Jim Sun of Evolution Securities China released a note to clients earlier today on Shanda Interactive (ticker: SNDA). Key extracts:
Rating change. We are downgrading our recommendation on Shanda from HOLD to SELL. Not only are we anticipating a significant quarterly reduction in 1Q06 MMOG revenue due to Shanda’s revised pricing strategy, but higher-than-expected 4Q05 operating expenses are, in our view, unlikely materially improve. Reduced target price. We have reduced our target price from US$16 to US$10, equivalent to 9.2x adjusted FY07e EV/EBITDA, and 10.4x adjusted FY07e ex-cash diluted EPS. Our EV/EBITDA multiple is premised on 15.3% FY07-FY10 EBITDA growth and a benchmark 0.6x PEG multiple. MMORPG. In part owing to the introduction of a new pricing model for Mir II, Woool and other games in December 2005, segment revenue declined 30.2% qoq to US$28.6m, coming in 7.8% below our US$30.9m forecast. In addition, average concurrent users (ACCU) for Mir II and Woool fell 13% qoq to 548k in 4Q06 to see average revenue per user (ARPU) decline 20.8% qoq from RMB 0.24 to RMB 0.19. Casual game. Segment revenue dropped 23.5% qoq to US$10.1m – 24% lower than our US$13.3m estimate – as users for BNB fell. However, after including GameTea which Shanda acquired in 4Q05, peak concurrent users (PCCU) for casual gaming improved from 1.5m in 3Q05 to 1.7m in 4Q05. EZ series products. We believe the lack of content will hamper the take-up of EZ series products. As a result, we do not expect that this product will emerge as a significant growth driver for Shanda until late 2007.