Giant Interactive Group: Leading Position in a Growing Industry

Oct.30.07 | About: Giant Interactive (GA)

Giant Interactive Group (NYSE:GA) is one of China's leading online game developers and operators in terms of revenues. The company focus on massively-multiplayer-online, or MMO, games that are played through networked game servers in which tens of thousands of players are able to simultaneously connect and interact. The company has a team of over 140 experienced game developers, which includes dedicated product development and enhancement teams for each of its MMO games. As of June 30, 2007, company had 797 employees.

Its first internally developed MMO game, ZT Online, was commercially launched in January 2006. ZT Online's compound quarterly growth rate was 39.6% and 45.3%, respectively, in terms of peak concurrent users and average concurrent users from the quarter ended March 31, 2006 through the quarter ended September 30, 2007. The company plan to commercially launch its second MMO game, ZT Online PTP, a pay-to-play game based on the ZT Online free-to-play game, and its third MMO game, Giant Online, in the fourth quarter of 2007. The company acquired the intellectual property rights of free-to-play MMO game, King of Kings III, from Taiwan Lager Network Technology Co., Ltd., or Lager Network, a developer in Taiwan, in the third quarter of 2007, and currently intend to commercially launch the game in China in 2008.

Network/Market Reach

The company has built nationwide distribution and marketing networks to sell and market its prepaid game cards and game points. As of August 31, 2007, its distribution network consisted of over 200 distributors and reached over 116,500 retail outlets, including Internet cafes, software stores, supermarkets, bookstores, newspaper stands and convenience stores located throughout China. The company also sell game points through its official game website.

As of August 31, 2007, its marketing network consisted of over 250 liaison offices located throughout China.

Revenue

The company generates revenue from following segments:

  • Online game revenues represent revenues generated from free-to-play games, and starting in the fourth quarter of 2007, from pay-to-play game through sales of prepaid game cards through its distribution network and game points on its website.
  • Overseas licensing net revenues represent license fees that it derives from the license of its games to other operators.Online game revenues contribute nearly 99% of the company's revenues.

Competition

The company competes principally with the following three groups of competitors in China:

  • Domestic online game developers and operators in China, including CDC Corporation, Kingsoft Corporation, Perfect World Co., Ltd., Shanda Interactive Entertainment Limited, Tencent Holdings Ltd and The9 Limited;
  • Major Internet portal operators in China, including NetEase.com, Inc. and major Chinese Internet portals, all of which leverage their existing strength in aggregating content, and marketing and cross-selling among their established Internet user base to promote online games; and
  • Overseas online game developers, including Blizzard Entertainment, Nineyou International Limited and Webzen Inc.

Financials (in thousands)

The company's financial year ends on December 31.The company shows nearly 700% revenue growth in H1 2007 as compare to H1 2006Company shows over 1000% profit growth in H1 2007 as compare to H1 2006Company's cash flow is sufficient for its future growth.Balance sheet look less strong due to nearly US$99 million of dividend payable.

The growth in revenues and profit is due to steep rise in:

  • Quarterly average concurrent users from 163 in quarter ended June 30, 2006 to 515 in quarter ended June 30, 2007
  • Rise in average revenue per from 117 RBM in quarter ended June 30, 2006 to 295 RBM in quarter ended June 30, 2007.

Valuation/Offer Value

At its offer price of $13 per share company shares are available at PE nearly 25 (annualizing First half FY 2007)

Our IPO Rating

9 on scale of "1 to 10" (10 for best)

Company/Industry Expectations

(These are just assumptions and the company may perform differently)

  • The research company IDC expects the industry to grow at 25% (compounded annual till 2011)
  • The company is expected grow in tandem with industry.

Negatives

  • Complex corporate structure.
  • Revenues can fluctuate quarter on quarter.
  • Most countries are implementing laws to avoid online game addiction among its users/online player any tough law can hit company hard.
  • Currently high dependence on Chinese market.
  • High dependence on single game.
  • Short operational history.
  • Operating margins are very high and can come under pressure with rising competition.
  • The company currently enjoy tax holidays for almost all of its operations and within next couple of years it will lose most of these tax holidays and may have to pay tax @ 20% - 30%.
  • The company has shown a tremendous growth in revenues and profits in last couple of years in future this type of growth is not expected due to bigger base and rising completion.
  • The company is expected to introduce few more game in market in near future this can put pressure on margins due to high marketing/advertising expenses, moreover the success of these games is not guaranteed.

Positives

  • Size/leading position: The company is one of the largest player in its industry and operational area.
  • History of high growth.
  • Integrated operation: The company is a developer as well as distributor/operator of online games in Chinese market this allow company to operate with high margins.
  • Wide presence in operating area: As of August 31, 2007, its distribution network consisted of over 200 distributors and reached over 116,500 retail outlets which allow company to reach more and more customers.
  • High operating margins.

This article reflects personal view of the author about the company and one must read offer prospectus and consult its financial adviser before making any investment decision.