Friday, May 27, 2005

Gravity, latest developments

Gaming3 Posted by Hello

Saturday, May 21, 2005

GRVY(7.4$) vs. gaming industry

I compared Gravity versus its Korean and Chinese peers, it is not hard to realize that Gravity is still seriously undervalued.

GRVY vs. Gaming Industry Posted by Hello

Friday, May 13, 2005

Gravity(GRVY,5.6$), Strong Buy.

What a blood-shedding day for Gravity(GRVY), after the earning last night, it is down 40% today.

Market has proved that I am a nerd. Based on my past research on this company, I did not believe in the original 91 mil USD revenue target, but that did not stop me to buy this stock, because even the company could hold its sales the same level as last year, which is 64 mil USD, I would still buy when it was 11, because I think it was much cheaper than most of its peers. Compare it to its Chinese brothers (SNDA,NTES,NCTY) or its Japanese partner GungHo(3765 JP), as well as any other technology company, then you know how ridiculous the valuation of this company was. When it was around 9, I did not sell a single share, instead, I added a little more. Today, after it plunged, I was thinking to sell a part of my holding above 8 to have some relief. But the market did not give me that chance, anxious investors keep driving down to unbelievable low levels, seems like the story is over and the used-to-be rosy future suddenly turns dark and cold.

But, as a nerd, I still think, things are not that bad.

The Q1 was in line with original guidance, that is not a surprise. Full year revenue was guided down, that is not surprise to me either. When they gave the ambitious 91 mil USD revenue target two months ago, I do not think there is anybody believing in them, just too good to be true. Frankly, I even think they can not guarantee to meet the current 75 mil USD target either. But, I am pretty confident it won't be hard to be flat to last year, which was 64 mil USD.

That said, I do not care much as long as the company can have a higher revenue than last year. So the current 75 mil USD guidance, which is 17% above that of 2004, is not a surprise to me, but rather, a some kind of comfort.

I agree Gravity is not the most competitive company in its playground, there are far more powerful guys with more muscles. I also agree that there are risks with Gravity's business. But, is there anything without risk in this world? On a return over risk basis, a not so good company may outperform a first tier leader from an investment perspective.

I call myself to be a 'value believer' (I may live in my own illusions). I believe there is a fair price for everything. As long as the market price is far away from its fair price, I will go for it. That is why I have been chasing Gravity and get hurt badly, up to now.

Forget the lowered earning guidance from 91 mil USD to 71 mil USD, forget the slight earning miss. Forget to watch who is rushing to sell. Just simply focus on a few simple facts:

* Cash per share: 3.7
* Book value per share: 4.4
* EPS in 2004, 1 USD per ADS.
* EPS in 2005, I expect it between 0.9$ to 1$. If based on the lowered guidance, EPS will be slightly more than 1$.
* Two games in operation in 37 countries. Two more new games are going to be released in first half of 2006.

This makes me to rethink the term 'value'. This investing style must be painful and nerve-testing in nature. If everybody likes something, how can you find value(to buy with a discount)? You can only pick up the so called value when the majority, which is called the 'market', rush to dump at whatever price. But to most people, move against the majority is stupid. Those who did are either too stupid or too smart,but for sure, they are different from majority. But how many times the majority can make exceptional things happen? Not many. If they can, then everybody will be rich, everybody will be elected president. If all are rich, all are presidents, then nobody is rich, nobody is president any more.

Anyway,full disclosure, GRVY was my biggest holding before (about half of total holdings). Today,with another 40% haircut,I more than doubled my position.

Note: See some previous research in Gravity by me and another friend at: sid=1609535663&mid=460

Thursday, May 12, 2005

Gravity Q1 Result

Gravity released Q1 result, in line with guidance:
Revenue was 15.8 mil USD, net was 6.5 mil USD.
Diluted earning per ADS is 26 cents. If use the latest number of outstanding ADSs, EPS will be 23 cents.

The company lowered its 05 revenue target from 91.1 mil USD to 75.1 mil USD.

For the second quarter, it expects 15.3 mil USD in revenue, and 5.9 mil pretax profit.

