Perfect World Living Up to Its Name

Perfect World Co. (PWRD) is living up to its name in terms of the last two quarters' results. It has averaged an 85.5% surprise over that time. New game launches are driving revenue and earnings growth as is a growing Chinese economy. Two of the six covering analysts have lifted their numbers over the past month. The stock is very attractively valued at a PEG ratio of 0.7.

Perfect World Co. operates as an online game developer and operator in China. It primarily develops three-dimensional (3D) online games based on its proprietary Angelica 3D game engine and game development platform.

Its 3D massively multiplayer online role playing games (MMORPG) include Perfect World, an adventure and fantasy game with traditional Chinese settings; and Legend of Martial Arts, which is based on a TV drama series with the same Chinese name and is an adventure story of Chinese swordsmen set in an ancient kingdom.

Strong 4th-Quarter Profits

In late-February, the company said that it swung to a fourth-quarter profit and beat analysts' estimates as online game operation revenue jumped, aided by the launch of some game expansion packs. For the quarter that ended Dec. 31, Perfect World earned RMB 146.2 million ($20.1 million), or RMB 2.48 (34 cents) per ADS. This compares with a loss of RMB 11.1 million, or RMB 0.43 per ADS, in the same quarter last year. The EPS of 34 cents beat estimates by 11 cents.

Perfect World's online game operation revenue rose to RMB 230.2 million ($31.6 million) from RMB 59.8 million, while the company's overseas licensing revenues grew to RMB 28.2 million ($3.9 million) from RMB 1 million. The company also said the number of active paying customers for games that follow its item-based revenue model rose to 1.6 million -- up 159.9% from the year-ago quarter.

Guiding Higher

PWRD said that its first-quarter revenue will beat analysts' projections due to anticipated growth from the launch of new games and revenue from current games. Revenues should come in around $39 million, versus views of $32 million. The company added that it intends to launch open "beta" testing for the new game "Hot Dance Party" by the end of the first quarter. Beta testing is an initial testing period that a game goes through before its official commercial release.

"2007 was a great year for us and our fourth quarter results came in well ahead of our expectations," commented Mr. Michael Chi, Chairman and Chief Executive Officer of Perfect World. "I believe our achievements were driven by our ability to successfully develop and operate new games while maintaining user interest in our portfolio of existing games. This demonstrates our commitment to deliver solid results and maximize shareholder value."

The company has posted an average surprise of 85.5% over the past two quarters. Current-year earnings estimates have increased 19 cents to $1.56 per share over the past 90 days. Two of the six covering analysts have lifted their numbers over the past month. The stock is very attractively valued at a PEG ratio of 0.7.