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Giant Interactive Group Inc. (NYSE:GA)

Q4 2009 Earnings Call

March 4, 2010 8:00 pm ET

Executives

Rich Chiang – IR Manager

Eric He – CFO

Wei Liu – President

Analysts

Jin Yoon – Nomura

Andrey Glukhov – Brean Murray, Carret & Co

Alicia Yap – Citigroup

Atul Bagga – ThinkEquity

Jenny Wu – Morgan Stanley

Wendy Huang – RBS

Adam Krejcik – Roth Capital Partners

Eddie Leung – Banc of America/Merrill Lynch

Gary Ngan – UBS

Operator

Good morning, ladies and gentlemen, I would like to welcome everyone to Giant Interactive Group's fourth quarter and fiscal year 2009 earnings conference call. (Operator instructions) After the presentation there will be a question-and-answer session. (Operator instructions) Now I would like to transfer the call to the moderator, Mr. Rich Chiang, Investor Relations Manager of Giant Interactive Inc.

Rich Chiang

Good morning, ladies and gentlemen. Welcome to the fourth quarter and full year 2009 earnings conference call for Giant Interactive Group. With me today are Ms. Wei Liu, President; Mr. Eric He, Chief Financial Officer; and Mr. Shufan Ji, Vice President of Research and Development. Please excuse that we are calling in from different locations this time.

As we proceed through our prepared remarks, we will refer to our results presentation, which can be downloaded from our website at www.ga-me.com. Following the remarks, Ms. Liu, and Mr. He, Mr. Hui will be happy to take your questions.

Before we continue, I would like to remind you that statements on this call that are not strictly historical in nature constitute forward-looking statements within the meaning of Section 27(NYSE:A) of the Securities Act of 1933 as amended, and Section 21(NYSE:E) of the Securities Exchange Act of 1934 as amended, and as defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intend, plan, believe, estimates, and other similar statements, and include among others, statements regarding our continued efforts to increase shareholder value through strategic investments and expansion or adjustment of game content and features.

Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results of Giant to be materially different from historical results or from any results expressed or implied by such forward-looking statements. These factors include, but are not limited to, risks and uncertainties related to the progress, timing, costs, and results of game testing and product development, competition from other online game companies, and the additional risks discussed in filings with the Securities will remain at a and Exchange Commission, including our annual report on Form 20(NYSE:F) filed on June 19th, 2009.

All forward-looking statements are qualified in their entirety by this cautionary statement and Giant undertakes no obligation to revise or update this information to reflect events or circumstances after the date hereof.

In addition, please note that references in the presentation to dollars refer to US dollars. Now I would like to pass the call over to Eric He, our Chief Financial Officer.

Eric He

Thank you, Rich. Good morning and good evening, everyone. Thank you for joining us today with 2009 having drawn to an end. We are proud of the progress we made on several strategic fronts this year. We have assembled a robust pipeline that will soon translate into a diversified product offering for China online gaming markets. And we have also successfully reined in costs to ensure our operations remain efficient and effective.

Although our results in the second half of 2009 were adversely impacted by the cancellation of certain monetization features within ZT Online, mainly Treasure Box. We have recently begun to see an emerging trend of this stabilization within the games user and spending levels. While we are not yet at finish line, we are growing more confidence that our flagship game is starting to build positive momentum, and will ultimately provide us with healthy, sustainable revenue base. We are excited to see that recovery of ZT Online towards the end of 2009.

We are equally pleased with the development of our pipeline. Many of our new games are progressing through the various stages of product launch. I will go into little more detail on the outlook and the pipeline in just a few minutes. But first, I would like you to review our operating metrics for the fourth quarter of 2009 starting on slide 6.

Total active paying accounts or APA was 138,000, representing 2.7% sequential increase and 11.8% year-over-year decline. Average revenue per user or ARPU declined 7.3% from the third quarter 2009 and 11.8% from the fourth quarter 2008 to RMB 240.5. Average concurrent users or ACU was 485,000, a 14% sequential increase and a 12.7% decrease from the fourth quarter 2008.

Peak concurrent users or PCU grew 8.6% from the previous quarter, and decreased by 7.6% year-over-year to 1,391,000. Similar to the third quarter 2009, the cancellation of Treasure Box impacted our fourth quarter financial results. However, we do not expect this trend to be long-lasting. We have recently seen encouraging sign of stability within ZT Online and indicating that user levels and in game spending has begun to normalize and grow.

