SNDA: Beats in Scariest Quarter; 2009 Growth Rolls On
Shanda Interactive Entertainment Limited
Rating: Outperform
Price: $50.99
Q2 EPS is much better than expected. Shanda reported Q2 revenue and EPS of $181.1 million and $0.90 versus our estimates of $180.7 million and $0.81. The EPS beat came from lower-than-expected costs of goods and development expenses. Shanda’s tax rate was also lower than expected, but it would have beat without that.
‘AION’ fears seem overblown as MMO growth rolls on. After the frenzy of positive AION sentiment ended abruptly, the success of the game became investors’ greatest fear. While Shanda did not break out its results exactly, we believe AION was the source of Q2 growth and better-than-expected Q3 guidance.
Other revenue was responsible for the upside. It is timely that Shanda’s other revenue outperformed because it is the chunk of revenue that constitutes Shanda’s nongame assets. Against increasing skepticism that Shanda can ever build this business into a significant revenue contributor, it appears to have gained traction, although it still contributes a small slice of Shanda’s overall revenue.
This is a good entry point in SNDA. SNDA has settled after skepticism around the release of AION and the spinoff of Shanda Games, which presents an attractive entry point. We continue to believe that the company is one of the best-positioned operators in the China online games sector.
Detailed Discussion
Q2 Beat Came from Other Revenue
Shanda Interactive reported Q2 revenue and EPS of $181.1 million and $0.90 versus our estimates of $180.7 million and $0.81. The EPS beat came from lower costs of goods and development expenses relative to our estimates as well as a lower tax rate, which were partially offset by higher S&M and G&A expenses. Shanda also benefited from a government incentive payment in the quarter, but when combined with investment income, the total was not significantly higher than our estimates. In total, the difference from these two items relative to our estimates amounted to $0.02 per share.
Reported Earnings
Sources: Company reports, Pacific Crest Securities estimates
‘AION’ Fears Seem Overblown as MMO Growth Rolls On
Massively multiplayer online game revenue was RMB 1,074.7 million versus our estimate of RMB 1,085.0 million, which was essentially in line. Monthly active paying accounts (APA) were better than we expected at 8.58 million versus our estimate of 7.48 million. However, average revenue per user (ARPU) of RMB 41.7 was below our forecast of RMB 44.2. Shanda attributed the solid growth in users, but offset in ARPU, to greater conversion of new users to paying users in the quarter.
The contribution from AION, Shanda’s newest significant game, was meaningful in the quarter and likely the source of the growth of the MMO business, but Shanda maintained its policy of not releasing data on individual games. Even though it is not entirely clear, we believe its core business was essentially flat in Q2, potentially with modest growth, and that the addition of AION was the main catalyst of growth.
Casual games revenue was below our forecast. Q2 revenue was RMB 102.9 million versus our estimate of RMB 108.0 million. Shanda has not been able to drive growth in its casual business, even as it spends on the development and licensing of new titles. We believe that the casual game industry is growing in China, but other vendors, especially Tencent, are the beneficiaries of the growth. Casual APAs were 1.86 million and ARPU was RMB 18.4 versus our estimates of 1.75 million and RMB 19.9, respectively.
Other revenue was the big surprise in the quarter. It contributed RMB 59.6 million versus our estimate of RMB 45.0 million. It is timely that Shanda’s other revenue outperformed because it is the chunk of revenue that constitutes Shanda’s nongame assets. Despite increasing skepticism that Shanda can ever build this business into a significant revenue contributor, it appears to have gained traction, although it still contributes a small slice of Shanda’s overall revenue.
Active Paying Accounts Continue Their Ascent
Sources: Company reports, Pacific Crest Securities
Modest Decline in ARPU (RMB) from Higher APAs
Sources: Company reports, Pacific Crest Securities
‘AION’ Expansion Should Help Maintain Growth
Shanda released an expansion for AION in August that has stabilized growth in the game. While it clearly prefers not to discuss individual titles, Shanda did mention that it is pleased with the reception of the expansion. Further, Shanda will release another expansion in Q4 that should provide another boost to maintain momentum. While our expectations have remained relatively muted, even with the extremely positive response following beta testing last spring, AION continues to be a very positive contributor to growth for Shanda.
This Is a Good Entry Point in SNDA
With a rapidly growing Internet user base and continued strong results, the online game industry in China is underappreciated, in our view. Shanda is a market leader and a pioneer of Chinese online gaming’s revenue model, and has a well-diversified and leading game portfolio. SNDA has settled after skepticism around the release of AION and the spinoff of Shanda Games, which presents an attractive entry point. With SNDA trading at 128x our 2010 GAAP EPS estimate of $4.00, we continue to believe Shanda is underappreciated, and one of the best-positioned companies in the China online games sector.