In 2004, net income is 29.2 mil USD, which translates to about 1.05$ per ADS. This year, my estimate is that net income will be roughly equal to the number of that 2004.

Full disclosure, I long GRVY.

RMB speculation underway?

I saw many reports from various sources these days that people are speculating China to loosen its currency peg with dollar.

Currency speculation is not new, back to latter part of 2004, people bought up Chinese stocks listed on NASDAQ in anticipation from a currency boost, also, so called 'hot money' found their way to China through other sources like real estate and domestic (and Hong Kong) stock market. Afterwards, people found the reevaluation process may be longer than they could wait.

Not only investors, officials back into China must have been very busy to cope with issue. On the one hand, they need to deal with the pressure from western countries to push up RMB's value, on the other hand, they need to carefully consider the pros and cons to have a currency with more purchase power.

While the current peg starting 1995 seems outdated, and it is natural to believe this aging fixed exchange rate should not be a good indicator for RMB's value.But the question is to what extent the RMB should be appreciated and how much freedom the government should give to the market,

The Chinese leaders will not have difficulty to realize the negative impacts with a stronger currency. Those negative effects include but limit to:
* Slower export growth
* Loss of millions of jobs
* Loss in huge USD deposit, which totals about 650 billion USD.
* Possible hit to other areas, such as real estates.

The real estates, which may already be trapped in a bubble(thanks to the global easy money policy led by the FED) and is now in the retreat ( U.S. housing market starts to cool down, recent reports also said housing prices in Shanghai, China's biggest city by population, saw its housing price shed 10% to 20% in the past month.). Hot money,those liquid capital hunting for returns,must also have contributed to the rise of the housing market. If in case, they can make a quick profit from RMB reevalution and pocket the gains, then what happened to the Japan housing market in the early 90's may be able to show again in China. If the housing market crashes, the amount of defaulted loans, lent by the national banks, will shoot up and directly jepodize the stability of China's financial system.

Provided with these risks, the Chinese leaders will not eaily give in to a stronger RMB, although it will make imports of goods (like the most needed oil,metals,ores,etc.) cheaper. Think the other way, if it is in China's national interest to boost up the RMB, the westerners will not push China to do so. This kind of philosophy is quite common is Chinese culture, history taught them not to do what his opponents tells him. This is reflected by premier Wen Jiabao's public remarks some time ago, saying China will not make any move when there are high pressures from other countries and high speculation from investors. Rather, he said the policy will be out at a time that is not expected.

Before the May holiday, news said people are betting China will have some action during the holiday, now the holiday is over, nothing happened. People now look into late May,which is likely to be another disappointment.

In my opinion, it is not a matter of should or should not but a matter of when the RMB should be strengthened, given the Chinese economy keep making smoke with high single digit growth and inflation in check. My strategy is not to time it, since Wen already said he will act when people are not prepared, rather, I will choose some promising Chinese companies and invest in them with a long term horizon. Surely, not all Chinese stocks are equal, I try to pick those that are of good value even without factoring in the possibility of currency kick.

Tuesday, May 10, 2005

Mobile gaming, next hot arena

While we see more and more competitions in MMORPG playground, savvy companies and investors should look for new growth opportunities.

As far as I can see, the next hot area for gaming is mobile games.

EA will release 15 mobile games to China market this year, also, the first commercial mobile game,SanJieChuanShuo,has been launched in April.

Not many companies in China are well positioned for this race, as far as I can see, Shanda is the one that is most likely to grab the market.

Shanda acquired a stake in Digital Red in summer of 2004, time will prove this may be a very good strategic investment.

Pricy stocks from Forbes

Totay Forbes picked out 5 stocks that looks expensive, they are JOBS,ICUI,IDCC,TECH,NCTY.
Here is the Forbes link:

I am glad to see they agree on my calls on JOBS and NCTY, which I followed for a while and thought they are seriously overvalued vs. their growth and earning power.

Full disclosure, I shorted NCTY, no position in JOBS.

Monday, May 09, 2005

JOBS: Not Everything from China Is A Gem

Everybody on the planet knows a simple fact: China is rising. But betting on money on Chinese stocks may be a different story.