Our fourth quarter and full year 2009 financial highlights are shown on slide seven. Net revenue for the quarter was $40.4 million, representing a 4.9% decline from the third quarter of 2009, and a 21.8% decline from the fourth quarter last year.

For the full year 2009, net revenue totaled $191 million, down 18.2% from 2008. This decline in the revenue was attributable to the shifts in user playing and spending habits, following the cancellation of Treasure Box in the second half of 2009.

Gross profit for the fourth quarter of 2009 was 33.9 million, representing a 5.4% sequential decrease and 21.9% year-over-year decline.

Gross margin of 83.9% was down slightly from 84.3% in the previous quarter, but was essentially flat compared to gross margin of 84% in the fourth quarter 2008. Gross profit in fiscal 2009 was 161.1 million, down 20.1% from 2008. Gross margin for the year was 84.3% as we maintained healthy and stable margin levels due to our flexibility to remove excess costs.

Operating expenses for the fourth quarter 2009 totaled $8.2 million, up 5% sequentially, but down 32.7% over the fourth quarter 2008. Operating expenses for the full year 2009 were down 35% to 39 million, primarily due to our continued efforts to trim both sales and marketing expenses and G&A costs. The reduction of these expenses more than offset the increased R&D spendings as we allocate additional resources towards the development and enhancement of new and existing games throughout 2009 and beyond.

R&D spending increased 12.2% sequentially and 9.3% from the year ago period, mainly due to increase in staff compensation and additional hiring of research and development personnel. For fiscal 2009, R&D expenses increased by 28% to 16.6 million as we expanded to accommodate additional product development and existing game enhancements.

Sales and marketing expenses rose 14.5% sequentially as we increased promotional efforts for ZT Online Green edition. Sales and marketing costs were down 23.4% year-over-year due to our efforts to control costs and streamline operations on the marketing front. Total sales and marketing expenses for the year were 17.5 million, down a significant 50.5% from 2008, demonstrating our ability to effectively and efficiently manage our sales and marketing operations.

General and administrative expenses were up 23.3% sequentially, but down 20.7% year-over-year due to stringent cost control. G&A expenses for the full year were down 14.3% over 2008 to 17.8 million, as we saw the decrease in consulting fees and option expenses.

Net income attributable to the company's shareholders in the fourth quarter 2009 was basically flat sequentially at $29 million, but declined 31.9% year-over-year. Net margin attributable to the company's shareholders was 71.7% for the fourth quarter 2009, as we made considerable progress controlling costs throughout the year. As a result, net margin level increased sequentially throughout 2009. For the full year, net income declined 22.8% to 125.9 million and net margin was 65.9%.

Basic and diluted earnings per ADS for the fourth quarter 2009 were $0.13 and $0.12 respectively. For the full year 2009, the reported basic and diluted earnings per ADS were $0.56 and $0.54 respectively.

Now moving to the balance sheet on slide 10, as of December 31, 2009, cash, cash equivalents, short term investments and Held-To-Maturity Investments combined increased to $791 million due mostly to cash generated from operations. Now, in addition to our financial performance, I would like to provide some updates on our game portfolios and pipelines. As you may have already seen from our earnings release, we have assembled quite a robust pipeline of games in recent quarters, could provide us with numerous growth prospects and will ultimately help diversify and expand our revenue base.

Turning first to our ZT Online series of games on slide 12. Although our original ZT Online games has not yet fully rebounded, following our decision to cancel Treasure Box in the second half of 2009, we are continuing to enhance and upgrade the games in order to reengage users and accelerate the recovery process. The progress on the development and testing front with ZT Online series of games remains on track.

In particular, I would like to highlight the ZT Online Green edition has gained a significant amount of traction among lower spending users in the recent months. In December, it attracted new users when we launched into a closed beta testing reaching a PCU level above 300,000. The game is progressing better than our initial expectations, and we are looking forward to initiating open beta testing at the end of the first quarter 2010.

Building further on our segmentation strategy, we continue to operate ZT Online Classic edition, and are also progressing smoothly in our testing stage for ZT Online II. In addition, capturing new users through the evaluation of our core flagship ZT Online series, we have also added an impressive suite of games to our pipelines, which are designed to diversify our product offerings and provide additional avenues for future growth.

