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Foreign Investment: China’s weather hell is heaven for this industry

Posted February 29, 2008

"When it’s cold outside and snow is piled up above the windows, what else can you do but find some way to entertain yourself until some nice soldiers in tanks come to dig you out? The harsh winter may have been bad for other industries in China, but it’s been great for the online gaming sector." — Stephanie Grimmett

by Stephanie Grimmett

Baltimore – (TFN):  I don’t know about you, but the only time I’ve looked at an online gaming Web site (think World of Warcraft, not PokerStars.com) was when I was doing research on stocks.

I have a few old-school Dungeons & Dragons friends, although I’m not sure they’ve played in the last five years. And I know someone who’s addicted to The Sims, but that has more to do with her desire for an unlimited wardrobe and the power to change her hairstyle every five minutes than a need for fantasy role-playing.

All in all, I guess I just don’t understand the appeal of creating a larger-than-life alter ego and wandering around with a bunch of strangers in a make-believe world. I have no desire to slay a dragon or rescue a princess or find magical powers.

Maybe that means I’m boring. Maybe if I were Chinese I’d think differently.

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Foreign Investment: China's online obsession

The Chinese love their online games. World of Warcraft and The Legend of Mir provide an escape from a still-repressive government and give gamers freedom of action and more power than they can act on in their real lives.

Half of China’s 210 million Internet users are under 25, the prime candidates for gaming. And with the benefits of higher-paid parents and a tech-savvy education, the country’s young are signing up for online games in droves. In fact, the online gaming market in China is larger than both the online advertising and Internet search markets, a feat unheard of in the U.S. or any other Western country.

When China goes online, it’s for entertainment, not for news or to find out a random bit of trivia. Even the free-speech advocates at Google bowed before the pressure of the censor-happy PRC.  So it’s unlikely the Chinese can learn anything new from their shrunken and tightly-controlled version of the Internet. At news sites, all they’ll get is the same Party line they receive from the radio, television and print news, no different perspectives, no new ideas (because new ideas are strictly the property of the “glorious revolution”… maybe I’ve got my Parties confused there, but you understand what I mean.).

So when it’s cold outside and snow is piled up above the windows, what else can you do but find some way to entertain yourself until some nice soldiers in tanks come to dig you out?

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Foreign Investment: Bad weather means banner profits

The harsh winter may have been bad for other industries in China, but it’s been great for the online gaming sector. NetEase.com Inc., The9, Giant Interactive Group and Perfect World Company all reported better-than-expected fourth quarter results. And Shanda Interactive (SNDA: NASDAQ) beat profit estimates by 50 million yuan (about $7 million).

Shanda is China’s largest online games provider. It operates The Legend of Mir II, Ragnarok Online and Dungeons and Dragons Online in China, along with six titles the company developed itself and several Korean games it licensed for operation in its homeland.

The company just reported fantastic fourth quarter earnings, due in part to the new Dungeons and Dragons offering, a Walt Disney racing game and additional content, like new monsters, in a few of the company’s older titles.

Sales gained 52% to 714.2 million yuan ($99.8 million) in the fourth quarter. And net income came up to 292.6 million yuan ($40.9 million) from 240.3 million in the third quarter.

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Foreign Investment: Shanda shares soar

We originally recommended SNDA nearly two years ago, when it was going for around $12. Now it’s up to $34.42, a 180% gain. The stock suffered a slide from its peak of nearly $41 a few months ago, but it’s on the rise again, as it should be.

We’re long-term investors in Shanda. The company is solid. It has continued to increase its market share, and its customer base will keep growing as more and more Chinese join the Internet-literate world. Even after the price hike of the last two years, SNDA still has the lowest P/E ratio in its industry, even when looking at other Chinese online gaming ADRs.

At this point, I think Shanda still has much more room to run. And if you haven’t gotten into the stock yet, you should, right now, before it gets back up to $40.

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Posted by Stephanie Grimmett · Filed Under International Investing 

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