Price Target Updates On 6 Chinese Internet Companies

by: David Ristau

Earnings season is over, but we are continuing to update price targets, buy/sell ratings, etc. for companies that we currently cover in our EquityAnalytics department. Today, we have updated several companies. They include – Giant Interactive (NYSE:GA), Shanda Games (NASDAQ:GAME), (NASDAQ:NTES), Perfect World (NASDAQ:PWRD), Shanda Interactive (NASDAQ:SNDA), Youku (NYSE:YOKU). Our EquityAnalytics division covers more than 100 companies in different industries. We have price targets on each company, Buy/Hold/Sell ratings, and scores for Growth, Profitability, Financial Health, Management, and Value. The following is an update on our current reports.

The chart below shows new ratings, price targets, and buy/sell ranges versus old ones:

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GA – Downgrade from Buy to Sell, Decrease PT from $15 to $3

Giant Interactive got a significant slash as we had not updated our price target in the past few months. Upon taking a closer look, we slashed our targets for sales and income for the next couple years as the company is underperforming what we thought it would do. Additionally negative is the fact that the company saw a major decline in its cash in the latest quarter. That drop hurts its equity value and stock worth. Further, we upped our discount rate for the company as its net debt decreased.

GAME – Upgrade from Hold to Buy, Decrease PT from $9.50 to $6

Shanda Games is looking like a value speculation play in China right now. The company looks like it has some potential from its current levels. We foresee the company seeing some slight improvement in operating income from its current levels next year. The company had some temporary value from a special dividend that it introduced, and it has met our estimates for the year. The stock, however, has suffered from an increase in working capital.

NTES – Maintain at Hold, Decrease PT from $56 to $50.50

NetEase is one of the leading video game companies in China, and it is one of our top picks in China as a company that has a bit more safety. NetEase is really doing well with a number of its games, and its last round of earnings were very strong. The company is fairly cheap at 12, although valuations in China's internet industry are very erratic. The company continues to outperform and is doing a stock buyback. We did decrease our price target as the beta rose for the stock and increased the discount rate.

PWRD - Maintain at Buy, Decrease PT from $35 to $18

Perfect World remains another of our top picks for Chinese gaming. The company has been hit this year, but we expect a bounce back in 2012. The company was one of the first major players in China and has taken a backseat as the likes of NetEase and others have stolen market share. The company, however, has a strong pipeline in 2012 and is increasing its international presence. We think both of these are going to give upside to the 2012 numbers. China actually may be flat in organic growth, but we believe the company's expansion into North America and Europe is going to be very positive.

SNDA - Maintain at Hold, Decrease PT from $48 to $36

YOKU - Maintain at Sell, Decrease PT from $14.50 to $11

Youku continues to be one of our least favorite plays in China. The company once again disappointed our already weak earnings in its latest quarter, and it seems to be going in the wrong direction. Six months ago we thought the company was worth $14.50. It has moved to that level, and we believe it now has more to go. Youku has yet to show it can turn a profit. The web video industry, while popular, is a hard one to produce consistent earnings in. We do not believe profits will be made until FY 2013. Unlike Sohu (NASDAQ:SOHU) or Baidu (NASDAQ:BIDU), Youku does not have the ability to mainain consistent advertising through search nor does it have the same depth of use.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.