Many of these games have either entered into various testing phases in recent months or are slated to be promoted more heavily in the coming months. We have made substantial progress on the development front, and each of these new games has potential to become successful among Chinese gamers.

Slide 13 provides a brief overview of our pipeline games. Of particular note, The Golden Land and Dragon Soul both entered into limited closed beta testing in the recent months, and we have made further enhancement based on feedbacks from our gamers. The revised version of The Golden Land is scheduled to undergo testing in the first quarter 2010. Dragon Soul is scheduled to enter into closed beta testing in the fourth quarter of 2010.

King of Kings III, which is slated to initiate open beta testing in the second quarter 2010 has been further enhanced, and we have unlocked higher character range and improved overall playability of this game. We also remain committed to further optimizing our internally developed Giant Online in order to generate interest from a wider audience of users.

Our Win@Giant program , which was introduced last year has thus far been a valuable source of new game prospect, including XT Online, which recently entered ultimately limited closed beta testing, and My Sweetie, which continued to be optimized and enhanced.

Finally, I am happy to report that we recently added a new license game to our pipeline. Having recently signed an agreement with Mail.Ru to exclusively operate Astrum Nival’s MMORPG Allods Online in China. We believe this game further strengthens our already robust pipeline. Over the coming months, our R&D talents were localize Allods Online to the preferences of Chinese gamers in anticipation of commercial launch in late 2010.

To conclude, we are encouraged by the stabilization and growth in ZT Online in recent months, which coupled with anticipated ramp up and added contribution from our new games such as ZT Online Green edition leads us to be confident in both our near and long-term outlook. As such, we expect to see a return to sustainable revenue growth commencing in the first quarter 2010.

However, due to a reduction in certain non-operating factors such as expected decrease in government financial incentive, we do not believe that our profits will move in line with revenue in the near term. As we begin to build positive momentum can embark our next phase of growth, we will of course remain committed to delivering long-term sustainable value to our shareholders.

This completes our presentation. We will now take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Jin Yoon with Nomura. Please proceed.

Jin Yoon - Nomura

Hi, good morning guys. I apologize if I missed this on our prepared remarks, but on your ZT Green game can you just give me the divide in what you see versus what you see on your network in terms of PCU versus what you expect from (inaudible) network, as well as what you expect them in terms of ARPU going forward, if there is going to be any major differences in ARPUs between your network and what is going to be on (inaudible). And just a follow up question regarding ZT Online, I think in your prepared remarks you mentioned that the APAs as well as APRU levels are stabilizing and trending upwards. With that being said, I guess what's the functionality within the game now that Treasure Boxes are out, if that is kind of driving I guess momentum to the upside with stabilizing of software. Thanks guys?

(Foreign Language)

[Interpreted] Allow me to translate the answers from our management team. First question regarding PCU levels on ZT Online Green edition, we don't disclose -- and we won't really break down all the individual metrics for the different games and different version, but the Green edition that we are operating on our servers, and not from (inaudible) servers. And that being said so far the Green Edition PCU has surpassed expectations, our initial expectations and we are also hopeful that it will improve further once we launch into open beta testing soon.

Now, ZT Online Green Edition was launched only in October. So, ARPU levels are low at this point in time, but they should also be lower than the original ZT Online. As for your second question, yes, when we cancelled Treasure Box in ZT Online, we did three things to try to improve the game even more, and make up the difference and get gamers back into playing the game and spending in the game.

The first one is to improve game play and balancing between low-end gamers and high-end gamers. Second is to improve the monetization in the game, and make it more justified for paying customers. And third is doing extension to increase the interactions between gamers and the game.

Wei Liu

Next.

Operator

Our next question comes from the line of Andrey Glukhov with Brean Murray. Please proceed.

Andrey Glukhov - Brean Murray, Carret & Co

Yes. Thank you for taking the question. First, can you guys talk about what is the kind of potential kind of incremental contribution from the ZT Green, and to the extent that may push down your other games like ZT Classic, you know how pressure, how much cannibalization are you guys seeing from them and then I have a follow up. Thanks.

