Akatsuki Inc (TYO 3932): A $188M Net Net Japanese Game Developer with Ambitious Growth Plans, Trading at 0.75x Book (0.55x Adjusted), 11x Operating Profits, and a Decade of Profitability

Recently formed a capital alliance with Sony (6758) and Koei Tecmo (TYO 3635) validate development capabilities.

Source: DBZ Dokkan Battle Google Play Store

Akatsuki Inc (TYO 3932) is a net-net Japanese video game developer with 10 years of profitability. They’re undergoing a big transformation in an effort to better compete globally by investing enormous amounts into their core development capabilities and increasing their average budget per game 3-6x. They recently formed a capital alliance with Sony (6758) and Koei Tecmo (TYO 3635) with each taking a 10% and 8% stake respectively.

Quick highlights:

• Current share price: ¥2,029

• Market Cap: ~¥29,420m

• Book Value: ¥40,211m

• Price/Book: 0.73x

• Net Asset Value Per Share: ¥2,773

• Dividend: ¥80/share. Company has a 3% Dividend on Equity (DoE) policy

• Yield: ~4%

• NCAV: ¥27,551m

• Investment Securities (book value): ¥10,474m

• Investment Securities (Market value estimate by company): ¥25,646m

• NCAV+Investment Securities (at book value): ¥38,025 (¥2622 /share)

• NCAV+Investment Securities (at market value): ¥53,197m (¥3,668 /share)

• Shares Outstanding: 14.5m

Overview:

Akatsuki is a video game developer in Japan focused on mobile games. They co-develop and run one of the longest running and most successful mobile games in the world: Dragon Ball Z Dokkan Battle. The game has generated over $3 billion in lifetime sales since 2015. The company has largely been coasting on the success of this single game for the last 9 years. They’ve had a few other smaller successes over the years, but the mobile game business is very much hit driven. While Dokkan Battle is certainly past its prime, it will likely continue to be profitable for many more years. Games that have been around this long tend to have sticky audiences.

Besides the games business Akatsuki also has a venture capital arm which invests in a wide assortment of early stage growth companies. While there’s little synergy between a game developer and a VC business, Akatsuki has done a decent job creating value with this business with market values sitting at ~1.6x total amount invested. Over the years the company has taken writedowns on their losers while keeping their winners. Total invested in the VC business is ¥16b while book value is ¥10.4b. Market value is ¥25.6b. The market assigns negative value to this business as a whole after backing out net current assets and investments (even at book value). These are VC investments though and are not liquid, so best to value them conservatively. We’re deep into net-net valuations at book value as is.

The Transformation:

The entire Japanese mobile games industry has been falling behind over the years with Chinese competitors upending Japanese and South Korean market dominance. In August 2022 Akatsuki announced they would invest ¥20b to strengthen their game development capabilities, which given their ~¥29b market cap is an enormous sum. Has this push resulted in any massive improvements at Akatsuki? Not yet, but a tech demo released last year demonstrates that the company has seriously elevated their development capabilities:

Akatsuki New Game Development Platform Demo:

A game using this technology is expected to release sometime in FY 2026/2027. While there’s no guarantee any new game will be successful, it’s obvious that this technology is impressive, especially for a Japanese game studio. Two much larger peers Sony and Koei Tecmo seem to think so too, as they formed a capital alliance with Akatsuki by purchasing 2.53m shares directly from the company (~17% dilution) on January 9th, 2024. Obvious dilution at this level is terrible, but Akatsuki gets a pass as they bought back 2.09m shares last year for a little less than what they issued these shares to Sony and Koei Tecmo for. Sony will own ~10% of outstanding shares while Koei Techmo 8%. Net dilution is only ~500k shares which is acceptable given the upsides of the partnership. That upside being the chance to work with these much larger studios with their better known IPs.

Akatsuki is aiming to make bigger budget mobile games with global appeal across multiple platforms. This is the approach many big budget Chinese games have taken (Genshin Impact, Honkai Star Rail, Wuthering Waves, and Tower of Fantasy come to mind).

Conclusion / Why Now?

Akatsuki is dirt cheap, but it isn’t without risk. The mobile games industry is hit-driven and without a new one, Akatsuki will likely drift downwards. They’ve done a remarkable job staying profitable while investing in new titles and technologies. Other dirt cheap net nets in my portfolio are ‘safer’ bets, but Akatsuki is a name that could 5-10x (or more) on a single hit game. Other net-net gaming companies like Nippon Ichi Software (3851) are much more conservative, but have less upside as they’re playing it safe and making no attempt to swing for the fences.

The last time I looked at Akatsuki was about 12 months ago and passed on it, but looking at it again now after their tech demo and partnership with Sony and Koei Tecmo, I’m interested. I own Akatsuki as part of my cheap Japanese basket.

Further reading: Management Strategy Briefing Presentation (English), Capital Alliance with Sony & Koei Tecmo, Full Year Finnacial Summary (English)

Disclosure: I own shares in Akatsuki and Nippon Ichi Software. None of this is investment advice. Everything in this post is my own opinion and I could be wrong. Do your own due dilligence.