S&P analyst David So initiated coverage of online game operator and developer Shanda Interactive (ticker: SNDA) on June 8th with a buy rating and a 12-month price target of $48. Here are the highlights of his research note:
- Among China's Internet companies, Shanda is best positioned to capitalize on the rapid growth in the online gaming market which S&P estimates to reach $864 million in 2007 based on CAGR ('03-'07) of 53%.
- As the cost of PC and broadband Internet access declines and personal income rises in China, S&P believes this will continue to stimulate greater online game usage such that Shanda’s revenue will generate 3 yr CAGR of 31% based on its forecast.
- The stock is trading at 20.1x adjusted (pre-goodwill) EPS and EV/EBITDA of 17.3x for '05, which are both attractive given EPS 3yr CAGR of 42% and EBITDA 3yr CAGR of 31%.
- S&P initiates coverage of Shanda with a 5-STARS (Strong Buy) recommendation and a 12-month target price of $48, representing the midpoint of its relative PE and DCF valuations of $59 and $39, respectively.
- Downside risks to its recommendation include greater-than-expected competition, poor uptake of its new Massive Multiplayer Online Role Playing Games (MMORGs), unfavorable change in contractual arrangements with Shanda Networking and the offloading of shares issued to convertible debt holders at $39.70 per ADS.