(Foreign Language)

[Interpreted] Yes, for ZT Online Green Edition’s contribution to our overall business, we launch this new edition in October 2009. In the very beginning the revenue contribution has been very low, but user numbers has surpassed our expectations. But as we head into the first quarter of 2010 revenue contribution will increase, and as we guided in our guidance that revenue will see some positive trajectory in the first quarter. Some of this will be caused by the ZT Online Green Edition.

As for cannibalization, this has been very limited -- our cannibalization has been very limited since ZT Online Green Edition has been launched. It is a different game compared to other versions of ZT targeting different gamers, the content is different and it is suitable for gamers of different preferences than the other editions.

Andrey Glukhov - Brean Murray, Carret & Co

Thanks, and the follow up, last year about this time you guys announced the dividend pay out and kind of disclosed the dividend amount, what are your expectations on the dividend this year, and when do you expect to announce it. Thank you very much.

(Foreign Language)

[Interpreted] As far as dividend, and we still need to discuss and approve it with our board of directors, and once we do we will have an announcement for everyone.

Operator

Our next question comes from the line of Alicia Yap with Citigroup. Please proceed.

Alicia Yap - Citigroup

Hi. Good morning and good evening, Ji, Eric and Rich, I have two questions. First of all, since you have cash balance of almost 800 million, could you comment on what would be the use of cash, and are you looking into some M&A, if so in what areas. And would you consider not just the gaming, but also look into the complimentary gaming related services?

(Foreign Language)

[Interpreted] Alicia yes, we do actually generate free cash every quarter. As you can see at the end of 2009, it is approaching 800 million. Well, we have several uses for this. Although Ms. Liu the president just mentioned dividend will be subject to the board approval. I think that that should be one of the possible usage for this cash. On top of that, we actually have the authorization of purchase back of our own stock of 150 million. So far we have not used that amount yet. I think in due time if there is need or necessary we therefore only will use that amount without a doubt.

I think you are right. For us the most important thing in the productive way to use this money will be to purchase some productive assets. We are looking to several routes. One of the very important route is our Win@Giant program. As we actually established Win@Giant program last year, it has been more than a year now, we actually have invested close to 9 teams, 9 projects including our licensing agreement. So this has been a very important usage of our money, but we think we would continue to beef up the Win@Giant programs.

Other than Win@Giant program, I think we will also look into some other areas including some of the assets related projects or you know, internet-related projects, but I think the bulk of the you know, investment into the assets will be related to our MMORPG development team and you know, development talents, this kind of projects. So I think yes, we will be focusing on you know, game related assets and try to make the best use of our cash.

Alicia Yap - Citigroup

Okay, thank you, and the second question is for your sales and marketing spend and the margins in 2010. So since you're going to -- you're trying to launch a number of new games this year, how should we think about your sales and marketing spend across the year. Do you plan to still have more disciplined spending or will you return to more creative and aggressive marketing campaign that you’ve previously employed and with that could you give us some color on the non-GAAP operating margin range, excluding the financial incentive?

(Foreign Language)

[Interpreted] Yes, as far sales and marketing expenses in 2010, yes indeed we do have more games in our pipeline that will be lost or promoted. So, naturally sales and marketing expenses should creep up, but we will find the appropriate level of marketing expenses according to each game’s performance. We will analyze each game’s performance during testing stages, look at users’ feedback, their expectations, churn rate, once the users try these games. So we will determine what we expect out of each game, and then determine the appropriate budget to allocate for each project. So in conclusion, we believe that sales and marketing expenses will continue to be controlled going forward.

(Foreign Language)

[Interpreted] Another point is that of course according to our chairman mantra that a game’s potential is really determined by the game play or fun, how well this game is designed, and not by the marketing strategy or tactics used to deploy during the game’s launch. As we've seen in the marketplace recently there has been games that have done very well during initial launch, but have died down after that. So we definitely want to avoid these types of situations, and focus more on ramping up games and having continuous and stable growth.

Alicia Yap - Citigroup

Okay, can I have one follow-up.

Eric He

Yes, go ahead.

Alicia Yap - Citigroup

We like to get your comments of given some of the recent developments on the competitors’ games, could you share your view on the overall industry growth. Are we entering a more mature stage or do you think the industry as you enter a very strong growth going forward, and based on your operation experience, so do you think that it is actually getting harder to attract new gamers now even though we have a pretty good content, and do you think gamers actually are spending shorter time staying in one game and easier to switch to new games these days?

