The9 (NCTY) closed at $6.57 up 7.5% on Thursday. The stock is up over 13% over the past week on the heels of news of another Firefall licensing deal, a new game launch, and cost cut plans. In the past week, NCTY has outperformed many of its Chinese gaming peers including Perfect World (PWRD), Changyou.com (CYOU), NetEase (NTES), Giant Interactive (GA), and Shanda Games (GAME).
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We believe the recent rise in stock price is due to a number of factors:
1. Successful response to Firefall at PAX East gaming convention last weekend. Firefall is The9's upcoming hit game developed by Red 5 Studios, which is owned by The9. Registered users waiting to play Firefall jumped from 325,000 before PAX East to over 390,000 in less than one week.
2. New $10MM licensing deal reported. A major Chinese gaming news site reported on Monday that The9 is entering into a licensing agreement with Innova Systems to operate Firefall in Russia. The9 announced a $23MM deal with Garena for the Southeast Asia licensing rights in November 2011.
3. Successful launch of open beta for ShenXianZhuan. ShenXianZhuan is The9's self-developed MMORPG game based on China's folklore of its immortal gods. The game launched in March and is reported to have generated 20MM RMB ($3.2MM U.S. Dollars) in its first month. This is a substantial development as this implies The9 could report a 70% increase in Q1 revenue and a 200% increase in Q2 revenue compared to Q4's reported $4.4MM in revenue.
4. Cost cuts in China reported. A Chinese news site reported that The9 has made staff cuts. The9 announced that these cuts were implemented in order to improve operating cost efficiencies. We have confirmed with a company representative that these cuts were related to non-profitable projects and were implemented by the company in order to position itself for profitability. No staff related to the Firefall project were cut. We view this as positive news as it indicates to us that The9 is focused on driving profitability and shedding unnecessary costs to focus its energies on successful projects such as Firefall and ShenXianZhuan. A quick check of Chinese online recruiting site 51Job.com (JOBS) also shows that The9 is still recruiting for certain positions and posted a new job opening for programmers on April 12th.
Even after its recent rise, we believe The9 offers huge upside potential as it currently trades for less than its cash value of $6.96 per share. With a strong initial response to ShenXianZhuan's open beta and Firefall's fast growing user base, we believe we will see upside revenue surprises from The9 in the coming quarters. As The9 begins generating meaningful revenue, we believe the valuation of the company could increase substantially as the focus of investors shifts from The9's balance sheet to its projected earnings.
Disclosure: I am long NCTY.