Our EquityAnalytics department is always updating price targets and ratings on companies that we cover based on new information. Our price targets and ratings are thoroughly researched and use financial analysis tools to determine stock prices. Today we are updating the following companies: DangDang (DANG), Giant Interactive (GA), Shanda Games (GAME), Kongzhong (KONG), NetEase (NTES), Perfect World (PWRD), Sina (SINA), and Youku (YOKU).
The chart below shows new ratings, price targets, and buy/sell ranges vs. old ones:
China DangDang: Downgrade from Buy to Hold, Decrease PT From $9.50 to $9
China DangDang maintains basically the same price for us as we slightly dropped our PT on lower expectations for the year. We are still looking for a 2014 profitability model with 2015 showing a lot of growth for the commerce web site. The company's latest quarter was slightly under our expectations, and their profitability model looks to be very weak for 2012 as well, despite sales growth. The company, though, has a very tempting business model as the "Amazon of China." As more and more Chinese individuals use the internet and buy goods online, DangDang will continue to be appealing. We cannot give any lofty goals for the company, though, until we start to see some results of profitability.
Giant Interactive: Maintain At Sell, Increase PT from $3 to $4
Giant Interactive continues to be maintained at Sell as we remain skeptical of the company's equity value. We increased our expectations across the board after the company's latest results. The issue, for us, remains that the company has extremely high levels of working capital increases. The continual rise of working capital causes a hit to equity value in our model as it takes away from free cash flow. The company has heavy rises of working capital. The issue with that is high working capital means large debtor and stock levels, which is true for GA as they have over 250M shares outstanding. We would see a dramatic increase in our price target if working capital averages came down. The company, though, lacks financial health in our opinion as those levels continue to rise.
Shanda Games: Maintain At Buy, Increase PT from $6 to $7
Shanda Games gets a slight bump up as the company's latest round of results were better than expected, which caused us to raise our expectations for the company. The company's depreciation also rose more than expected, which also helps equity value. Capex and debt levels, however, rose as well, which did cause us to only slightly increase expectations. Cash is better for the company as well, which signals better health. The company's gaming offerings continue to remain compelling to us, and we believe they are an excellent value at 5.5 future PE.
Kongzhong: Downgrade from Buy to Hold, Decrease PT From $6.50 to $5
Kongzhong underperformed our expectations for the latest fiscal year. The company lost more money than we expected, and while 2012 looks to be a turnaround for the company, we are less excited about the company as execution seemed to be under our expectations. The company has a nice mixture of games that have been well received, and their upcoming "World of Tanks" game looks compelling. At the same time, we had to drop expectations due to their underperformance. Guidance for 2012 was right in line with expectations. The company is well off in financial health, which is appealing. If we see the company start to execute slightly above expectations, this company could quickly regain as one of our favorites. For now, we believe we were overambitious.
Netease: Maintain at Hold, Increase PT from $50.50 to $60
Netease put together a very solid FY in 2012 that outperformed our expectations. The company saw their tax rate lower. Additionally, we decreased the company's discount rate as their growth in sales seems to be continuing to improve at a higher rate than expected. The company has definitely done a great job with their game lineup as well as been able to see large amounts of revenue and earnings come from licensing the "World of Warcraft" line from Activision Blizzard (ATVI). The company, recently, renewed the contract with ATVI for another three years. The move should also allow for the company to have access to ATVI's "Diablo 3" game as well as next expansion set on WoW. Overall, the license is crucial to the continued growth of NTES. The combination of the license and recent strong results are what made us raise expectations. The market is currently pricing in a lot of that as well, so we will have to wait for some pullback to dive into it.
Perfect World: Maintain at Buy, Increase PT from $18 to $23
Perfect World continues to maintain as one of our favorite Chinese gaming companies. Despite the company's recent weakness, we still believe the stock has a lot of value and could see a solid end to this year. The company is one of the cheapest stocks out there at a 0.6 future PE ratio, which is very cheap...especially for an industry that tends to price in around 15x future PE. The market has basically no faith in the company's ability to create any earnings growth moving forward. The company, further, announced in mid-March that they are offering a $2 special dividend. The company has ample cash at over $320M on their balance sheet, and they continue to outpace earnings. We believe all of PWRD's drawbacks have been on investor fear. At this point, shares are cheap as they can get and should be looked at for upside.
Sina: Maintain at Sell, Decrease PT from $60 to $49
We continue to feel less and less excited about Sina despite the ability for lots of organic growth as more and more Chinese individuals start to use the internet. One of the main reasons we are skeptical on SINA is that they have yet to successfully monetize Weibo in our opinion. The company has continued to see earnings decrease, and their latest round of results were well below our expectations. The company needs to show that they can monetize Weibo successfully before we would be purchasing any shares. Further, if they cannot successfully monetize it, SINA may see an even larger price decrease. We are skeptical right now, and we would not invest on hope that Sina can clean this situation up.
Youku: Maintain at Sell, Decrease PT from $11 to $5
Youku is just not a good investment right now. Any investment in the company is 100% speculation about future profitability. The company, at this point, looks to have no profitability in sight. The problem is monetizing a large library of videos similar to Youtube. Advertisements are one way, but the company seems to be quite far from getting to the current valuations. We have configured profitability in 2013 with over $100M in operating income by 2015. This aggressive model is not able to come up with any price target near current levels. We do not see what others are seeing, and we would not be invested here.