Thursday, March 31, 2005

Shanda Vs. SINA

SNDA:30.2, BUY, 12 month target 50
SINA 31.19,Neutral

As I have been insisting since Shanda released the 19.5% stake in SINA, I do not think there will be a stock merger in the near term.

This is based on a few rationales:

First, in order to understand the purpose of Shanda's stake in SINA, we need to look back to all the purchase deals Shanda did before.

Time Event
2/18/2004 Got 19.5% stake in SINA in cash;
11/29/2004 Got 29% stake in Actoz with 91.7 million USD in cash;
10/8/2004 Wholly bought Qidian, terms not disclosed, this should be a very small deal.
8/2/2004 Got stake in BianFeng. Upfront consideration paid in cash, the remaining to be paid in cash in mid 2005 on an earn-out basis
7/30/2004 Invested in HaoFang, will pay by cash or stock to get controlling stake
1/1/2004 took a minority stake in Digital red with cash, will pay more to get controlling stake in 2006 based on Digital Red's earnings.
Jan-04 Bought ZONA

It seems that Shanda seldom does one time buyouts, instead, it first steps a toe into the target, and enters into an agreement to get more stake later.
For SINA, I believe it is similar case.

Second, will 1 + 1 > 2 ?
The rationale behind a merger is that 1+1 will get more than 2. Is it the case for Shanda and SINA? It is a very good question.

Lastly, Shanda does not have that much cash to buy out SINA, then stock merger is only choice, which is empirically proved to be a more expensive way.

NCTY: WoW is everything

I did some research into NCTY, and here is what I can share with you. You make your own decisions, I may be biased since I have minor short position in this.

In my opinion, holding NCTY at current price level is very risky and without much upside potential. Without WoW, this stock will probably sell around 5, based on 0.1 USD EPS in 2004 and down-going trend of MU business. So everything is about WoW, even the management is beefing up on it(after all, what else comfort they can give to the share holders? Nothing, only the hope that money will come.), the9's fate is highly connected with WoW, if it goes really well, The9 will be good, if it goes pretty good or not so well, it will be a disaster to this stock.

Okay, here is the research I did (NCTY was trading at 17.25 when I did this report yesterday)

NCTY, Neutral/SELL

Company Overlook
Shares Out(mil) 24.19
Price 17.25
Market Cap(Mil) 417.21
Shares Floating(Mil) 6.08
Avg Daily Vol(000) 305.00

EPS(ttm) 0.12
Book Value/Share(1) 2.07
Cash Per Share: 3.96
Est LT EPS Growth 0.30

Price Target 12 Month 16.00

Rev(mil USD) 2003 2004 2005 2006
Mar 0.31 0.81 1.09
Jun 0.50 1.46 1.20
Sep 0.65 1.08 1.32
Dec 0.68 1.08 1.45
Total 2.13 4.43 5.05 20.00

Net(USD) 2003 2004 2005 2006
Mar 0.55 0.41 (0.59)
Jun 1.31 1.23 0.30
Sep 1.55 0.38 2.33
Dec 2.45 0.95 4.56
Total 5.86 2.96 6.60 19.00

EPS(USD) 2003 2004 2005 2006
Mar 0.02 0.02 (0.02)
Jun 0.05 0.05 0.01
Sep 0.06 0.02 0.10
Dec 0.10 0.04 0.19
Total 0.24 0.12 0.27 0.79

P/E 140.95 63.20
1) Book value is estimated by taking away those intagibles, capitalized expenses, etc. from the stated share holder's equity. Also substract about 50 mil USD, which is about the present value of the game license fees and the promised royaty paments, which totals to 53 mil for WoW during four years.

Key points:
*Before WoW is commercially launched, the9 depends on MU and its newly launched game, the Mystina, as main revenue source.

*WoW won't be launched until the later part of 2005.

*After excluding the one time about 2 million USD gain in Q404 by selling Pass9, The9's payment system, to two third parties, the9 will have a loss of around 0.5 million USD

*For current quarter, it is very likely to have loss mainly because the lackluster sales of MU game and increasing costs caused by introducing new games, mainly WoW and Mystina.

*For next quarter, revenue can not get much better since current games are still the revenue source and spending will keep going up mainly beause of the costs to test WoW and launch new games.

*After WoW is launched, it is estimated to have at least 80,000 average concurrent users to breakeven.

