Akatsuki: Business Alliances, Upgrading Investment Quality, But TRIBE NINE Delays (AKAFF)

Akatsuki Inc. (OTCPK:AKAFF) (3932:TYO) has performed well since we established out position starting around last June. The situation has been that major catalysts have increased visibility of the stock, and the younger management and their major investment plans that will put their unproductive cash to productive uses are credible.

The headwind since the jump has been that TRIBE NINE, becoming an increasingly ambitious multiplatform release, has been delayed. The income statement is riding on TRIBE NINE, but not the balance sheet, where they have a lot of capital to be able to make a much larger pipeline. The valuation is still hyper compressed, and there is no question that there is a valuation upside, particularly as the cash will not sit idle much longer.

Business Alliance News

This is the PR from Akatsuki that caused the 20% or so increase in price.

The shares they bought back in May they are now selling to Sony (SONY) and Koei Tecmo (OTC:TKHCF), their long-time collaborator, as a business alliance aimed at increasing the reach of Akatsuki’s games.

Getting any kind of affirmation or nod from Sony is obviously very interesting, since this may be Sony’s angle to get a foot in mobile gaming. Choosing Akatsuki is a great sign that the company is solid operationally and has a good professional standing. It could also be a signal that Akatsuki intends to move into more robust game releases that could also launch on Sony platforms. Given their broad investment plans, they would have the budgets for some of these moves.

The shares, which were in May 2023 bought back and since held in treasury, were sold to these business alliance partners at pretty low market prices, as of before the announcement which unsurprisingly rocketed share prices, but the proceeds will at least be used to pay a disbursement, although it is unclear over what time frame. But it could mean a 15% or so special dividend. This more tangible realization of value is why markets have especially liked the developments.

New shareholder structure below.

Koei Tecmo has already published some of their games and are quite long-time collaborators, so it’s not such a big surprise there.

Recent Earnings

The investment plan has been a key consideration for shareholders, and was already getting lip service by the time we invested with no reaction in prices. Investors in Japan are used to a fair amount of talk with conservatism and skittishness hampering any kind of delivery. While TRIBE NINE, their new ultra-baseball gacha game, was already in the works, and they recently launched a new Atelier game that was doing alright and had notable on-launch-day downloads hitting the app store billboards, in the Akatsuki Games Now presentation last August they revealed their plans to further develop into 3D graphics and more impressive games, converging on the more traditional development formula of game developers in the East.

Of note is that they are delaying the TRIBE NINE launch, which should have otherwise happened by now, because they also want to bring it to PC in a more fully fleshed, and less poorly ported experience. It is coming out around 6 months from now or more. They are going to do a closed beta and then try to release it on multiple platforms after that, depending on the results of the closed beta test.

The sales actually fell quite a lot sequentially, which is a bit concerning because it means that incremental contribution of Atelier isn’t that substantial, and that other titles must have fallen off further (around 7 billion JPY – 5 billion JPY), although the seasonality is more or less in line with what’s typical.

The income figures are still a little meaningless because of the investments they are doing to launch new titles that are getting expensed these quarters, but there was substantial growth in advertising costs to push Atelier that is likely not to repeat. Without these expenses, there might have been profits this quarter.

Their cash balances are coming down from around 34 billion to 27 billion JPY. YoY Dokkan had some major events last year that make comps tough despite the full quarter contribution of Atelier, leading to the flat sales result, but it is clear that the investment plan is actually underway, with the cash being spent on both broadening the deepening the pipeline. Based on the plan, they won’t be sinking all their cash, keeping a buffer which is actually quite normal for these sorts of developers.

It would have been good to see an imminent TRIBE NINE release. Frankly, while the extreme baseball category is quite developed, it’s not clear the returns to quality in the category. However, they are looking to up the quality so that it can be played in earnest on PC, and that it’s not just a mobile release, which possibly expands the market. However, we maintain that it would be better to save the money for other projects that had the intention of multiplatform release later.

In terms of comics, the segment loss continues to shrink, and they continue to develop the HykeComic app with a view on seeing whether they can sink more cash into this to grow it profitably, since e-manga is a pretty competitive segment already. Although they have some exclusives from the author of Sword Art Online, and are generally trying to bring readers to their pay as you go platform.

The IP business is also growing, more than 10% of sales now.

We note upcoming IP releases and monetization as something to watch in the future. Something might become a hit and make the company’s medium-term future.

Bottom Line

Akatsuki is not a complex story from a valuation point of view. Their EV is hyper compressed by all the free cash as well as the investments that they’ve made in their Dawn Capital funds. The VC space never got shocked in Japan due to the persistently low rate environment there like it did elsewhere, so we aren’t inclined to write down the assets that remain unrealized. In fact, the IPO market barely suffered in Japan, which is the primary means of VC exit.

Trying to value them exactly is a fool’s errand because they don’t capitalize their development expenses, so the bottom line is much more linked to their lumpy cash flow situation, inherent to being a games developer. Still, we use some historical figure for EBITDA to get something as a reference, halving the multiples that comps have.

Dokkan Battle Arena continues to produce cash, in addition to the massive war chest they have to be able to make their shift to next-gen. The business alliances are a major vote of confidence. Akatsuki Inc. is still an obvious buy.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.