Date |
Company Name |
IPO Capitalization (mln euro) |
Reduction rate (%) |
|
06.05.2016 |
X-trade Brokers
DM S.A. |
1 349,9 |
53,5% |
|
19.04.2017 |
Dino Polska S.A. |
3 284,3 |
75,0% |
|
17.07.2017 |
Getback S.A. |
1 480,0 |
50,0*% |
|
27.07.2017 |
Play Communications S.A. |
9 108,4 |
63,2% |
|
12.10.2020 |
Allegro.eu S.A. |
43 000,0 |
84,7% |
|
18.12.2020 |
PCF Group S.A. |
1 359,9 |
98,5% |
* the reduction rate in the
second term was 81.6%.
Source: GPW, www.strefainwestorow.pl
[ accesed March 6, 2021].
As we can see in the table above, companies with large capitalization
are highly valued by investors. Such high interest is due to the small number
of such IPOs - the WSE is dominated by entities which at the time of the IPO
achieve a capitalization not exceeding PLN 100 million. Another problem is
insufficient liquidity - It can be assumed that trading only in the largest
companies allows to maintain liquidity.
Conclusion:
Huuuge's debut is one of the most interesting on the primary market
recently. Firstly, a company operating on the global market, not directly
related to Poland, decided to make a debut - usually companies with
international ambitions rarely decide on an IPO on such a regional capital
market[10].
Secondly, it is one of the largest IPOs in recent years. It seems to me
that a company of this scale could try to enter virtually any stock exchange,
especially on the very rich American market where it is located.
Thirdly, it operates in an industry that is developing outstandingly and
is becoming more and more associated with Poland. Investors associate the
gaming industry with spectacular successes and high profits
In my opinion, each of these reasons was a factor that made such an exaggerated IPO result possible. Investors treated Huuuge as a gaming company and not a social casino. Gaming companies usually achieve higher transaction / market multipliers, which in such a situation prompted investors to purchase securities at a very high valuation (about half lower than enterprises with a similar scale of operations and business model – I encourage you to read the post about Cyberpunk 2077, where I showed the multipliers of AAA game producers for the beginning of December). It is also difficult to defend the thesis about the huge growth potential - The product portfolio includes mature production, while the funds obtained are to be used for acquisitions. In contrast, the financial results were improved and compared to the market results only in 2020. Another feature that helped in the IPO were the three previous large IPOs (Allegro, PCF Group and Answear), which turned out to be very successful for investors. It is possible that investors, following previous events, expected a similar scenario here.
Summing up, Huuuge's IPO can be treated as a great success for the
company and the shareholders who got everything they could out of the company.
Concerns about the company materialized after the debut. Acquisition related activities
will be of key importance to the companies in the future, and may decide on
further stock price changes.
[1] Inwestorzy
rzucili się na akcje Huuuge. Efekt: ostre cięcie zapisów (spidersweb.pl)
[accesed March 2, 2021].
[2] Cena maksymalna akcji w ofercie publicznej Huuuge ustalona
na 50 zł | StrefaInwestorow.pl [accesed March 2, 2021/
[3] Huuuge Inc. First listing of Huuuge
Inc. press release
[4] Huuuge Inc. Prospectus, p.67
[5] https://www.stockwatch.pl/wiadomosci/huuuge-debiutuje-na-gpw-transmisja,akcje,285812 [accesed March 3, 2021].
[6] https://www.wnp.pl/finanse/gielda-w-warszawie-swiatowym-liderem-spolek-z-branzy-gamedev,451630.html [accesed March 5, 2021]
[7] https://www.bankier.pl/wiadomosc/GPW-sie-kurczy-Jest-najgorzej-od-7-lat-7903382.html [accesed March 5, 2021].
[8] https://www.bankier.pl/wiadomosc/Debiuty-na-GPW-w-2021-r-Fotowoltaika-biotechnologia-i-inne-8044630.html [accesed March 5, 2021].
[9] https://www.gamesindustry.biz/articles/2020-12-14-ea-agrees-USD1-2-billion-acquisition-of-codemasters [accesed March 7, 2021].
[10] https://www.pb.pl/kajdany-zasciankowosci-zaciskaja-sie-na-gpw-1110451 [accesed March 9, 2021].
