Perfect World Shares Appear To Have Room To Run

Despite rising over 25% last Friday, Perfect World (PWRD) shares, which had its trading debut just a day before, have more room to rise. PWRD operates in the fast-growing Chinese 3D massively multi-player online role-playing games (MMORPGs) industry. It has the advantage of offering domestically developed online games, which attracts more customer loyalty in China.

According to the IDC, online games revenues grew 73.5% in 2006 to US$816 Mil, and expects this number to grow 30.2% a year on average to US$3 Bil by 2011. Domestically developed online games have a market share of 64.8% currently.

PWRD currently offers 4 MMORGPs, including the top 2 3D online games currently: Perfect World and the Legend of Martial Arts. It plans to release 2 more MMORGPs and 1 casual game (game ends within a short period of time ) by early 2008. PWRD's revenue model is a combination of both time-based and item-based model, with the latter dominating. An item-based model allows players to purchase performance-enhancing items like clothes, accessories and pets during the game.

Pre-paid cards are sold through distributors, while points are also sold online. PWRD has also licensed its games to operators in 11 other countries. Its leadtime for game development is as short as 6 months, allowing it to further take advantage of the rapidly growing industry.

1Q07 revenues jumped more than nine-fold to Rmb87 Mil, and is already 88% of the 2006 full-year revenue figure. The company has already become profitable to the tune of US$5 Mil during the quarter, compared to losses during the past 3 years. Assuming a that the US$5 Mil in 1st quarter profits will only account for 15% of 2007 full-year profits (this is very conservative as the growth momentum on even on a quarterly basis is very high), the full-year figure will come out to US$33.9 Mil. Dividing this by the 55.86 Mil outstanding ADSs after the IPO, this comes out to EPS of US$0.61 per share.

This comes out to about 42x PE on a trailing basis, with growth sure to accelerate further in 2008, as the company is only beginning to come into its own. To take account of the its growth potential, a 70x trailing multiple may be appropriate, with a potential target of US$42.70 per share.

Disclosure: Author is long PWRD

Comments

[Wan Eric:]

just look at peers' PE. So stupid!

2007 Aug 01 10:01 PM