(Foreign Language)

[Interpreted] Okay, the first part of your question regarding industry growth, yes our president Liu recently attended industry events hosted by GAPP, General Administration of Press and Publication held in (inaudible) in China. Many people in the industry attended this event, and analyzed the situation that you spoke of. In 2009, the industry grew at around 50% and the consensus among people in the industry is that in 2010 it should grow about 30% to 40%.

As for the second part of your question, getting new gamers, yes, it is indeed getting harder and harder to get new gamers. It's harder and harder to make games successful, but we realized that the most important thing is still to have good game design and make the game fun for gamers, and this includes many different aspects of the game's developments. You have to have great in game economy, good game play, good technology, good-looking graphics. So in general demands of gamers are going up, you know, marketing tactics need to be improved also while we will continue to strive to meet all these needs.

Operator

Our next question comes from the line of Atul Bagga with ThinkEquity. Please proceed.

Atul Bagga - ThinkEquity

Hi guys. Thanks for taking my call. Handful of questions for you, can you talk about, you mentioned that ARPU on ZT Online seems to be trending up in 4Q. Can you talk about how long does it take before we get to see ARPU in the same range, as it was in the second and first quarter of '09. Second, on gratification on the ACU and PCU number for fourth quarter that you shared, do they include ACU, PCU number on ZT Green, and if so can you just separate out and give us some directional highlight on how ZT Online might have fared in terms of PCU and ACU. And lastly I wanted to ask your competition, (inaudible) they have shared that in Q1 they expect the Mir II to be down significantly, and given that Mir II and ZT Online seems to be targeting similar audience, I wanted to see do you guys benefit from the deception in Mir II franchise. Thank you.

Eric He

Thank you. (Foreign Language)

[Interpreted] Yes for ZT Online, the original version of our flagship game, since the cancellation of Treasure Box in the third quarter, we have been working very hard to recover the game after the cancellation of Treasure Box. In the fourth quarter and especially in December we have seen that the effects are over, and ZT Online has stabilized and started to grow again. So in the first quarter and in 2010, we expect the growth from ZT online again.

In terms of user numbers between the different versions of the ZT franchise, ZT Online he original, has largest number of users followed by Green Edition and then followed by Classic edition. As far as Shanda’s Mir series of games, we can't comment too much on our competing games. We just acknowledge that Mir is a mature game, but is a independent game of ZT Online. So we don't really know how it will affect our game.

Atul Bagga - ThinkEquity

Perfect. Can I ask a very quick follow-up?

Eric He

Yes.

Atul Bagga - ThinkEquity

Can you just talk about how the investment in 51.com, what are your plans with that investment, and are you guys looking at the strategy of any more social games or is it more about acquisition of new customers? Thank you.

(Foreign Language)

[Interpreted] Yes, as for 51.com, and we would say that users have been very stable on that platform. We think that 51.com is a great social networking website in China, and yes, as for synergies between us and 51.com, we have been investigating possibilities into this area. We do have a couple of social games or projects in development. Two examples are one that is one project that is being headed up by our chairman Mr. Yuzhu, and another project that we are partnering with an American game designer.

So when these are ready, I'm sure we will think about possibly doing the -- working with 51 on these projects. As for other investments, we will continue to look at other social gaming companies or social networking companies. It is possible that we invest in other opportunities in the future, because as we've mentioned previously we do think there is an important convergence between online games and social networking.

Operator

Our next question comes from the line of Jenny Wu with Morgan Stanley. Please proceed.

Jenny Wu - Morgan Stanley

Thank you for taking my question. First one is on strong turnaround for the company in 1Q. Could you give us some guidance on 1Q growth, and secondly was the margin tends to expand, and another question that I see there is (inaudible) investment income in 4Q. What is that related to? Is that one-off or recurring. Thank you.

(Foreign Language)

Eric He

Okay, as we guided that the first quarter, we expect that our top line will you know, start to grow. It will be hopefully very, you know, sustainable turnaround situation for us on the top line. As for the margin trend, I think you know our gross margin and our operating margin will be pretty, you know, sustainable. However, in our operating margin specifically includes you know, some government incentive.

