Square Enix (9684): ¥5,000 Share Price – Fantasy, or Viable Quest?
Square Enix’s (SQE) fantastic 1Q FY17 performance, combined with the successful launch of Dragon Quest XI in Japan, has sent the company’s shares up close to the ¥4,000 mark, as it looks for the first time as though the company might genuinely fulfil its business potential. The question now is whether both the company and the stock can kick on from here and exceed the all-time high of ¥4,933 generated during the 1990s tech bubble.
Key Points
- Collaboration opportunities open new doors for existing game franchises.
- SQE is looking to further expand overseas: combined, Hong Kong, Taiwan and Korea form a market at least as big as the Japanese market; and they hold more promise than the gateway-protected Chinese mark.
- MMO is enjoying a comeback for SQE in FY17 thanks to expansion packs for Final Fantasy XIV and Dragon Quest X, while the latter’s expansion to Switch is likely to boost sales.
- There are opportunities with VR.
- Growth via M&A: SQE has done this several times before and potential target Capcom (9697) fits nicely and is increasingly affordable.
- Profitability of the core digital division should continue to improve thanks to both downloads, and the shift in sales mix to higher-margin mobile and MMO gaming.
- CPA is consistently around 20% of revenues - hardly a high risk, particularly when you have US$1bil in the bank.
- Valuations remain undemanding and the payout ratio remains high.
Square Enix Holdings is a holding company that is mainly engaged in the entertainment industry. Co., through its subsidiaries, operates in four business segments. The Digital Entertainment business is engaged in the design, development, sale, licensed sale and operation of digital entertainment contents focusing on computer games. The Amusement segment is engaged in the operation of amusement facilities, the design, development, manufacture, sale and rental of amusement equipment. The Publishing segment is involved in the publication of comic magazines, books and game related books. The Rights Property segment is involved design, production, sale and grant of secondary works.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
PSA produces both company and sector reports. The focus of PSA’s research is to identify winners and losers as new technologies impact the top and bottom lines of corporations. Critical to our research is the clear explanation of how these new technologies work and how they impact companies and industries.
The founding partners have worked closely together for twenty years and the team has more than doubled in size since 2012.
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