Online Games (China), SNDA - September 4th, 2009 — 5:54am
WoW Is Gone; Other Games Are Surprisingly Weak
The9 Limited
Rating: Sector Perform
Price: $9.13
Rating: Sector Perform
Price: $9.13
Results miss estimates due to loss of ‘WoW.’ The9 reported Q1 revenue of $62.4 million and GAAP loss per share of ($0.26) versus our estimates of $60.3 million and $0.29. It also reported Q2 revenue and GAAP loss per share of $42.2 million and ($0.46) versus our estimates of $71.5 million and $0.48. Results were much worse than expected because of the loss of World of Warcraft (WoW) in early June and associated depreciation and other expenses recognized due to the loss.
NCTY, Online Games (China) - August 28th, 2009 — 5:10am
Soft Out-Quarter Guidance Again; Delays Becoming Regular
Giant Interactive Group Inc.
Rating: Sector Perform
Price: $7.74
Slight Q2 beat. Giant reported Q2 revenue and EPS of $53.3 million and $0.15, respectively, versus our estimates of $53.0 million and $0.14. The EPS beat came from higher gross margin and lower expenses as Giant trimmed S&M and R&D in the quarter. The company also guided Q3 revenue to a range of between $45.4 million and $50.5 million versus the Street expectation of $58.0 million. Finally, Giant delayed testing of its next game, ZT Online 2, to late Q4 versus the previous expectation for Q3.
GA, Online Games (China) - August 19th, 2009 — 10:49am
Downgrading as Valuation Overshadows WoW
NetEase.com, Inc.
Rating: Sector Perform
Price: $46.65
Upside from one-time benefit, lack of ‘WoW’ expense. NetEase reported Q2 revenue and EPS of $126.4 million and $0.53 versus our estimates of $127.5 million and $0.20. The discrepancy versus our expectation was largely due to our expectation for a three-week contribution of World of Warcraft (WoW) revenue and cost in Q2. NetEase did receive a one-time benefit from revenue from dormant user accounts in Q2. Net of this benefit, NetEase online game revenue was RMB 696.6 million, roughly RMB 30 million below our estimate excluding WoW.
NTES - August 13th, 2009 — 5:03am
Beats Preannouncement; Raising Estimates, Price Target to $45
Perfect World Co., Ltd.
Rating: Outperform
Price: $37.40
Beats Q2 preannouncement. Perfect World announced Q2 sales that were well ahead of its initial guidance and 2% above the high end of its positive pre-announcement issued on June 19. GAAP revenue and EPS were $76.3 million and $0.72, compared with our original estimates of $74.5 million and $0.65. Upside was driven mostly by average revenue per user (ARPU), which was RMB 237 versus our estimate of RMB 201. Guidance for Q3 was also better than expected; the company expects 5% to 8% sales growth versus the Street’s preresults estimate of approximately 4% growth.
Online Games (China), PWRD - August 11th, 2009 — 5:05am
Q2 Video Games/Entertainment Earnings Preview
Event:
We are publishing our Q2 earnings preview for our Video Games, Chinese Online Games and Entertainment coverage list
Focus Stocks:
ERTS – We expect it to meet or beat Street Q2 forecasts
SNDA – We expect it to meet or beat Street Q2 forecasts
NTES – We expect it to meet Q2 Street forecasts
Games, Online Games (China) - July 22nd, 2009 — 10:51am
China Online Games Tour Wrap-Up
Chinese Online Games: Development Cost Trumps Marketing, but Remains Dwarfed by Sales Growth
Last week, we visited several Chinese online game companies. Our conclusions from the trip are as follows.
GA, NTES, Online Games (China), PWRD, SNDA - June 23rd, 2009 — 4:58am
‘Battle of the Immortals’ Drives Upside; Raising PT to $35
Perfect World Co., Ltd.
Rating: Outperform
Price: $26.68
Perfect World positively preannounces Q2 revenue. Perfect World announced it expects Q2 revenue to grow by between 15% and 20% sequentially, up from its prior guidance of between -2% and 2%. Stronger-than-expected results were driven by the performance of its recent 2.5D MMORPG, Battle of the Immortals (BOI), which entered beta testing in early April and has gained solid traction, with an estimated 180,000 average concurrent users.
Online Games (China), PWRD - June 19th, 2009 — 11:09am
SNDA: Acquires a Majority Interest in HRAY
Event:
Shanda has announced that it will purchase a majority stake in Hurray! Holding (HRAY, NR), a wireless value-added services (WVAS) company in China
There have been reports of a possible transaction since mid-May. Hurray was publically in play and Shanda was noted as being one of the bidders
Online Games (China), SNDA - June 8th, 2009 — 3:17pm
E3 Day 1: ATVI, NTES
Event:
Activision Blizzard (ATVI, Outperform) held an analyst event on the first day of E3 (actually a day before the first day)
Conclusion:
Modest positive. Much of the discussion in the four hour event was on familiar trends that were not new to most investors. We do not believe anything extremely actionable came of the event. However there were a few interesting things to ponder for longer-term investors: