Shanda Games: Expecting Solid Q4 Earnings

Includes: GAME, SNDA
by: Xiaofan Zhang

Chinese gaming company Shanda Games (NASDAQ:GAME), a subsidiary of Shanda Interactive Entertainment (NASDAQ:SNDA), will announce 4Q09 earnings and 1Q10 guidance on February 28 EST.

I expect the company to report revenue of $195 million, up 5% Q/Q and at the high end of management's guidance range. I believe such solid performance, driven by steady game usage of "Legend (Chuan Qi) Series", has enabled Shanda Games to remain the second largest Chinese online gaming company in terms of revenue.

Looking ahead, I expect the 5-game Legend Series (Mir 2, Woool, Chuan Qi Wai Zhuan, Chuan Qi Gui Lai, Chuan Shi Qun Ying Zhuan) to drive Shanda's stable growth in 1Q10.

Legend Series continued to grow steadily in 4Q09. In the last quarter, Shanda's Legend Series grew Average Concurrent Users (ACU) by 4% Q/Q to 423K, with total revenue increasing 5.3% Q/Q, according to my research.

The steady performance was primarily driven by strong revenue growth of Chuan Qi Gui Lai and Chuan Shi Qun Ying Zhuan, two new games in the Legend Series, which offset slight declines of Mir 2 and Woool. I note Mir 2 and Woool had 140K and 108K ACUs in 4Q09. The other three "Legend Games" had a combined ACU of 175K, accounting for 41% of total ACUs for the Legend Series.

Such an ACU mix indicates Shanda has successfully diversified its revenue away from Mir 2 and Woool. I suggest that investors take a fresh look at Shanda's revenue concentration risk: The company's dependence on Mir 2 and Woool is actually much lower than investors' consensus.

Current trends suggest Shanda will likely achieve stable growth in 1Q10. Based on my research, daily average usage of Shanda's major games has been stable in 1Q10 despite short-term weaknesses during the Chinese New Year holidays. Legend Series has remained the major growth driver, contributing over 75% of total revenues. Aion, Mir 2, Woool, and Mao Xian Dao have been the top 4 games for Shanda in terms of average concurrent users quarter-to-date.

Notable recently launched games include Chuan Shi Qun Ying Zhuan, Luvinia Online, and TS2 Online. These three games demonstrated positive trends in 4Q09, and will likely achieve decent growth in 1Q10. Based on these data points, I believe Shanda Games will sustain its single-percentage-point growth Q/Q in 1Q10.

Going forward, I believe Shanda Games will continue to grow steadily thanks to its superior operations ability and unique expertise in understanding and using the industry value chain.

Disclosure: No positions.