*Given the following assumptions:
* Assume WoW will commercially launched from start of 3Q05.
* Assume Monthly Fee for WoW will be 50RMB, which is at the above the average of most games.
* Assume total users that pays a monthly fee for 3Q05 and 4Q05 will be 1.5 million and 1.8 million. Which is close to the MU average pay users in the past two years. In terms of PCUs, I expect them to be about 300,000 and 350,000, based on analysis of Netease's popular games.
* Assume net margin for WoW is assumed to be 32%, which should not be too conservative for a licensed game with high royalty payments.
* As a matter of fact, WoW will be operated through a joint venture, which The9 owns 68.9% since Dec 04. (The9 has 54% stake initially, but it says in its prospectus that the stake will increase to 68.9% since Dec 2004 after a loan settlement, let's assume this has gone through.
Based on above assumptions, we can derive some idea how much earnings will WoW bring:
Revenue for WoW in last two quarters of 2005 will be 9 million USD and 11 million USD respectively, and The9 will receive 2 mil USD and 2.4 mil USD respectively

*For next year, revenue from WoW is roughly estimated at 50 mil USD, this number could be evaluated from a few different agles:
* Assuming that average number of users that ever paid a monthly fee during that quarter is slightly above 2 million, we can get rougthly 50 mil USD revenue for 2006
* Also, according to IDC, projected gaming market of 2006 in China will be around 336 mil USD. Since there are more than 100 games under operations and more to come, 50 million for a single title is already very satisfiable.
* And, compare with the operation history of other games, we can get some idea of the earning power of games

*Based on these analysis, holding NCTY at current price level will have more downside potential than upside. The 12 month target is estimated by 20 times of 2006 EPS. But during this year, it is likely to see NCTY to edge lower to reflect all the uncertainties of its game titles. Also, The9 will need to spend at least 67 million USD in WoW in the next four years for license, marketing and royalty advances. It did not disclose agreements for other games, but these agreements are essentially off- balance-sheet liabilities and should be factored into its share price. In a letter I sent to the IR people at The9, I asked about the details of these agreements as well as the terms of those outstanding convertible perfer shares(What is the divident rate? Are the dividends accumulating? Any restrictions on conversion? What is the conversion ratio? If it is callable, at what price? etc.)
, but I did not hear from them yet, maybe they do not want to disclose it or just ignores such an inqury.

Wednesday, March 23, 2005

Technical Vs. Fundamental. (GRVY,SNDA,NTES,NCTY)

Today GRVY dropped 6% with about 80,000 shares traded, about 3 times the average daily volume.

For a technical investor, this is a perfect time to sell GRVY, sudden huge drop with large volume.

For a Fundamental investor, especially those with longer term investment goals, the drop is double fold: You do not want to see it drop, of course, but in another way, the more the drop, the more attractive to get more, if you still have the buying power and overall risk is still in control(in terms of diversification).My goal is to buy good names with good price, with an investment horizon of 6 months to 12 months. The road will be bumpy, but no returns will come without risk. Sometimes it is nerve testing, just like what is happening to GRVY now.

Last year, I have been riding SNDA from 21 to 24.5, and chickened out in fear of violent volatility,it could easily fluctuate up or down more than 5% in a day. Looking back what happened to SNDA later, I can only call myself a short-sighted chicken. Because I got out not because I thought the story was over, just simply because wanted to lock in the profit!

Now, after the huge sell-off in Jan and most of Feb,I am back to SNDA, its story is far from over. There are two strong names in China gaming market, which is still growing fast with juicy margins, SNDA and NTES, they make up about 60% of the whole market.SNDA is the leader, having about 40% market share, its strength lies in strategic planning and perfect execution, it is also heading to new business areas like IPTV, also tried to take over SINA, the No.1 portal in China. NTES is a uprising star in the gaming play, game revenue consists of more than 70% of its total revenue, the other 20% comes from online ad.NTES is rising because its two principal games are getting more and more popular now, according to company news release, the PCU of these two games hit historical highs this month, totaling about 1 million. ACU numbers are not released, but I guess could be easily 50% more than last quarter. I am holding NTES, waiting to enter to SNDA (below 30 would be good), but GRVY is still my largest holding.

There is another name in China gaming sector, The9(NCTY), it seems have caught a lot of attention. This is the Chinese vendor that has been operating MU (Webzen's only game) in China, and just like Webzen, MU has been going down in 2004, and The9 is making very little money, its total EPS for 2004 is about 0.1USD/ADS, but its shares have been trading around 20 $! WoW is widely speculated to be the saver of this company, it has been proven to be a very popular game in North America and Europe. But look what happened to it in Korea market, although it is a good game, it is now only the number 6th most popular game in Korea after its commercial launch on Jan 18th. To breakeven, NCTY needs to get at least 80,000 average online users for a period of 4 years! Even WoW is a big title from Blizzard, this is still very challenging, let alone the fierce competition from other games, more than 100 titles, in China. And even WoW will be a blockbuster with very high ACU, say 400,000, the9's 2005 earnings will be hard to reach the 0.79$ per diluted ADS, given that WoW can not be commercially launched until mid summer. That bullish high in the sky earning forecast number is given by the analyst from underwriter. I have happily shorted NCTY at 21, and will not hesitate to ride it down till below 10. I set it up as a long-short strategy vs. NTES and SNDA, with the belief that on the relative value basis, NCTY is too expensive, SNDA and NTES are cheaper.

That is all my thoughts on a few hot names in Asia gaming sector.

GRVY vs. WZEN. Is GRVY doomed to fall like WZEN?

