Perfect World a Perfect Play

I am beginning a stake in Chinese gaming company Perfect World (PWRD) in the $30.70s. I tried to buy this 2 days ago near $29 but Marketocracy.com did not have it in their database (ugh). So now it is ready to be bought, so I'm paying up 5.8% from where I had wished.

Perfect World is part of a cohort of Chinese gaming companies (some others include Giant Interactive (GA), Netease (NTES), and Shanda Interactive (SNDA)) Unlike American video games, I don't have any sophistication or window into which games actually will be the big winners since many are based on domestic folk lore/tradition and the like. Not being a 14 year old Chinese teenager, I don't have that knowledge base, so I don't which company will have the "hot games," but I like the space, and I chose Perfect World vs peers for some other factors

1. lower end of valuation on forward estimates vs peers
2. smaller share count versus peers (which means any incremental revenue gains will be better reflected in earning PER share) and
3. (as of Tuesday) it had fallen back to a key support level. (which it has since bounced off)

But I'd be lying if I said, I clearly see their games as superior to any peer. But the model is very interesting - most of these games are "free" to play but you pay for items within the game.

I own Sohu.com (SOHU) which is part 2nd tier search engine and part gaming; the gaming arm was the hero last quarter so this is yet another reason to be interested in this sector. [Apr 28: Sohu.com Crushes Estimates - Up 15%] Sohu.com has put on a 50% type of move within a month.

Even here at $30-$31 the stock trades 18x 2008 estimates, for 30-40% type of future growth (could be much higher, I'm being conservative). These names are very volatile and an earnings miss has the potential to drop them 30% overnight - Perfect World reports next Monday - I believe there is however a good chance we could see a very good upside surprise. But I am not going all out and starting with a 600 share buy or about 1.6% of portfolio. If I'm wrong and we have some miss, I'll be happy to buy lower as the earnings story should not change in the future.

Other benefits; this is a much smaller company than we typically own at a $1.6 Billion market cap (gives us some more small cap exposure and smaller companies are always easier to grow faster), and it is not related to commodities so it continues the plan to find good growth stories that diversify away from that theme (so when the market trashes those groups, which is long overdue, we have some things that are immune). Last, it continues our theme away from the United States of Subprime - we are going to a country where the average consumer is becoming richer, not poorer.

Here is a summary of their last earnings report

• Chinese online gaming company Perfect World Co. said Monday 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. In the most recent quarter, Perfect World used a much greater number of share to calculate its earnings on a per-share basis. Analysts polled by Thomson Financial expected, on average, a profit of 27 cents per share on $29.8 million in revenue.
• The company's revenue rose to RMB 258.4 million ($35.4 million) from RMB 60.8 million in the year-ago quarter.
• 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 percent from the year-ago quarter.

Long Perfect World in fund and personal account