The9: Still Attractive Despite WoF Weakness

| About: The9 Limited (NCTY)

Shares of The9 Limited (NASDAQ:NCTY) have gained more than 5% since I published a positive article on new game World of Fighter (WoF). My recent tracking suggests WoF's Peak Concurrent Users (PCU) have dropped to around 100K from its peak of over 200K. Despite its recent weakness, WoF is already a successful game that has benefited The9 a lot in terms of profits and morale. In my view, NCTY remains attractive due to its improved business fundamentals as a result of recent acquisitions and management changes.

WoF has significant positive impact on The9 despite its recent decline. According to my tracking, starting from mid-February, WoF stopped being one of the top 20 most-played Chinese online games, and its daily PCU has remained at around 100K since then. However, I believe WoF is already a business success. As a side-scrolling fighting game, it stayed as a top-20 game for over a month while competing against Tencent's (OTCPK:TCTZF) dominant side-scrolling game DNF. This is already the best record for a Chinese-developed side-scrolling game. WoF is still a popular game at its current usage level. I forecast that WoF will generate over $10 million revenue in 2010 and serve as a building block for The9's turnaround story. In addition to its financial contribution, WoF proves that The9's in-house game development team has decent skills. I believe this success has boosted the morale of The9's employees, who have been working under great pressure after the company's World of Warcraft license expired on June 7, 2009.

Recent acquisitions and management changes have improved The9's business fundamentals. Since the beginning of 2010, The9's founder Jun Zhu has become much more involved in the company's business, and the company recently acquired strategic stakes in Red 5 Studios and Fire Rain, two development teams led by well-known industry veterans. These are both positive changes to The9's business fundamentals, in my view. The return of Jun Zhu enables The9 to act more aggressively and effectively in acquiring game development teams and licensing externally developed games. Fire Rain's strong expertise in game engine and related tools gives The9 the capacity to develop and launch multiple games per year, thus reducing the risk of excessively relying on any single game.

Disclosure: No positions.