Tuesday, May 20, 2008

Motley Fool on Chinese Gaming

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We had another solid report out of this sector today, from The9 (NCTY) which actually licenses a game I am familiar with, World of Warcraft. Here are some details.
  • For the first quarter of 2008, The9 reported total gross revenues of RMB463.8 million (US$66.1 million), which increased by 4% compared to RMB447.5 million (US$63.8 million) in the fourth quarter of 2007 and by 63% compared to RMB284.7 million (US$40.6 million) in the first quarter of 2007.
  • For the first quarter of 2008, online game services gross revenues were RMB462.2 million (US$65.9 million), representing a 2% increase from RMB451.4 million (US$64.4 million) in the fourth quarter of 2007 and a 64% increase from RMB281.3 million (US$40.1 million) in the first quarter of 2007. The increase was primarily because of continued revenue growth from Blizzard Entertainment's World of Warcraft despite the holiday impact during the quarter
  • Gross profit for the first quarter of 2008 increased by 3% quarter-over- quarter and 60% year-over-year to RMB208.0 million (US$29.7 million). The sequential increase of gross profit was largely in line with the increase in net revenues. Gross profit margin for the first quarter of 2008 remained relatively stable at 47% compared to the previous quarter and the same period of last year.
  • For the first quarter of 2008, net income was RMB89.7 million (US$12.8 million), which increased by 4% from RMB86.0 million (US$12.3 million) in the fourth quarter of 2007 and by 36% compared to RMB66.1 million (US$9.4 million) in the first quarter of 2007. The sequential increase in net income was a result of the cumulative effect of the foregoing factors.
  • Fully diluted earnings per share and per ADS for the first quarter of 2008 was RMB3.21 (US$0.46), compared to RMB2.93 (US$0.42) in the fourth quarter of 2007 and RMB2.65 (US$0.38) in the first quarter of 2007.
This was a strong beat, 46 cents versus analysts 32 cents but frankly Perfect World (PWRD) grew much faster, and has far superior gross margins (near 90% versus NCTY's sub 50%) I take it this comes from owning your own games versus licensing them. That said, Perfect World "disappointed" the lemmings with its guidance and news of the 3 day shutdown due to the earthquake.

Here is a story from Motely Fool on the sector.
  • Investors in Chinese gaming stocks felt aftershocks of last week's disastrous earthquake. Shares of Giant Interactive (NYSE: GA), Perfect World (Nasdaq: PWRD), NetEase.com (Nasdaq: NTES), and Shanda Interactive (Nasdaq: SNDA) fell by 6% to 13% yesterday, on news that China was shutting down Internet cafes as part of a three-day mourning period for the quake's victims. Most, if not all, of the companies are shutting off their servers until the country's roughly 100,000 cafes reopen on Thursday in observance.
  • The company's (The9) flagship title is the Chinese port of Blizzard's globally popular World of Warcraft. Along with smaller titles in the company's portfolio, The9's registered user base now stands at 38.1 million gamers, with as many as 1.2 million playing the multiplayer games at the same time.
  • The9's stellar report followed a mixed showing at Perfect World. The quarter was spectacular for Perfect World, with revenue shooting 248% higher to $43.2 million, and earnings growing even faster, to $0.38 a share. The performance beat expectations, but Perfect World stung investors with a bleak near-term outlook.
  • Leaning partly on the three-day mourning lull, but also on its own ramped-up operating overhead, Perfect World is looking for meager sequential growth of 0% to 5% for the current quarter, and on lower operating and net margins. That's not good, but it's also about the only blemish here.
  • With Giant, Perfect World, and now The9 having easily topped market guesstimates, it would be a surprise if NetEase (which posts tomorrow) and Shanda (which posts next week) don't keep the streak going.
Continues to be a promising sector, far under the radar of most investors. But not without risk.

Long Perfect World in fund; no personal position

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