Look at the Chinese domestic stock market, it is interesting to see that since the collapse of the bubble in 2000, the two China domestic stock indexes, Shanghai Composite and Shenzhen Composite, have shed about 50% of their values. While the worldwide stock market experienced a temporary rebound starting in 2002, the Chinese ones did not have the luck to be in this upstream, they have been heading all the way down. Recently, anxieties arose in a lot of investors that a major crash is not avoidable, since the two indexes keep creating 6-year new lows, and hundreds of companies were temporarily halted to trade in fear of crash.

This seems contradictory to the booming China economy. Open any news source, you can easily find page after page discussions on China's rise, both politically and economically, its eye-pooping GDP growth rate, as well as its huge market potential and vast opportunities. Everything looks cheerful.

This contradiction looks confusing, at least to me half a year ago. I asked a senior consultant who has spent all his career on Wall Street and knew the Chinese market quite well since he is Chinese. The main reason for this downturn, in his opinion ,was that the market has been too expensive, historical P/E of those indexes have been coming down from above 50 to about 20 now. This explanation seems plausible, later as I looked more into this matter and various other analysis from domestic media in China, I saw more explanations. It seems people also blamed the downturn a lot on government intervention and lax security laws, the former makes the market factor in too much wills of policy makers, the later makes the game not a fair play since the inside trading and accounting frauds are pervasive but not punished.

The Chinese stock market looks like trouble water, but it does not matter to most overseas investing public since most people do not trade on Chinese domestic stock markets. But how about those companies which made their way to Hong Kong and NASDAQ?

I do not know much about Chinese stocks in Hong Kong market, all I learned is that a lot of Chinese mainland companies have made their IPOs there. Other than Hong Kong, many guys made their way to NASDAQ. I guess that some people are familiar with these Chinese runners, I am not trying to talk about them in one bite, instead, I am more interested to follow the technology sector, since I am a tech guy and thus could understand their business a little bit better than I do with other sectors. Let us list their names by business categories:

* Web Portals
-Business Model: Online Ad, wireless services
* Online Gaming:
-Business Model: MMORPG gaming, casual gaming.
* Travel:
-Business Model: Online air ticket and hotel booking
-Companies on NASDAQ:CTRP,LONG
* Wireless Services
-Business Model: Providing 2G and 2.5G data services to mobile subscribers.
* Other: JRJC
-Business Model: Providing online financial data service to its subscribers.

Unlike their counterparts back in China, some of these companies have been chased by return hungry investors. Some of them have been pushed up so high and when the judgment days (earning report dates) came, the bubble burst and the stock dived like free fall. JOBS and JRJC are the most typical examples.

Today JOBS reported Q105 earnings, with a mere 1.11 million USD in net income, this stocks shed 28% to 14.7. This reminds me of another black day of Jan 18th,2005, when JOBS reported its first quarter earnings, it dived from 43.8 to 28.3, a 43% bloodshed. Buyers of this stock in the past 7 months after its IPO must have been frustrating, but relentless fact is that the stock is still far from being cheap even after these corrections.

In 2004, JOBS made 55.60 mil USD in total net revenue, 7.4 mil USD in net income. That translates to about 26 cents a share. Thus current P/E using today's close price of 14.7 is still as high as 57. This year, things are not getting much better. In the first quarter, JOBS already put 1.1 mil USD net income into pocket, based on company guidance, net income for the first half year is around 2.6 mil USD in total. Given this, it will be very challenging for JOBS to earn more net income than it did in 2004. That means the leading P/E ratio is well above 57. Since most Chinese companies on NASDAQ are trading at less than 22 times of 2005 earnings, JOBS does not seem to be cheap in any sense.

JOBS started as an online recruiting service company in late 90's, its flagship website ( was quite popular to recruiters and job seekers. But from the very beginning of its business operation, its play field was filled with too many players, since there was not much barrier to enter this business, one can simply invest some money, buy some machines, hire a bunch of tech guys to create a web site with a database back end, then the business can be up and running. Not only players like 51Job and ChinaHR were competing to get a bigger market share, existing web portals like Sina,Sohu and Netease also started such services.

