Eight Reasons to Buy Shanda Games (NASDAQ:GAME) Today
"Strong Buy" Rated U.S.-Listed Chinese Stocks (February 8, 2012)
Daily Analyst Actions on Chinese ADRs
Booming China online game industry. Online games have become highly popular in China, with young users spending hours playing these games as their main form of entertainment. According to IDC, the online game market in China was US$2.7 billion in 2008 and is expected to reach US$5.8 billion by 2013, representing a compound annual growth rate (CAGR) of 16.7%. According to industry experts, there are several strong drivers of online gaming in China including the rapid adoption of the Internet in China, growth in Internet cafés, adoption of broadband, and the increasing view of the Internet and online gaming as a source of entertainment.
Second largest company in the booming market. The China online game market is highly fragmented today but the top 10 leading players account for over 80% of the revenues, according to analysts, with Shanda as the number two operator, making $186 million in revenue and $54 million in net profit in Q3:2009. Shanda's top two games, Legend of Mir II and The World of Legend, are currently two of the top six online games in China in terms of revenue.
Highly scalable business model. Shanda achieved 33% operating margin and 29% net profit margin in the third quarter of 2009. Online gaming is a highly scaleable business given the low capital investments and relatively fixed expense structure. Additionally, Shanda benefits from viral or word-of-mouth marketing of its games. Over time, the launch of more in-house developed game will expand margins.
Large and balanced game portfolio. Shanda owns one of the largest and most balanced online game portfolios in China: The company currently 21 MMORPGs and 11 advanced casual games. It currently plans to launch 20 more MMORPGs and 8 advanced casual games in the future. The company’s Legend of Mir II and The World of Legend are two of the oldest and most profitable online games in China.
Huge network of game servers. Shanda owns a nationwide network of around 11,000 servers and 2,300 server annex equipment units capable of accommodating 11 million concurrent online game players. A nationwide server network matters more in China than elsewhere, because of the country’s size and because of poor connections between the various fixed-line telecom operators.
Strong distribution network. Shanda maintains a nationwide game card distribution system through wholesalers and retail distributors. The company also makes revenue through direct online sales. Shanda’s distribution system is one of the largest in the industry, and is likely to remain a competitive advantage until the majority of Chinese Internet users have credit (or debit) cards and feel comfortable using them online.
Comprehensive customer support. Shanda provides various customer support features, including a 24-hour helpline and walk-in help desks. The company has 200+ technical support and customer service employees, one of the largest among China online game companies.
Reasonable price level. Shanda Games' shares are inexpensive compared with its peers: It is trading at an 11x forward P/E based on average 2010 earnings per share estimated by analysts. Such a P/E level is below the valuation of most Chinese online game stocks: 13x of Netease.com Inc. (NASDAQ:NTES), 13x of Giant Interactive Group, Inc. (NYSE:GA), 12x of Perfect World Co., Ltd. (NASDAQ:PWRD). It is slightly higher than the 10x of Changyou.com Limited (NASDAQ:CYOU).
