3 New Ideas on China Internet Stocks

by: Xiaofan Zhang

In this article, I summarize my latest investment ideas on China Internet stocks based on major events and data points in the past week.

Giant Interactive (NYSE:GA) still has plenty of upside due to new games' strengths. GA rose 4.8% last Friday on good 4Q09 results and 1Q10 outlook. I believe GA still has plenty of upside because most investors have not noticed recent strengths of Giant's new games Golden Land (webpage game) and Dragon Soul (3D MMORPG), which in January achieved PCUs of 80K and 70K respectively, according to my research. These two games are still in closed beta testing, and their usage will grow significantly after large-scale marketing begins ahead of their open beta. Based on my research, I forecast Dragon Soul will surpass 200K PCUs in 2010 and become Giant's next hit game. I believe Giant's stock is a "Strong Buy" at current levels.

Tencent (OTCPK:TCTZF) QQ surpassed 100 million PCU. On March 5, Tencent's flagship QQ instant messaging service reached 100 million peak concurrent users (PCU). This milestone achievement shows Tencent's user base is still growing rapidly in terms of scale and stickiness. I forecast QQ's growth momentum will enable Tencent to grow 2010 revenue and net profit by more than 40% to RMB 17.5 billion and RMB 7.2 billion, respectively. Trading at 35x 2010 EPS, I believe Tencent's stock is a "Buy" at current price levels.

Shanda Games (NASDAQ:GAME) innovated in-game economic system. On March 5, Shanda Games started the testing of New Mir Sidestory (Xin Chuanqi Waizhuan), the latest expansion pack for its game Mir Sidestory. In the new version, Shanda acts as a middleman that buys and sells players' virtual items. I believe such a "C2B2C" model will stimulate in-game economic activities and create strong financial incentives for middle class players to play the game harder and longer. I believe Mir Sidestory will likely reverse its downward usage trend thanks to this new version, and Shanda's other games may adopt this model in the future. As the industry leader in innovating in-game economic systems, Shanda is well positioned to overcome recent difficulties in growing revenues.

Author's Disclosure: no positions