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Ten Most Popular Online Games in China

The table below lists the 10 most popular online games in China, as of 10/15/2007, according to a survey by 17173.com, the leading online gaming information website in China.

Analysis:

1. Perfect World (PWRD) claims three spots in the list. This recent IPO is covered by six Wall Street firms (Morgan Stanley, Credit Suisse, Citigroup, CIBC, SIG, Pali Research). All of them have a "Buy" rating on the stock.

2. Fantasy Westward Journey (FWJ), World of Warcraft (WoW), and TLBB are the only three games that received more than 80K votes. Other games trailed by a large margin. This shows that the flagship games of NetEase (NTES) and The9 (NCTY) continue to lead the market, and TLBB's developer and operator, Sohu (SOHU), has become a strong competitor in the industry.

3. After two and a half years' operation, CDC Games' Yulgang is still very popular. Yulgang is one of the earliest free-to-play, item-based online games in China. Its sustained popularity demonstrates that item-based games can have a long life cycle if they are operated appropriately. CDC Games is a subsidiary of CDC Corp. (CHINA) and the pioneer of the free-to-play, item-based business model in China.

4. Industry leader Shanda (SNDA) did not claim any spot in the Top-10 list. Is this a bad sign? Not really. Actually this demonstrates that Shanda is not overly dependent on any single game, and its revenues are very diversified. This reduces the "hit-or-miss" risk which has been investors' major concern on online gaming stocks. From this perspective, Shanda may be the safest investment among all the Chinese online gaming companies.

Table: 10 Most Popular Online Games in China

Ranking	Game	Operator	Ticker	Votes	% of No.1
1	Fantasy Westward Journey	NetEase	NTES	128,409	100%
2	World of Warcraft	The9	NCTY	96,224	75%
3	TLBB	Sohu	SOHU	81,988	64%
4	CrazyRacing	TianCity	N/A	68,091	53%
5	Legend of Martial Arts	Perfect World	PWRD	62,275	48%
6	Perfect World II	Perfect World	PWRD	58,806	46%
7	Yulgang	CDC Games	CHINA	53,228	41%
8	Zhuxian	Perfect World	PWRD	45,822	36%
9	Tianji Online	FerryGame	N/A	42,002	33%
10	Da Hanghai Shidai Online	Choei Net-Tech	N/A	36,447	28%

Source: 17173.com

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Ranking of Top 10 Online Games in China and Its Implications

The table below is a ranking of top 10 online games in China, based on Peak Concurrent Users (PCU) during the past three months. Key observations:

1. Seven of the top 10 games generate revenues from the "Free-to-Play, Pay-for-Virtual-Items" model. This trend bodes well for Shanda (SNDA) and CDC Corp (CHINA), two pioneers of this business model, and will continue to pressure NetEase (NTES) and The9 (NCTY), whose games generate revenues from selling play-time.

2. Six of the top 10 games are operated by U.S.-listed Chinese companies (CHINA, NCTY, NTES, SNDA). This shows that capital markets like the industry, and operating in this industry does require a lot of funding. Why is this industry attractive? A short answer: scalability and profitability - three of the 10 most profitable U.S.-listed Chinese companies are online gaming companies.

3. Shanda, the No.1 Chinese online games operator based on 1Q07 revenues, only holds the No.7 spot in this ranking. Is this a bad sign? We don't think so. Actually this demonstrates that Shanda is no longer overly dependent on any single game, and its revenues are very diversified. This reduces the "hit-or-miss" risk which has been investors' major concern on online gaming stocks. From this perspective, Shanda may be the safest investment among all the Chinese online gaming companies.

NetEase (NTES) Q4 2006 Earnings: What Does History Tell Us?

NetEase (NTES) will report Q4 2006 earnings next Monday (Feb 26) after market close. The stock has been performing well recently. Will it maintain the momentum following the earnings report? What should investors focus on when looking at the press release and listening to the conference call?

In this article, we will analyze NetEase's earnings history for the past six quaters, and try to find some useful patterns that can be used by investors to evaluate the incoming earnings report.

