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Get a free option on SNDA

|Includes:Shanda Interactive Entertainment Limited (SNDA)

There's no free lunch, right? But sometimes Mr. Market does send out some freebies.

SNDA has spun off its online gaming unit and listed as GAME. It still owns 71% of GAME. Based on today's stock price. GAME has market value of $2.17b. That gives SNDA's holding a worth of $1.54b. As of 4th quarter, SNDA hold a cash plus marketable securities of $1.9b. That values SNDA at $3.4b WITHOUT counting any other businesses. SNDA has recently moved up a bit and it has market cap of $3.08b based on today's price. Still, you need to discount the cash holding to arrive at current market value. Get a in-the-money call on cash for free isn't bad, right? (they recently announced they will buy back $300m shares)

Even better, SNDA also owns non-gaming business, which has an after-tax profit of $35mm. Let's be super conservative and give it a multiple of 7 (even though it grows as 40% annually), it worth $200mm. Fine, Market is still valuing SNDA as if this unit like non-exist. So, again, you are getting a free option on this earning.

Where is the risk then? In my opinion, a contraction of multiples on GAME will be most damaging. Market currently prices GAME with forward P/E of 9, the lowest in  Chinese online game sector. The average P/E of the sector? 32.

SNDA also has highest revenue among its peers, I mean, It's got more revenue than Baidu. With little debt, strong free cash flow generation and high margin, the downside risk seemingly is limited.


Disclosure: Long SNDA(have to)

Stocks: SNDA