Check on China: Perfect World Co., Ltd.
A decade ago, China lacked even a single online game provider. Today, as Web-related businesses in China rake in profits and new technology lures an ever-increasing number of Chinese to the Internet, the online gaming industry is large and growing fast. All over the country, tech-savvy teens, twenty-somethings and thirty-somethings sit at PCs in private homes, Internet cafes and university computer labs for hours on end playing complex 3-D games.
China was home to about 120 million online gamers as of the end of 2007, with revenues reaching $1.29 billion, a 57% increase over the previous year. China's game-industry revenues are expected to hit $1.79 billion in 2008 and rise to $2.3 billion in 2009, according to the China Internet Network Information Center.
One outfit benefiting from the surge in online gaming in China is Perfect World Co., Ltd. (Nasdaq:PWRD). Founded in 2004 and publicly listed as an American Depositary Receipt last year, the Beijing-based online game developer and operator has a portfolio of 3-D massively multiplayer online role playing games (MMORPGs), including Perfect World, an adventure game played in a historical Chinese setting; Perfect World II, its more advanced sequel; Legend of Martial Arts, named after a popular Chinese TV series following the exploits of a swordsmen in ancient China; Zhu Xian, a kung-fu focused fantasy game; Chi Bi, a war game set in China's turbulent Three Kingdoms period; and Hot Dance Party, a game that allows players to practice dance moves and create and customize characters (family members and pets).
The company distributes physical and virtual prepaid game cards and sells "points" online through its e-sales system and website. While most of Perfect World's revenues are generated domestically, the company also licenses its games outside of China. It recently inked deals to license its games to partners who will expand its reach into places such as Taiwan, Hong Kong, Malaysia, Singapore, Thailand, Vietnam and the Philippines.
Perfect World did well in the first quarter of 2008, thanks in part to the launch of its new Chi Bi game. The company posted revenues of $43.2 million, a 247% increase over the year-ago quarter. Quarterly net income skyrocketed 295% to $22.6 million, or $0.38 a share (the Street was expecting $0.35). The number of active paying customers for games surged 144% to approximately 1.7 million. And the average revenue per paying customer rose 58% increase over the previous year quarter.
Following the earnings release in May, Perfect World was set for worse-than-expected revenue gains in the second quarter (the top brass was projecting its top line to come in between flat and a 5% sequential rise), saying the company would be hurt by the suspension of game services during the three-day period of national mourning for earthquake victims and the disaster's impact on the firm's Sichuan operations. But forecasts can change quickly. Last month, the company brightened its outlook, due to exceptional results from new game expansion packs and successful marketing campaigns. The company now projects second-quarter revenues between $48.3 million and $50.5 million, a 10% to 15% improvement over the first quarter.
The company's rosier outlook prompted Roth Capital Partners analyst Adam Krejcik to retreat from his previous trimming of estimates on Perfect World's 2008 performance on June 16. He maintains a “buy” rating and a $36 price target. Andrey Glukhov with Brean Murray raised his outlook on June 13, forecasting $202 million in 2008 revenue (a 114% rise year over year) and $278 million in 2009 revenue (a 39% yearly increase), respectively. The analysts' EPS estimates are $1.83 in 2008 and $2.30 in 2009. Citi Investment Research analyst Alicia Yap rates the stock a “buy” with a $35 price target.
Defying the recent decline of Chinese online gaming stocks, Perfect World is using its game-design smarts, ever-growing following and international expansion efforts to increase its clout in China's online game sector, which experts view as one of the best ways to gain investment exposure to the country's growing Internet population.
Indeed, the future appears bright for the Chinese online gaming market, which is taking full advantage of China's burgeoning high-speed broadband networks and wireless connectivity. A recent report on the Chinese video games market by KPMG says that growth in Chinese online gaming is now on par with that of the Internet and mobile markets. In a booming marketplace, China-produced online games account for $20 million in export revenues, and hold 65% of domestic market share despite stiff competition from well-entrenched game design houses based in Japan and South Korea.
Given China's online game fixation, analysts are predicting the industry will post solid growth over the next five years, which is a good sign for investors in this sector to continue playing the game.