The table below shows NetEase's key financial numbers from 2Q05 to 3Q06, and compares them with company guidance and Wall Street consensus. Stock prices and EPS have been adjusted for stock splits. We highlighted the key metrics (in red borders or shaded backgrounds) that determined the direction of the stock following earnings reports. And we concludes several useful patterns and rules below the table:

BIDU: Disappointing Results May Lead to Lower P/E and Lower Price

Baidu (BIDU) has reported Q4 2006 earnings. The results are obviously dissappointing, as shown by the table below:

1. Revenue barely met consensus. The spread between actual and consensus revenues continued to shrink to 0%.

2. Guidance for 1Q07 ($34-$35M) indicates 0% quarter-over-quarter growth, and is below consensus estimate of $39.0M. Last quarter when BIDU reported, the stock dropped largely because the guidance for this quarter ($34-$35M) missed Wall Street consensus ($36M).

BIDU 4Q06 Earnings: What Can We Learn from History?

Baidu (BIDU) will report Q4 2006 earnings on Wed, Feb 14, 2007 after market close (for conference call details, refer to this article). In this article, we will analyze BIDU's earnings reports history since its IPO. Hopefully investors can make more knowledgeable decision based on the information.

The table below compares actual financial results with Wall Street consensus and Baidu's own guidance. Whether the actual results beat the consensus and guidance, and whether next quarter's guidance meets Wall Street's next quarter consensus estimates, will largely determine where the stock is going following the earnings report.

What Happened to SNDA Last Week: Events and Implications

In the last week, two important events happened to Shanda (SNDA). In this article, we will briefly describe what happened, and explain the implications for SNDA.

Event No.1:

Time: Mon, Feb 5, 2007

What happened: Shanda announced that game developers Actoz and Wemade would drop their copyright lawsuits regarding Shanda's in-house game "Woool".

Implications: This event removes an overhang for the launch of "Woool 2", which will likely be one of Shanda's key revenue generators.

Guess How Sina and Tencent Commented on Sohu's Q4 2006 Earnings?

Sohu has reported Q4 2006 earnings. How would Sohu's rivals, Sina and Tencent, comment on the results? Let's look at some screen shots of their websites:

Wall Street Luckily Found Something to Congratulate SOHU on

Here's something interesting during the SOHU earnings conference call (those who listened to it may have caught this):

In an earnings conference call, when the results are good, Wall Street analysts would typically say "Congratulations on a great quarter!" before asking questions. In SOHU's Q4 2006 call, several analysts did say "congratulations". HOWEVER, instead of talking about the quarter, they were congratulating Carol Yu, the CFO, on her promotion to co-President!

IN FACT, during the call, none of the analysts congratulated SOHU on its Q4 2006 results. This is NOT a good sign. Obviously, those analysts wanted to create goodwill with Charles Zhang and Carol Yu, but the earnings made it a difficult task. They finally decided to find something else to congratulate on, and what they luckily found was the CFO's promotion.

The truth is not pretty: SOHU has missed both the revenue and EPS consensus for Q4 2006:

Actual revenue: $34.4M vs. Wall Street Consensus: $35.5M
Actual GAAP EPS: $0.16 vs. Wall Street Consensus: $0.17

Based on the revenue and EPS misses, and the downbeat atmosphere of the conference call, it's clear that the Wall Street are not satisfied with SOHU's results. We will likely see several negative research reports on SOHU coming out on the morning of Tuesday Feb 6, 2007. The stock will likely be under downward pressure following the earnings report.

Related articles:

• SOHU's Q4 2006 Report - What to Watch
• Why Has SINA Outperformed SOHU?
• YTD Performance Ranking of US-Listed Chinese Stocks
• What Can We Learn from China Internet Guide 2007? (2) 
• Watch Chinese Stocks: Q4 2006 Guidance & Consensus
• Watch Chinese Stocks: Q4 2006 Reporting Schedules

SOHU's Q4 2006 Report - What to Watch

Sohu is reporting Q4 2006 results on Monday Feb 5th, the first among China Internet companies (for a detailed reporting schedule of Chinese companies, click here). Sohu's financial and operating results can be used as an indicator of how its peers (BIDU, SINA, TOMO, CHINA) are doing in online brand advertising, WVAS, and paid search.

In this article, we will outline positive and negative factors for Sohu during Q4, and key issues that investors should watch closely, when looking at the press release and listening to the conference call.

Morning News - 01/31/2007

Latest news about CEO, EFUT, LFC, NTES, SNDA, SMI, STP, SVA, TSL:

Why Has SINA Outperformed SOHU?

Investors following Chinese Internet stocks may have noticed this: Since late June, 2006,  SINA has outperformed SOHU by a large margin - in this period, SINA shares have climbed nearly 60%, while SOHU shares have gained 10%. There are many theories regarding this performance gap by the two major Internet portals in China. In this article, we will summarize several mainstream explanations.

