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Perfect World continues fall on cost concerns, Morgan Stanley downgrade

  • Shares of Perfect World (PWRD -6.6%) continue the descent they began during AH yesterday. Although the Chinese web/mobile game maker beat Q2 consensus and issued strong Q3 guidance, investors appear to have been left wanting.
  • A chief concern is ballooning costs. Cost of revenue grew 37% Y/Y in Q2 while opex grew 18.6% Y/Y. Revenue was up 4.7% in the same period. Marketing expenses were the largest culprit, up 60.1% Y/Y. Pacific Crest noted, "Q3 guidance is strong but spending is expected to remain elevated."
  • Morgan Stanley chopped its rating earlier today to Equal Weight from Overweight following Perfect World's Q2 release: "This mainly reflects rich valuation. Perfect World is trading at 10.7x 2014e P/E, vs. 4.6-10.8x for peers." However, the bank raised its PT to $20, reflecting its expectation of strong revenue growth in 2H on the back of "strong reception of new games such as Saint Seiya Online and Swordsman Online."
  • Perfect World is up 81.1% YTD, its climb nearly two-fold that of peers.
  • Other Chinese game makers: Shanda Games (GAME), NetEase (NTES), Giant Interactive (GA)
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