Chinese Online Gaming Stocks: Wait for a Better Entry Point

Chinese online gaming stocks have performed very well year-to-date and attracted many investors' attention. This article provides a current review of eight Chinese online gaming stocks traded in the U.S. exchanges, and discusses investment strategies.

Chinese online gaming stocks are divided into three tiers: The table below shows that among the eight stocks in this industry, Shanda (SNDA) and NetEase (NTES) are in the first tier, with quarterly revenues above $100 million. Perfect World (PWRD), Changyou.com (CYOU), and Giant Interactive Group (GA) are in the second tier, with quarterly revenues between $50 million and $100 million. GigaMedia (GIGM), CDC Corp. (CHINA), and The9 (NCTY) are in the third tier. These rankings are ultimately determined by a few key games. In the table's last two columns, I have listed key games for each company and their PCU (Peak Concurrent Users) during 6/21/2009-6/27/2009 based on my estimates.

Investors are betting on larger companies. The table shows an interesting pattern: for all companies, the higher the quarterly revenue, the higher the P/E ratio. This means the market currently expects larger Chinese online gaming companies to have a higher chance of launching successful games, and grow faster than smaller companies. In other words, investors' consensus is that larger companies will increase their market share in the future, and the industry will become more concentrated. This is why they are betting on current industry leaders.

Industry leaders are trading very close to 52-week highs. The top four revenue-generating companies - SNDA, NTES, PWRD, and CYOU - have surged 87%, 70%, 89%, and 185% year-to-date, and they are trading at 93%, 97%, 96%, and 99% of their 52-week highs. In contrast, three major market indexes, Dow 30, S&P 500, and NASDAQ Composite, are only trading at 71%, 70%, and 74% of 52-week highs. In my opinion, investors interested in buying these four stocks should wait for a better entry point.

Snapshot of Chinese Online Gaming Stocks Traded in the U.S.

Disclosure: No positions.

Comments

[HaavBline]

Good article.

Changyou.com (CYOU) is worth watching. It was a spin-off from Sohu, has a hot game in TLBB.

CYOU owns exclusive rights to develop games based on TOP Chinese Wuxia novelist Jin Yong novels which have the proven popularity for two generations in Asia. Jin Yong's major novels had been made (and remade) into wuxia movies and TV series multiple times and never lost popularity. That's more than J.K. Rawling can claim at this point.

That Changyou can developed Jin Yong's novels into popular on-line games and still have exclusive rights to turn two other Jin Yong novels into on-lin games in the future should be a strong positive for this company.

2009 Jun 29 09:15 PM

[Edward D. Jones]

I own GIGM. They've got some hot new games coming out.

2009 Jun 30 06:00 PM