First, let's get a better feeling of the phenomenon that we are trying to explain: The chart below shows the ratio of SINA price divided by SOHU price over the last two years.

NCTY: Burning Crusade's Successful Debut in NA and Europe a Good Sign

What's the biggest driver for NCTY (The9 Ltd.)? Yes, it's the performance of its core game, World of Warcraft (WoW). The9 licensed this popular game from Blizzard Entertainment, one of the top PC game developers in the world. In the most recent quarter (3Q06), WoW generated $29.1 million for The9, representing 99% of the company's total revenues. Latest news about the successful debut of Burning Crusade, WoW's expansion pack in North America and Europe, bodes well for the stock:

What Can We Learn from China Internet Guide 2007? (2)

In its Internet Guide 2007, Internet Society of China revealed some data points that can help investors make more knowledgable decisions on stocks such as SINA, SOHU, NTES, SNDA, BIDU, etc. Key points:

1. Sina remains No.1 in portal and became No.1 in blog.

2. Sohu is no longer among the top three portals in China.

3. Baidu has solidified market leadership over Google and Yahoo.

4. Tencent's QQ has maintained No.1 in instant messaging.

5. Alibaba's Taobao.com is still No.1 in C2C, ahead of eBay China.

The table below summarizes the top three companies in 10 segments, according to Internet Guide 2007.

BIDU: What Can We Learn from China Internet Guide 2007? (1)

On Jan. 10, 2007, the Internet Society of China (ISC) released Internet Guide 2007, a survey report on China's Internet industry. Major U.S.-listed Chinese companies such as Sina, Sohu, NetEase, and Shanda, were evaluated in the report.

In the past, similar surveys have largely contributed to the rise and fall of certain Chinese Internet stocks. Baidu (BIDU) is a perfect example:

BIDU: Have You Noticed the Change?

There have been news reports that Baidu has obtained an Internet News License from the Chinese government. However, the company has not made a public announcement about this. Comparing this with Baidu's upbeat press release on entering the Janpanese market, you may be wondering: why not put out an announcement if it indeed got the news license?

Seeing is believing. Let's do some digging to judge whether this is a rumor or a fact.

BIDU: What Wall Street Did Not Tell You about Baidu (3)

According to various surveys, Baidu beats Google China by a large margin, in terms of both revenue and traffic. Wall Street analysts have listed many reasons: broader product lines, deeper distribution network, popular MP3 channel, ... but they have missed an important factor: Google China's connection problem.

The purpose of this article is to provide you with more background information, which may help you form a more balanced view on the dynamics of China's paid search market.

Numbers You Should Know about China's Online Gaming Industry (1)

Online gaming stocks, including NetEase (NTES), Shanda (SNDA), and The9 (NCTY), has attracted the attention of many investors. To evaluate these stocks, one must first gauge the health of the whole industry: How big is the market? How fast will it grow? What's the driver?

Numbers don't lie. Below is the answer:

BIDU: What Wall Street Did Not Tell You about Baidu (2)

According to various sources, including website owners and research organizations in China, Baidu's revenues are roughly 3x-5x that of Google China. Among many factors leading to this result, here is a mistake made by Google, which Wall Street analysts did not tell us:

Google China offers incentives to agencies at the expense of advertisers.

BIDU: What Wall Street Did Not Tell You about Baidu (1)

Shares of Baidu (BIDU) have been doing well lately. Compared to one year ago, analysts are much more positive about the stock.

BIDU is doing well partially because several analysts upgraded it within the last several months. The table below is a summary of recent broker actions. Note that major underwriters of Baidu's IPO, Goldman Sachs and Piper Jaffray, who should have known a lot about the company, have both changed their views on the stock:

Date	Broker	Action	From	To
11/16/2006	WR Hambrecht	Initiated	-	Buy
11/1/2006	Goldman Sachs	Upgrade	Sell	Neutral
9/25/2006	Citigroup	Upgrade	Sell	Hold
7/17/2006	Brean Murray	Upgrade	Hold	Accumulate
7/14/2006	Piper Jaffray	Upgrade	Market Perform	Outperform
5/10/2006	Piper Jaffray	Upgrade	Underperform	Market Perform

Wall Street analysts shifted their positions on Baidu for various reasons, and their arguments have been widespread among investors. Below is some useful information that the Street did not tell you about Baidu and its rival Google China:

1. Baidu is doing a trial on certain keywords to clearly differentiate ads from organic search results.