As you can see that typically our first quarters of any particular years that incentive is not as big as you know, at year-end. So it will affect our margin situation a little bit, and as to the items that Jenny you mentioned, $7.2 million, that is actually the other income under other income items. That particular one in fact is special technology funds incentive from one of our governments, city governments. So I would consider that as another so-called non-operating items that happened in the fourth quarter, and it will be unlikely to recur in the first quarter or the quarters you know, ahead of us.

Jenny Wu - Morgan Stanley

Okay, thank you. How about the tax rate?

Eric He

Tax rate, I think we are facing a higher tax rate. I think currently in 2010 our marginal tax rate will be you know, one notch higher from 2009 10% to 11%.

Jenny Wu - Morgan Stanley

Okay, thank you. And now the question you mentioned (inaudible) have come and then how many R&D people you're having now and how much (inaudible)?

(Foreign Language)

[Interpreted] Currently, we have approximately 900 people in our R&D department, and we expect that this will grow to about thousand people, and stabilize around there, but this figure does not include those teams that have joined us under the Win@Giant incubation program.

Operator

Our next question comes from the line of Wendy Huang with RBS.

Wendy Huang - RBS

Hi, my first question, (inaudible) you just mentioned that the whole industry is likely to grow 30% to 40%. So with several new games to be launched in 2010 from the Giant, do you expect Giant to outgrow the industry space?

(Foreign Language)

[Interpreted] Our management team will strive to meet this goal.

Wendy Huang - RBS

Okay. Maybe you can -- could you elaborate a little bit, among your game types now, which of them do you have high expectations?

(Foreign Language)

[Interpreted] Yes, to meet that goal this year we do plan on launching or marketing many new games, starting out we have ZT Online Green Edition that we plan to launch into open beta testing soon, and hope to reach new highs in terms of usage and spending in that game. Following that we have King of Kings III. This game has been in testing since last year. So we do think it has been mature and stable platform now. We've been enhancing this game continuously, and we will also launch this game into open beta testing. Then we had XT Online that was derived from our Win@Giant incubation program.

We plan to launch this into closed beta testing at the end of the second quarter, and then Dragon Soul 3-D game from our R&D office in Guangdong province. This game entered into limited closed beta testing recently in January, and we will also launch this into closed beta testing soon. So all these games, the four games that we mentioned above should have more launches or promotions starting from the second quarter through the third quarter of this year.

After that we plan to launch our highly expected ZT Online II, as a sequel to our flagship game. This is probably our most important game of this year, and we hope to leverage the ZT Online name. Now, this game includes many new things such as new game play, new in game economy, and various other new features. Gamers have high expectations, and have been waiting for this game for a while, and then at the end of this year we’ve recently announced that we will -- we signed an exclusive contractor to license (inaudible) online, MMORPG developed in Russia, and we will spend several months localizing this game, and powering [ph] it to gamers presenters in China, and hope to launch this game by the end of this year.

Wendy Huang - RBS

I have a second question on the revenue, last quarter you mentioned that you are trying to levy some tax tariff on the in game transactions. Could you update on the progress of your (inaudible)?

Eric He

Okay. I think I need to actually tell the analysts or the market that we're actually launching this new revenue model. This revenue model actually has bigger effect on the users psychology than on the accounting or financial treatment, because as we are introducing this new revenue model, we will recognize this so called 5% transaction fee in our games, you know but the rest of the accounting treatment actually is very similar to our previous treatment, which is that we will amortize 95% -- the rest of the 95% on the basis of this useful life of the items. So to us I think this is you know on the accounting side is pretty similar to what this used to be.

Operator

(Operator instructions) Our next question comes from the line of Adam Krejcik with Roth Capital. Please proceed.

Adam Krejcik - Roth Capital Partners

Yes, hi. Thanks for taking my question. Eric, I was just wondering if you could be perhaps a little more specific in terms of your expectations for growth in Q1, about two thirds of the way through the quarter, I think consensus in the street is looking for about 7% to 8% top line growth. Is that reasonable on the revenue line. Do you think it should be in that range, maybe above or below, any guidance would be very helpful. Thanks?

