China gaming sector will benefit from convergence of three China themes i.e. increasing wages, rising consumption and massive online population (+450mn and growing) in China.
The online games market grew 25% in 2010 and forecasted by Pearl Research to exceed $8 billion in 2014. Online gaming dominates consumer internet in China and generate recurring revenue streams. These games (MMORPG i.e. massively multiplayer online role playing games) are hosted on company servers. Customers pay to access the digital game world on a usage-based or time-based system. They have shifted video gaming experience from individuals to becoming a social one i.e. ideal for internet platform.
Top game operators for 2010 were Tencent (H-share) with $1.4 billion in revenue, Netease (NASDAQ: NTES) with $749 million in revenue, Shanda Games (NASDAQ:GAME) with $680 million, Perfect World (NASDAQ: PWRD) with $374 million and Changyou (NASDAQ: CYOU) with $327 million in revenues. NTES, PWRD, GAME, GA and CYOU are pure play China on-line gaming companies with ADR. The business enjoys very high Gross Margin (60– 80%) and Operating Margin (30 – 60%). Revenue growth is mainly dependant upon growing game portfolio and paying player bases. ACU (Average concurrent users) and PCU (Peak concurrent users) are primary drivers, while ARPU and APU are secondary drivers.
New game pipeline of PWRD, GA and CYOU for 2011 is extensive and should benefit from low base effect. High ACU in beta trials indicate that 2011 and 2012 should be growth years for revenue. After a successful 2010 NTES and GAME have a high base effect in 2011. Investment timing should depend upon game related news flow and general China economic strength.
Following are current Buy – Sell Price range for each and could change as per news flow:
Ticker Buy range - Sell range
PWRD $22-25 $30-36
CYOU $35-42 $52-58
GA $7.5-8 $10-12
NTES $40-44 $55-60
GAME $6-6.5 $8-8.5
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