After 5 years, 51Job is the first Chinese company in its sector that made a successful IPO on NASDAQ, raised about 74 mil USD by selling 5.25 mil ADRs, valuing JOBS at market value of about 400 mil USD, more than 54 times of its 2004 earnings.

Later on, market chased this stock as high as 55$ in the next three months after its IPO debut, until the judgment day of Jan 18th, 2005 comes, cutting is price almost in half.

After today's another 28% hit, the stock is still not cheap, as Safa Rashtchy puts in his latest research disclosure:
"We would not be surprised if the stock sees further pressure as the current valuation is not necessarily low enough to attract bottom fishers."

This case may be a reminder to those who are and will step a toe into Chinese stocks. We admit the China market is big and growing, but since there is a fair price for everything, even promising players will have a hard time to meet mounting expectations from investors.

I personally call JOBS, together JRJC, and potentially NCTY, Chinese traps. They made smoke in their IPO with glaring business models and lengthy introduction of their bright business future. But when the earnings day comes, they just remind us of the old cliché: Valuation matters.

Going forward, there are more Chinese tech companies on the deck to be listed on NASDAQ, they came from various play fields: search, gaming, online auction, etc. JOBS served as a good example to let investors keep a cautious distance while approaching them since JOBS taught us the lesson that not everything from China necessarily be a gem. Is it because they are doomed to fall or we are asking too much from them?

Friday, May 06, 2005

The9: A trap?(Strong Sell)

NCTY has been jumping from 16 to 23 in the past few weeks without many justified reasons. This looks like a huge trap to me.

Some simple facts: * The rumor that WoW has more than 500,000 players is not validated by any official source. Based on what The9's CEO said before, their 96 servers plus those new ones in SiChuan could support at most 360,000 users.

* This is just open test, FREE, how many users will pay to stay is a very good question. The analyst from Goldman expect 50% of them will stay.

Given these, let us do some simple math, so simple that many may not be bothered to think about it at all.

Assume WoW is really really popular, say 1 million PCUS in open test(This figure is next to impossible, anyway, just assume it is true).Also assume WoW will start to charge from July 1st, monthly fee is about 50RMB, and 50% players stayed to pay for play.

So, that is a game with 500,000 PCUs, which is as popular as Netease's flagship game. How much money Netease made in last quarter from its most popular game:XYQ? It is about 18.5 Million USD, based on released data of ACUs and PCUs of its two games, which brought 31.6 million USD in revenue for Netease. If WoW is net margin is 33%(after fees to Blizzard), and also think The9 has 68.9% of control in the C9I venture, so the net income contribution is about 4.2 million per quarter. That translates to 17 cents per share each quarter.

In 2004, total net income for The9 is 3 million USD. That is about 12 cents per share. This year, no doubt its sluggish MU business will keep going down(Eveybody is on WoW, did anybody pay attention to their MU? That is their only income source in the first two quarters of 2005!). Together with mounting expense from promoting new games, it is very likely The9 will see a loss in the first two quarters. You may not believe this, but I got facts. In Q404, The9 reported net income of 0.9 million USD, which includes an ONE TIME sale proceeds of 1.83 million USD. Excluding this one time effect, the9 would have a loss of 1 million USD. Given the downtrend of its MU business and the company switches all its attention to Wow, MU will further suffer. Surely expenses will shoot up. Thus, I will not be surprised to see a few million USD loss in Q1 and Q2 respectively.

Now, let's be bullish again by assuming in the first two quarters of 2005 The9 could break even. Then its revenuee will largely ( I do not think other games will have considerable revenue contribution this year) depend on WoW. Plug in the simple math we did before, we are expecting EPS of 34 cents this year.

The Chinese gaming sector is trading at 22 times of 2005 earning estimate, so 34 cents implies a price of 7.48.

However, don't you think our assumptions we made are too cheerful?

Full disclosure, I shorted The9 twice before, I doubled that position today.

Wednesday, May 04, 2005

Chinese Wireless Plays:Time to buy

There are a group of Chinese companies listed on NASDAQ deriving their revenue mainly from wireless services, they include web portals such as SINA,SOHU,TOMO, as well as pure wireless houses such as KONG,HRAY,LTON. In 2004, this sector has been battered by regulation risks both from government and telecom service providers, last summer, China Mobile suspended some vendors from doing certain types of businesses, because some of them are caught in illegal billing behaviors.

