A Chinese Stock That’s Not Playing Games

09/13/2007 12:00 am EST

Focus: STOCKS

Jim Collins

Chairman and CEO, Insight Capital Research & Management, Inc.

Jim Collins, editor of OTC Insight, says a Chinese developer of multiplayer online games is growing rapidly, along with demand for its products among gamers.

Shanda Interactive Entertainment (NASDAQ: SNDA), through its subsidiaries, engages in the development and operation of online games in China. It offers a portfolio of online games, which users play over the Internet. The company was founded in 1999 and currently has 1,906 employees.

Shanda offers a portfolio of diversified entertainment content including online chess and board games, network PC games and a variety of cartoons, literary works, and music. Shanda’s most popular games, massively multiplayer online roleplaying games, allow thousands of users to interact with one another in a virtual world by assuming ongoing roles or characters with different features. The games are continuous, and players accumulate features and communicate with one another through instant messaging.

The casual games are less complex and time consuming than [multiplayer games], but attract a broader range of users, as well as more home users. Shanda’s online game offering includes a portfolio of over 70 simpler casual games including chess, board games, cards, mahjong, and arcade games.

On July 5th, Shanda announced that it signed an agreement to acquire Aurora Technology, a leading developer and operator of [multiplayer online games] in China. Aurora Technology is recognized as one of the top brands in the domestic market, with experienced team members and strong operational capabilities. The company also has an extensive nationwide online and offline multichannel prepaid game card distribution network.

Additionally, in July, Shanda acquired over a 50% stake in Actoz, a South Korean online game developer. As a result, Shanda will be the majority shareholder of Actoz.

For the quarter ended June 30th, Shanda reported net income of 37 cents per share, compared to 12 cents in the prior year. Revenues increased 45% to $74.1 million. The strong performance was attributed to the solid performance of the [multiplayer online game] business.

Shanda’s stock reached a 52-week high [of $33.65] on July 13th before retreating modestly. There are approximately 72 million shares in float, and the three-month average trading volume is 932,000. Banks and mutual funds own approximately 26% of the shares outstanding. The company has a relative strength of 94 and receives a rating of B+ for accumulation/distribution. (It closed above $31 Wednesday—Editor.)

Shanda’s revenue is greatly dependent upon two of their games, Mir II and Woool, [which accounted for some 70%] of net revenues, respectively. These and other online games may, however, have finite commercial life spans. In order to maintain long-term profitability and operational success, SNDA must continue to license or develop new online games that are attractive to users and replace existing online games as they reach the end of their commercial lifespan.

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