Earnings for Perfect World (PWRD) and Energy Conversion Devices (ENER) Both Solid

Although we are now in a time when fundamentals mean nothing, I'm still following along to see how companies are doing so when an era of rationality returns and the casino action abates we know what stocks we want to be back in. I sold both Perfect World (PWRD) and Energy Conversion Devices (ENER) in the early September purge, before the real crash. PWRD was sold Sept 8th at mid $23s; it's now in the mid $18s after trading as low as $14s.

ENER was sold Sept 10th near $56; it's now in the $37s after trading as low as $25s. There was no great skill on my part by selling these - effectively if you sold anything in early September you looked brilliant.

Both charts are poor and not something we'd be buying in a bull or sideways market. But I continue to find good stories behind both names; however as one precondition for me to return to "investing" in this market we need to see companies executing treated differently than ones that do not. Not "student body left" trading - if you look at Perfect World's chart it might as well be a US subprime lender - no differentiation.

Perfect World (PWRD) appears to making a run at best of breed among the cadre of Chinese video game makers... they also have a recently announced share repurchase program so management is responsive to the withering stock price [Oct 15: Perfect World Announces Share Repurchase Program] A quick glance at the numbers keeping in mind analysts were in at $54.5M revenue and $0.45 EPS. Revenue grew 78% year over year with some overseas licensing helping; gross margin holding well in the 87% range; net income up 67% and EPS up 53%. No major debt and again, a share repurchase on the way. All this and a bag of chips for just over a 10 PE.

• Total revenues were RMB381.8 million (USD56.2 million) in 3Q08, an increase of 14.2%, or RMB47.4 million, from RMB334.4 million in 2Q08 and an increase of 78.5%, or RMB167.9 million, from RMB213.9 million in 3Q07.
• Online game operation revenues were RMB324.5 million (USD 47.8 million) in 3Q08, an increase of 8.4%, or RMB 25.1 million, from RMB299.4 million in 2Q08 and an increase of 64.3%, or RMB127.0 million, from RMB197.4 million in 3Q07. The sequential increase in online game operation revenues was primarily attributable to the successful launch of unlimited closed beta testing for "Pocketpet Journey West", the successful launch of expansion packs for some of the Company's existing games and the positive market response from recent marketing campaigns.
• Gross profit was RMB334.5 million (USD49.3 million) in 3Q08, an increase of 14.1%, or RMB41.3 million, from RMB293.3 million in 2Q08, and an increase of 87.5%, or RMB156.1 million, from RMB178.5 million in 3Q07. Gross margin was 87.6% in 3Q08, as compared to 87.7 % in 2Q08 and 83.4% in 3Q07.
• Net income was RMB198.8 million (USD29.3 million) in 3Q08, an increase of 20.9%, or RMB34.3 million, from RMB164.5 million in 2Q08, and an increase of 61.2%, or RMB75.5 million, from RMB123.3 million in 3Q07.
  
• Basic and diluted earnings per ADS were RMB3.53 (USD0.52) and RMB3.34 (USD0.49), respectively, in 3Q08, as compared to basic and diluted earnings per ADS of RMB2.93 and RMB2.76, respectively, in 2Q08, and basic and diluted earnings per ADS of RMB2.51 and RMB2.18, respectively, in 3Q07.
• As of September 30, 2008, the Company had RMB1.3 billion (USD195.9 million) of cash and cash equivalents, an increase of 17.5%, or RMB198.4 million, from RMB1.1 billion as of June 30, 2008. The increase was mainly due to the net cash inflow generated from the Company's online game operations and overseas licensing.

Outlook

• Based on the Company's current operations, total revenues for the fourth quarter of 2008 are expected to be between RMB401 million and RMB420 million. This represents an increase of 5% - 10% on a sequential basis and reflects expected growth from existing games and newly launched "Pocketpet Journey West." (this is about $59-$62 USD; analysts at $60M - but this company generally under promises and over delivers)

Investing in solar has been abysmal of late - Energy Conversion Devices (ENER) has a bit of a differentiated product than many of the "me too" companies out there so the hope is there would be some positive effects from that. But this leads to another qualm with current market - almost every stock in a sector trades together despite their individual fundamentals; again no differentiation. That has to change to make us want to get serious about investing. But specific to solar, until concerns about credit markets abate it's just going to be difficult to stay in this sector since it's capital intensvie and most customer need credit for large projects. From their report - analysts were looking for $96M revenue and $0.26 EPS. At over 20x forward earnings estimates I cannot make a case for this being a cheap stock despite 100% year over year growth, when some Chinese peers now trade at 2-4x forward estimates. But we do have 100%+ year over year revenue growth, a company turning from unprofitable to profitable, and from cash flow negative to positive. All that and a bag of chips....err.. you get the point.

• Total consolidated revenues for the quarter were $95.8 million, an increase of 16 percent over the $82.4 million in revenues from the fourth quarter of fiscal 2008, and 104 percent higher than revenues of $47.0 million in the first quarter of fiscal 2008. Solar product sales were $89.5 million, a 16 percent sequential increase and a 124 percent increase over the prior- year quarter. The average selling price for solar laminates during the quarter was $3.04.
• Net income for the first quarter was $12.7 million, or $0.29 per fully diluted share, compared to net income of $9.9 million, or $0.24 per fully diluted share, in the fourth quarter of fiscal 2008, and a net loss of $7.6 million, or $0.19 per fully diluted share, in the year-ago period.
• The company reported net operating cash flow of $26.5 million for the first quarter, versus a use of cash of $14.8 million during the first quarter of fiscal 2008.
• First quarter net income and per-share figures include preproduction costs of $2.0 million or $0.05 per fully diluted share, restructuring costs of $0.2 million, or less than one cent per fully diluted share. The company also recorded an "other-than-temporary impairment of investment" of approximately $1.0 million, or $0.02 per fully diluted share, to reflect the decreased market value of a floating rate note issued by Lehman Brothers.
• Gross margin in the first quarter on solar product sales was 33.4 percent, and total gross margin was 34.1 percent. United Solar Ovonic produced 30.8 MWs and shipped 29.5 MWs of solar laminates in the first quarter.

Guidance for next Quarter

• Revenue $100-$108M; gross margin 34%

Guidance for the full Year

• Revenue $455-$485M; gross margins 35%
  

Now there would be no way to top the last few quarters when this lost child of a company finally found a sector to focus on (solar) and really turned the corner [Aug 28: Energy Conversion Devices Turnaround Story Continues to Have Legs] and [May 8: Energy Conversion Devices - Is the Turnaround Finally Here?] surprising the investment community - but they continue to build momentum and execute. All in all solid but as we keep repeating, any form of fundamental analysis is just for pure theoretical exercise at this point. It means very little in relation to stock prices.

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