Perfect World shares, which closed at $25.60 on Wednesday, have a 52-week trading range between $17.40 and $37.
China was home to about 120 million online gamers as of the end of 2007, with revenues reaching $1.29 billion, a 57% increase over the previous year. China's game-industry revenues are expected to hit $1.79 billion in 2008 and rise to $2.3 billion in 2009, according to the China Internet Network Information Center.
One outfit benefiting from the surge in online gaming in China is Perfect World Co., Ltd. (Nasdaq:PWRD). Founded in 2004 and publicly listed as an American Depositary Receipt last year, the Beijing-based online game developer and operator has a portfolio of 3-D massively multiplayer online role playing games (MMORPGs), including Perfect World, an adventure game played in a historical Chinese setting; Perfect World II, its more advanced sequel; Legend of Martial Arts, named after a popular Chinese TV series following the exploits of a swordsmen in ancient China; Zhu Xian, a kung-fu focused fantasy game; Chi Bi, a war game set in China's turbulent Three Kingdoms period; and Hot Dance Party, a game that allows players to practice dance moves and create and customize characters (family members and pets).
The company distributes physical and virtual prepaid game cards and sells "points" online through its e-sales system and website. While most of Perfect World's revenues are generated domestically, the company also licenses its games outside of China. It recently inked deals to license its games to partners who will expand its reach into places such as Taiwan, Hong Kong, Malaysia, Singapore, Thailand, Vietnam and the Philippines.
Perfect World did well in the first quarter of 2008, thanks in part to the launch of its new Chi Bi game. The company posted revenues of $43.2 million, a 247% increase over the year-ago quarter. Quarterly net income skyrocketed 295% to $22.6 million, or $0.38 a share (the Street was expecting $0.35). The number of active paying customers for games surged 144% to approximately 1.7 million. And the average revenue per paying customer rose 58% increase over the previous year quarter.
Following the earnings release in May, Perfect World was set for worse-than-expected revenue gains in the second quarter (the top brass was projecting its top line to come in between flat and a 5% sequential rise), saying the company would be hurt by the suspension of game services during the three-day period of national mourning for earthquake victims and the disaster's impact on the firm's Sichuan operations. But forecasts can change quickly. Last month, the company brightened its outlook, due to exceptional results from new game expansion packs and successful marketing campaigns. The company now projects second-quarter revenues between $48.3 million and $50.5 million, a 10% to 15% improvement over the first quarter.
The company's rosier outlook prompted Roth Capital Partners analyst Adam Krejcik to retreat from his previous trimming of estimates on Perfect World's 2008 performance on June 16. He maintains a “buy” rating and a $36 price target. Andrey Glukhov with Brean Murray raised his outlook on June 13, forecasting $202 million in 2008 revenue (a 114% rise year over year) and $278 million in 2009 revenue (a 39% yearly increase), respectively. The analysts' EPS estimates are $1.83 in 2008 and $2.30 in 2009. Citi Investment Research analyst Alicia Yap rates the stock a “buy” with a $35 price target.
Defying the recent decline of Chinese online gaming stocks, Perfect World is using its game-design smarts, ever-growing following and international expansion efforts to increase its clout in China's online game sector, which experts view as one of the best ways to gain investment exposure to the country's growing Internet population.
Indeed, the future appears bright for the Chinese online gaming market, which is taking full advantage of China's burgeoning high-speed broadband networks and wireless connectivity. A recent report on the Chinese video games market by KPMG says that growth in Chinese online gaming is now on par with that of the Internet and mobile markets. In a booming marketplace, China-produced online games account for $20 million in export revenues, and hold 65% of domestic market share despite stiff competition from well-entrenched game design houses based in Japan and South Korea.
Given China's online game fixation, analysts are predicting the industry will post solid growth over the next five years, which is a good sign for investors in this sector to continue playing the game.
Perfect World shares, which closed at $25.60 on Wednesday, have a 52-week trading range between $17.40 and $37.
About the Author
Shannon Roxborough previously worked as a global risk analyst, and lived in China for nearly two years.
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