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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 (NYSEARCA: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.
  • Source: Analyst Downgrades Shanda Interactive to "Sell"; EZ Series Won't Emerge Until '07 (SNDA)