"Giant Interactive (NYSE:GA) has the kind of numbers that accountants dream about; with a profit margin above 70% and huge cash reserves, the stock is selling well below book value," says Jim Trippon.

In his The China Stock Digest he explains, "Giant was founded in November 2004 and as become one of the fastest-growing and most profitable companies in the Chinese online game industry."

"Despite constantly rising earnings as more and more Chinese log on to the Internet, Giant Interactive is reasonably valued with a P/E multiple of 12.5.

"Because of its enormous cash reserves, Giant Interactive is also able to pay a dividend of 2.18%, not something you’d ordinarily expect from this kind of company.

"The company focuses on massively multiplayer online games that are played through networked game servers, in which a number of players are able to simultaneously connect and interact.

"Giant Online has several million users at peak hours. Although access to the games is free of charge, players must pay for accessories to assist in their online competition.

"Its first game, ZT Online, was launched in January 2006 and was voted the most popular online game in China according to the  International Data Corporation, a leading market research firm.

"In May 2007, ZT Online reached over 1 million peak concurrent users (PCU), a milestone that only a handful of games in the world have achieved. In April 2008, ZT Online surpassed the 2.1 million PCU mark, representing a new record in the Chinese online game industry.

"Giant Interactive’s second internally-developed game, Giant Online, launched in March 2008 with over 237,000 peak users, eclipsed ZT Online’s achievement during this stage.

"The company is also creating several sophisticated new games to be tested this year, including ZT Online II, the official version of Giant Online, King of Kings III and Empire of Sports.

"Giant has built a nationwide distribution network to sell the prepaid game cards and game points required to play its games, which consists of more than 270 distributors and over 116,500 retail outlets.

"In addition to retail outlets, users can also purchase virtual prepaid game cards on separate game websites. Advertising and promotional campaigns on the  Internet, television and in print support these activities.

"In its most recent earnings report, Giant Interactive posted a 32% decline in its first-quarter profit, hurt in part by tax expenses and what the company attributed to 'disruptions' caused by adjustments to the monetization structure of its flagship game.

"For the three months ended March 31, the company earned $33.9 million, down from a profit of $49 million in the same period a year earlier. Earnings per American Depositary share totaled 15 cents per share in the latest quarter.

"Giant Interactive Group also announced that for the second quarter of 2009, it expects to generate total net revenue to be in the range of $50 to $54 million.

"According to Reuters analysts were expecting the company to report $58 million for the same period. Giant Interactive is a recommended buy at a purchase price of up to $8.50 a share."
 

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