Is GRVY doomed to fall like WZEN did in 2004?
I did think over this question and why GRVY and WZEN, two very similar Korean gaming firms, are trading with so low P/Es. Here is something I wish to share with you.
In 2004, WZEN lost more than 50% of its value, now trading with a P/E(ttm) around 11, P/S(ttm) 4.59, P/BOOK around 1.35. This is largely because its business has been going down for evrey quarter in 2004, its sales for the four quarters 04 are (mil USD) 15.7,13.7,12.8, 1.1, overall, 2004 revenue is down 24% versus that of 2003. (see
There are reasons why WZEN have been falling like a rock and is going nowhere. MU is its only game, and the majority of its income is from Korea market, where competition is intensive and market is pretty matured. Plus, MU is an aging game, although it has been doing well in 2003 with patches and fixes, it has been and continue to lose edge to those newly developed games, like Mabinogi and NCSoft's Lineage. Based on a survey, MU is the number 4 most popular commercial game in Korea (RO is number 3), that is still good performance for such an old game.
Mu has been going down, so was the share price of Webzen. Looking forward, the next expected product,SUN, will be tested this summer. If it will be a blockbuster like MU, it will save WZEN, otherwise, WZEN will just be a pile of dead cash.
In contrast, GRVY is a different story.
GRVY relis on RO as the main revenue souce, but revenue is much more diversified than MU. Korea contributes 25% of revenue, the remaining comes from Japan,Taiwan,Thailand,China,Philippine,Indonesia,etc.The overseas revenue is also more stable in the sense that a portion of that income is license fees, which are not affected by the actual performance of RO in a specific quarter.The management of GRVY already proved their expertise in penerating into new markets, I would say they are masters in exporting their products. According to company conference call,more markets are going to be opened in Europe, India, Brazil, Russia, and maybe others. If this goes through, it could be very good extra revenue sources in the next one or two years.
Besides RO, the next new game R.O.S.E, is already in service in Korea, and contracts already signed for it in Japan,Taiwan, Macau. Surely more markets will be opened, like China, Thailand.
Other tahn RO and ROSE, Gravity also stepped into Mobile gaming and animation business. The mobile sector could be an interesting story, given the lastest news release saying GRVY is going to offer an mobile version of RO. The animation business has been showing very good tractioon in 2004, with average QoQ growth rate of about 50%. But looking forward, the company is not expecting this area to catch fire soon based on the sluggish (word from CEO on conf call) sales in the first two months of this year.
At the end of this year and beginning of next year, there are two games coming: Requiem and RO2. RO2 is widely expected, it was said that vedio for RO2 is widely welcomed at Japan's electronic entertainment show last November. Given the large user base of RO, RO2 should be doing OK, if not extraordinary.
Overall, you can see GRVY is a much more diversified business with more products on the pipeline, one after the another. On valuation side, assume GRVY is trading 10$/ADR, it P/E(ttm),P/S(ttm), P/B(as of 12.31.04) are 9.5,2.15,4.33. Compared with WZEN, which is trading at incredible low valuation level, GRVY is even cheaper.
I think GRVY and WZEN can not be treated the same forever given more and more people come to realize their difference. The core strength for GRVY is its excellent multinational marketing expertise and its continous pipeline of games; while the core competitiveness of WZEN is to be able to exert the most value from a single product, mainly from Korea market. If there will no be disastrous news waiting for GRVY, like accounting fraud, misleading forecast,etc, it is just a matter of time when this growing company be treated more FAIRLY in terms of price multiples, that is exactly why we have bought it.
Note:Gravity Financial results are at financial results are at

Saturday, March 19, 2005

Out of patience on GRVY?

Want to rush and sell in this down market?

In this market, there are too many overvalued bubble stocks, YHOO,EBAY,NCTY,JOBS,CTRP, just name a few in the internet sector. When the market is heading down, like what is happening now, these bubbles are particularly vulnerable.

Then those people hunger for returns will look at those “Value� stocks, that is, the price is not high enough to reflect its expected return with its risk. In the long run, I think GRVY is such a pick.

It is in the sexiest online gaming sector in Asia, this market is predicted to grow 30% each year to 2008. GRVY has a solid standing in this market, it has enough cash for its operation and marketing needs, a good team of management (let’s hope so for now), and a proven successful marketing strategy across world wide markets. In also has a not bad pipeline of upcoming products, which will grow its revenue and earnings in the next a few years.

People like GRVY mostly likely because of its valuation, it is trading around 10 time 2004 earnings, which is way below the average multiples of its peers in gaming sector.
Bears may argue that its business risks, like intense competition in Korea and other Asia markets, and the lack of liquidity of this stock. But even take all these risks into consideration, GRVY is very likely still undervalued.

Since the underwriters does not provide analyst coverage, we need to work harder to get more up-to-date facts of this stock.

One good strategy for this stock is to buy and hold if you believe in its value. Do not be bothered with daily ups and downs around 11, anyway, you won’t be able to sell it easily without a discount if we are scared or run out of patience.

Thursday, March 17, 2005


Welcome to Cool-Head-Investor.

I created this to promote disciplined research and investment. I learned a cool head is very important to not to lose, let alone to win big.

In this blog, I will publish my research and thoughts to those names I am interested. I may also create a discussion panel where ideas can be exchanged.