Nov. 25, 2009 (Chinavestor) GA Interactive (NYSE:GA) reported third quarter numbers yesterday, giving investors a chance to reassess the Chinese online game sector before December 1st, when industry leader Shanda Games (NASDAQ:GAME) is going to report. Changyou.com (NASDAQ:CYOU) and NetEase.com Inc. (NASDAQ:NTES) have reported already, improving visibility into the sector.
Looking at latest numbers of Giant Interactive (NYSE:GA) are somewhat misleading. Some commentators, like this one at Trading Markets, focus on earnings growth from last year and say "Giant Interactive Q3 Profit Up", the truth is that this increase is due to a low basis, nothing else. It is worth looking at revenue and profit numbers from a distance to get to the real picture. As the following chart testifies, Giant Interactive (NYSE:GA) has been on the decline with no indication that the situation is going to turn around anytime soon. This is what the Company said in regards to the outlook:
"The Company expects continued revenue pressure into the fourth quarter of 2009, while contributions from the new games are expected to ramp up in the first half of 2010"
The following table sums up major players from the online game sector. Note: Shanda Games Ltd. (NASDAQ:GAME) has not reported yet and numbers in the table are 2009 Q2 estimates.
| Revenue [RMB] | Change [QoQ] | Profit [RMB] | Change [QoQ] | |
| Shanda Game (NASDAQ:GAME) | 1,237.2 mil | n/a | ~426.9 mil | n/a |
| Changyou.com (NASDAQ:CYOU) | 469.36 mil | +3% | 258.25 mil | +9% |
| NetEase.com (NASDAQ:NTES) | 879.4 mil | +0.1% | 398.8 mil | -16% |
| Giant Interactive (NYSE:GA) | 290.2 mil | -21.4% | 197.7 mil | -14.7% |
| Perfect World (NASDAQ:PWRD) | 590.0 mil | +13.2% | 288.3 mil | +9.8% |
According to the table, Shanda Games (NASDAQ:SNDA) is the largest player in the field measured by total revenues followed by NetEase.com Inc. (NASDAQ:NTES). Changyou.com (NASDAQ:CYOU) comes in a distant third while Giant Interactive (NYSE:GA) is not only the smallest but with the worst dynamics of all. This is clearly demonstrated by the following two pie charts - market share of Chinese online game companies by total revenue in 2009 Q2 and 2009 Q3.
As the chart above testifies, large players got larger - e.g. Shanda Games (NASDAQ:GAME) and NetEase.com (NASDAQ:NTES) absorbed market share of The9 Ltd. (NASDAQ:NCTY) and Giant Interactive (NYSE:GA).
When it comes to valuation, Giant interactive (NYSE:GA) has a point: this is by far the least expensive among online gamers. As the following chart testifies, valuation of Shanda Games (NASDAQ:SNDA), NetEase.com Inc. (NASDAQ:NTES) and Changyou.com (NASDAQ:CYOU) increased from last quarter while Giant Interactive (NYSE:GA) is now trading at only 13 times earnings, less then half the competition.
This is good news for investors who believe that markets are efficient. Giant is trading at a significant discount compared to its peers due to lack of growth. The only chance for Giant Interactive (NYSE:GA) to regain its mojo is launching games that will do well under commercial operations not just closed beta testing. The old cliche, that the strength of the game portfolio is paramount, proved to be right again. My suggestion is to invest in those Chinese online game players only that have the best and the most diversified online game portfolio.
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