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Perfect World (NASDAQ:PWRD), China's leading online gaming company, created a new console division in December 2013 to target current and next-generation console (such as XBox One and Playstation 4) users. Perfect World specializes in developing MMORPGs (massively multiplayer online role playing games). A MMORPG is a genre of video games in which a number of players interact with each other in a virtual world by assuming character roles. The company intends to bring its free-to-play online games from PCs to consoles through its new division. [1]

We think that Perfect World's move to create a console division is well-timed since the Chinese government recently lifted its ban on the sale of video gaming consoles. This will open the doors for consoles to the world's third largest video game market by revenue. Perfect World is the leader in free-to-play PC titles in China, and its new division will give it leverage to capture the console market. The company's active paying customer base has been falling year over year since 2009. We believe that Perfect World's games for consoles could help it keep its customer base from declining further.

We have a price estimate of $17.14 for Perfect World's stock, implying a discount of about 15% to its market price.

Consoles Could Help Perfect World Cap The Decline In Its User Base

The Chinese video game industry generated $13 billion in revenues in 2013. This represents about 15% of the worldwide video game marketplace even though video consoles were banned in China until recently. The Chinese government lifted the ban in early January 2014. [2] Online client-based games account for more than 60% of the Chinese video game market and presently dominate the industry due to the 14-year ban on console sales. [3]

Online game developers such as Perfect World have benefited from the ban. Developers must however keep adding new games and extension packs to maintain user stickiness to games. While Perfect World's revenue from games in China increased from $177 million in 2008 to $235 million in 2012, we estimate that its active paying customer base declined from 1.6 million to 1.0 million during the same period due to factors such as 1) failure to achieve the desired level of popularity for certain games; 2) slow pace in launching new games; 3) increased competition; and 4) the company's anti-cheating efforts.

Perfect World will be able to reach out to a whole new audience-and therefore protect its customer base by offering its games on consoles. Over the past years, consoles have become increasingly popular among video gamers. Gartner estimates that consoles accounted for about 47% of the $93 billion worldwide video game market in 2013. Consoles are expected to continue their dominance over the video gaming market, which is forecast to reach $111 billion by 2015. [4]

In addition, Chinese gamers prefer free-to-play games with in-game buying activity over game titles that require a purchased. According to Hong Kong-based brokerage CLSA, the average Chinese gamer earns over $600 a month, making console titles expensive since they usually cost between $33 and $50. [5] We believe that Perfect World has a greater advantage over paid game publishers since its games can be played for free. The company also has a vast international market for consoles to explore.

Perfect World has already confirmed the launch of Neverwinter for consoles. Neverwinter is an MMORPG developed by Cryptic Studios, a subsidiary of Perfect World, and was ranked second by MMORPG.com in its list of "The Best MMOs of 2013." [6] We expect Perfect World to launch more existing and future games on consoles in order to reach out to more users.

Disclosure: No positions.

Source: Perfect World Creates New Division To Target Consoles