Giant Interactive Group: Great Potential in Play

Perfect World (PWRD), move over…there’s a new player in town. After profiling Perfect World in October, I was amused to see that one of the first IPOs in November is Giant Interactive (GA), a direct competitor of PWRD. Since the entire sector looks very attractive, I indicated for a good bit of the stock and even though the deal was tight, my fund managed to get some shares on the offering. The stock did very well rising nearly 20% on its first day of trading in the context of one of the sharpest market declines so far this year. It appears to me that if the stock can perform so well in a depressing environment, it could mount serious strength in a more constructive market.

Looking into the business model, GA operates a free-to-play Massively Multi-player Online game [MMO] and receives revenue from virtual products that are bought for use in the game. The trend in the industry is to offer the game play for free in order to lure in users who become attracted to the game and want to be more involved. The users often purchase particular items for their character within the game such as weapons or tools or aesthetics. Once a game is launched and active, developers continue adding new features in order to drive further traffic and further purchases. Giant has taken steps to create prepaid cards that users can purchase instead of making online purchases through the game. This way the company does not have the burden of many small transactions, and users are able to use the card throughout the game until the balance runs out. This also helps to create a loyal customer base as users will likely continue to play as long as they have some balance remaining.

While Giant only has one game outstanding at this time, they have collected impressive revenues from their ZT Online franchise. The company plans to launch two new games in the fourth quarter (ZT Online PTP and Giant Online). While these new games will likely have some cannibalization effect on the current ZT Online players, that will likely be offset by the positive revenue of those players purchasing items in the new games. An additional game dubbed “K III” will be launched in 2008 so the company will have a more diversified stream of revenue.

There is no shortage of competition in the MMO field. The following is a list of some of the major competitive games and the operating company.

• Fantasy Westward Journey - Netease.com Inc (NTES)
• World of Warcraft - The9 Limited (NCTY)
• Tian Long - Sohu.com Inc. (SOHU)
• Zhu Xian - Perfect World Co. (PWRD)
• MIR - Shanda Interactive Entertainment (SNDA)

Competition is fierce as game developers must vie for “featured game” status in many of China’s internet cafe’s. Since the games typically take up a significant amount of hard drive space, most cafe’s only allow a select number of games to be loaded onto the machines. Placement on a majority of these lists is crucial to survival in this business.

Because the stock is so new, analysts have not yet posted earnings estimates, price targets or recommendations. This is likely to be an undiscovered name for the next few weeks until restrictions are lifted on the underwriters. Once the story begins to get out, I anticipate a quick lift in the stock price and so I will likely be building a position over the next week or two. There are special risks involved in trading newly issued stocks so please exercise caution, but the potential for an exciting increase is definitely in play.

Disclosure: Author has a long position in GA

Comments

[davidinchina]

They priced their IPO at a rich valuation considering this is a one trick pony. One of their in-house developers told me that their upcoming titles were okay but nothing special, and quite (too) similar to Zhengtu Online. However a big factor in the success of their existing title is heavy marketing and so maybe they can make their upcoming titles a success.

[davidinchina]

They priced their IPO at a rich valuation considering this is a one trick pony. One of their in-house developers told me that their upcoming titles were okay but nothing special, and quite (too) similar to Zhengtu Online. However a big factor in the success of their existing title is heavy marketing and so maybe they can make their upcoming titles a success.

[davidinchina]

They priced their IPO at a rich valuation considering it is a one-trick pony. One of their in-house developers told me that their upcoming titles are okay but nothing special, and quite (too) similar to the existing Zhengtu Online. However the original game was okay because of heavy marketing so maybe they can do the same for their upcoming titles.

[mj]

I am glad you disclose you have a long position in this.
And best of luck!
You commit the crime of promoting a stock without adequate research and just selling hype-this stock has been exposed as a one trick pony!

No wonder its trading at at its nadir right now!