Eric He

Yes, Adam. I know that the market is really interested in finding out, what the growth rate is going to be. I think at this point yes, it is perhaps two thirds -- is well in the way of the first quarter, all I can say is we have seen that the recovery of our ZT Online original, and also green version really start to chip in in the first quarter. So, you know, I think what you said that single-digit, high single-digits recovery from fourth-quarter to first-quarter on a sequential basis is pretty much very likely. I think that is achievable numbers that we are expecting.

Adam Krejcik - Roth Capital Partners

Okay. I appreciate it. It is very helpful. And just on an unrelated question, I read somewhere about a new promotion that Giant might be doing that involved healthcare products. So, I was wondering if you could comment on whether or not that news article was true, and then number two if it is perhaps just elaborate on what you are trying to do. Thanks.

Eric He

You said the product on health care. I think because the management team and founder CEO and chairman prior venture was really to health care products or health hygiene. So we actually used Giant as a name of the company. There is actually a Giant Investment Corporation under the venture. So I can tell you pretty confirmed that Giant Interactive as a public company in the US, we actually dedicate ourselves in online gaming business. We would never actually look anything related to health care or any other industries. One of the doctrine that our CEO adopt is focus.

So we would definitely focus in this industry. I can assure you that we have never spent our energy, or resources or money into other business such as health care.

Operator

Our next question comes from the line of Eddie Leung with Banc of America/Merrill Lynch. Please proceed.

Eddie Leung - Banc of America/Merrill Lynch

Hi, good morning everyone. Hui Yuan, Liu, Eric, (inaudible). I have a question on the Green version as well, do you find the difference the new model of the green version or the game design. How does the conversion rate of the green version compare with let us say, the new version or other versions of ZT. Is this higher, lower or similar. Thanks.

(Foreign Language)

[Interpreted] Yes, from the onset we designed ZT Online Green Edition’s monetization to be very different from the other versions. And currently we have seen that ZT Online Green Edition has a much higher ratio of paying users compared to the original version.

Eddie Leung - Banc of America/Merrill Lynch

Got that. And I have a follow-up question on the government incentive, is it only a timing issue or the result of expirations of some incentive programs?

Eric He

Yes, the government incentive for us is refund of the sales tax that we pay to the city governments. Normally this is based on the prior year’s revenue, because as you know that city sales tax is value-added tax. It is levied on the basis of the revenue. So for example, in 2010 we will get this refund on the basis of revenue in 2009. Same situation in 2009, we actually get a refund of sales tax that we paid in 2008.

So yes, there is a time lag. To make the calculation more complicated that because we need to actually get refunds from the government, the governments will not be on time to pay you. However, in accounting sense if we don't receive the refunds we won’t be able to actually book or record this as our refunds. So, some times we need to actually work very hard, and to ask government to give us the money back.

So sometimes there is time differences, each quarters. So it will be kind of difficult to forecast whether this kind of a refund will happen in a very timely way. So this is very tricky and sometimes we need to work with the government very closely.

Operator

Our next question comes from the line of Gary Ngan with UBS. Please proceed.

Gary Ngan - UBS

Good morning everyone. Thank you for taking my question. I wanted to ask two questions, number one, for example given the similar amount of PCU and ACU, what would the revenue potential of ZT Green be compared to let us say the current run rates of ZT retail version?

(Foreign Language)

[Interpreted] Yes, ZT Online Green Edition is in its early stage of launch, and the figures we have are not that indicative of long-term where they will stabilize in the future, but currently we can tell you that the difference in spending is smaller than we had initially imagined. Spending for each user is lower compared to the original version, but there is a greater ratio, higher ratio of people who spend in Green edition than the original version.

Gary Ngan - UBS

Thanks. That is very helpful. My follow-up question is when we look at the ZT Online old version, after the monetization adjustment one in 2008 and the other cancellation of cash in 2009, what is the pay in concentration today compared to the let us say before the first half of 2008. Is that still 5% accounting for 50% of revenues?

(Foreign Language)

[Interpreted] Yes, indeed, after the two adjustments we have made in monetization of ZT Online, especially after the recent cancellation of Treasure Box, we have noticed a change in the concentration of paying users as they have actually increased, and that has definitely helped the recovery of ZT Online recently.

Operator

This concludes the question-and-answer session. Now I would like to floor turn back to Mr. Rich Chiang for final closing.

Rich Chiang

Thank you very much again for joining us today, and we look forward to updating you on our progress in the near future.

Wei Liu

Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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