A must-read comment on Shanda Interactive (SNDA)

Take a look at the following comment from a reader of The China Stock Blog:

HZ on Shanda Interactive (ticker: SNDA):

....SNDA is against headwind these days. For the past several months,
there are two issues that have clouded SNDA's growth prospect. One is
growth slowdown in its core market - Online game. The second is SNDA
still has not convinced investors it has a clear business model for its
IPTV strategy.

First, let's take a look at current competitive landscape in online
game industry in China. The hyper growth and high margin of online game
industry in the past three years have attracted more competition. From
NCTY, Tencent, NTES, to portals like SINA and Sohu and some less known
niche players, have all increased their resources allocation to eat
into SNDA's core market. In the same time, the macro environment have
been turning less friendly toward online game industry, similar the way
wireless SMS industry experienced two years ago, primarily due to the
government regulations and bad media coverage of more teenage addiction
to games, which sometimes have porn and violent contents, and so on.

While SNDA's lead position in online game has long been attributed to
its strong distribution channels through internet cafes nationwide. Now
with more PC penetration into families, bad publicity of online cafes,
and slowdown of online cafe expansion (just like online game itself, online cafe business has also run into fierce
competition and slower growth), traffic at online cafes has been
flat/down from its recent peak. That has a larger negative impact on
SNDA because of its heavy reliance on online cafe to sell its game
cards and also because its MMORPG (67% of its total revenue) generate
most of its revenue from internet cafe players. (MMORPG players tend to
go to internet cafe to play because these kids can meet/play with their
friends there. Also MMORPG requires high speed connection and cafe
internet connection speed is generally faster than home connection.)

SNDA realized the casual game may have more sustainable growth and
more demographic penetration, which can help diversify SNDA’s over
dependence on MMORPG. However the problems with casual game are it has
lower barrier of entry and therefore more competition. Casual game's
revenue per user is also lower than MMORPG. These may explain SNDA's
surprising 5.1% decline in casual game in Q2. Right now SNDA still has
its lead in this market, but inevitably, the growth and margin will be
impacted by more competition and slower overall market growth.

SNDA decided that they have to develop a strategy that can transform
SNDA from an online game operator to a more interactive media player.
Their bet is on IPTV, or an "interactive set top box" that they hope
can lead their business from internet cafe and PCs into families’
living rooms. Well, that's an ambitious goal and has been tried and
failed by many larger players like Microsoft and Sony in the past. SNDA
has to show people what makes SNDA a better chance to succeed this
time. So far, it has not done it yet.

For that I am shorting SNDA’s $45 calls.

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