Another concern from investors is that telecom service providers may take a big revenue share, thus eroding vendors' gross margin.

Because of these two concerns, stocks in this sector has been trading with lower price multiples than most other Internet companies.

Piper Jeffery issued a call a few weeks to buy this sector, based on the rationale that after a year's suspicion, regulation risk and margin shrink risk are not as severe as thought before.

I agree with this argument. My view to this sector is that:
First, it is a real, tangible and big business. The market is big and growing fast, driven by new services like 2.5G and 3G.
Second, 2.5G is gaining traction, it is expected to be a key growth driver for this year's wireless market growth.
Third, some companies are trading at low price multiples, thus it may look attractive to value investors.

Full disclosure, I long KONG and TOMO.

Rethink online games from a culture perspective

I saw some discussions about the boom of online games in Asia from a culture perspective, this topic is interesting and worth to think about.

For some non-gamers, it may be hard to understand why people spent so much time and money into playing computer games.Similarly, for some westerners, it may be hard to understand the attractiveness of online games to Asian folks.

I used to be a console game player when I was a teenager. After I bought my first PC in my college and started playing games like Quake,StarCraft,NeedForSpeed,Age of Empires etc., I would never play console game again, since there is so much more fun and controlling ability with a PC. At the beginning, I was playing on my own PC by myself, by and by I got bored because I was playing with programmed robots, their movements and tactics are so lousy and static that you will know where they are and what they are going to do to you next. You can not get such a nice feeling of victory or achievement.

Thankfully, network age arrived. We set up a Local Area Network(LAN) inside our dormitory building, connecting about 300 machines. Some people will open their machine to serve as a game server so that other players can join to play. I was a Quake player and I enjoyed a lot playing with dozens of other players, who are much smarter and harder to deal with than robots. I was so engaged in playing games via network that I would never play again with robots unless I was the only gamer left on the planet.

While I was playing games over LAN, another way of playing emerged quitely from various corners of the world:online gaming. I didn't pay too much attention to it before 2001 since the majority people do not have necessary high speed network, which is essential to play games online. As time went by, high speed networks have penetrated into many Internet cafes, schools,homes, the used-to-be high end luxury is becoming a commodity. No wonder online gaming has been booming ever since.

Up to now, I did not find time to really play online games yet, since I have a busy life to live with. But I did have installed a couple of them in my machine, played a little bit to get some flavor. As far as I can, these games provides more fun than console games, PC games and games over LAN, because it offers new ways of entertainment that its predecessors did not.

First, your rivals are real human beings with intelligence, thus posting more challenge to players. Being stronger and superior in games gives you incomparable self complacency and confidence.

Second, it opens a huge world to explore. Online games are usually much bigger than PC games since they have more chapters or episodes, and their maps could be expanded at the wish of providers. Thus there are more places to go, more tasks to do, more people to meet, more battles to fight.

Third, it brought people together to play in teams or parties. A single player will soon realize the world is too big and dangerous for him to survive by himself, this naturally urges him to find some strong team or party to become a member. Within the same team, people are brothers are sisters, they fight together and are ready to contribute to or sacrifice for the interest of other members of the same team. The team or party is like a big family, members are usually familiar with each other in the virtual gaming world.

At last, but not least important, online games could be viewed as a community. When most people went to bars to drink, you do not want to drink by yourself at home; Similarly, when a lot of people go online to play games, especially young girls,you do not want to be left behind. The world 'friendship' not only applies to real world, but to the online virtual world as well.

The gaming markets are still in growth, the leaders are Korea,Japan and Taiwan. China,HongKong,Thailand,Phellipines,India are catching up. According to IDC data, game markets in ASIA will have an CAGR of 30% in the next 3 or 4 years.

As an investor, surely you do not want to miss this booming sector. Up to now, not so many gaming companies have raised capital via IPOs,those early comers to NASDAQ include NTES,SNDA,NCTY,WZEN,GRVY. Do you own research, you may find one to buy.