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Investment Overview for Perfect World (NYSE:PWRD)
Games in China
- Active Paying Customers:
We currently forecast the number of active paying customers to decrease marginally and reach around 1 million by the end of the forecast period, due to increased competition and a shift in player interest to casual social games. However, if Perfect World's new game offerings fail to attract gamers and its active user base drops to around 0.6 million users, there could be a 5% downside to the Trefis price estimate. Conversely, if Perfect World's new games take off, and its active user base expands to 1.4 million users, there could be a 5% upside to the Trefis price estimate.
- Revenue from Games Outside of China:
We currently expect Perfect World's revenue from its international game operations to increase to $262 million by the end of the forecast period. However, the actual revenue growth could be much lower, if its games fail to attract users in the face of increased competition and the growing popularity of casual social games.
If Perfect World's revenues grow at a slower pace, reaching only about $170 million by the end of the forecast period, there could be a 4% downside to the Trefis price estimate.
Marketing, Advertising & Operational Expenses
- SG&A as a % of Revenue:
We currently expect Perfect World's selling, advertising and operational expenses (SG&A) to increase from around 32% in 2012 to around 35% by the end of the forecast period. Given an increase in competition in China as well as the international gaming market, Perfect World may have to spend much more to market and advertise its games. It may also have to ramp up its operational expenses if it wants to expand at a faster pace.
If Perfect World's SG&A expenses as a percentage of revenues increase to 40% by the end of the forecast period, there could be a 10% downside to the Trefis price estimate.
Research & Development Expenses
- R&D as a % of Revenue :
We currently expect Perfect World's research and development expenses (R&D) to increase from around 29% in 2012 to 35% by the end of the forecast period. Given an increase in competition in China as well as the international gaming market, Perfect World may have to spend much more on research and development, to upgrade its gaming engine and development platform in order to maintain a technological edge over its competitors and create better games.
If Perfect World's R&D expenses as a percentage of revenue increases to 38% by the end of the forecast period, there could be a 6% downside to the Trefis price estimate.
Perfect World is a Chinese online gaming company which specializes in developing 3D MMORPGs (massively multiplayer online role playing games) such as Legend of Martial Arts, Zhu Xian, Forsaken World and Battle of the Immortals.
A MMORPG is a type of video game in which a large number of players assume the role of a character and interact with each other in a virtual game world setting. They have a social team element and also allow the player to customize his character and upgrade his experience/abilities over the course of the game.
Perfect World’s games compete primarily with other MMORPGs such as World of Warcraft, EverQuest, Rift, Eve Online, Lord of the Rings Online, Runescape and Dungeons & Dragons Online.
Perfect World primarily makes money from its games in China, internationally and by licensing games to other publishers.
One of the top Chinese online gaming company
Perfect World is one of the leading Chinese online gaming companies which specializes in MMORPGs, besides NetEase, Tencent, Shanda Interactive, Giant Interactive, and ChangYou.com. It has a series of popular games including Perfect World, Legend of Martial Arts, Zhu Xian, Battle of the Immortals, Dragon Excalibur, Empire of the Immortals, Forsaken World and Swordsman Online.
According to a report released at China Game Industry Annual Conference 2012, the Chinese gaming market rose by 35.1% in 2012 to reach 60.3 billion yuan ($9.6 billion). iResearchOnline games comprised for 94.5% of the market, followed by mobile games (5.4%).
Growth in International Markets
Though Perfect World's growth in China has been dropping off, it has been expanding rapidly in international markets like Europe, America and Japan through its subsidiaries as well as in certain other international markets by licensing its games to other game operators. We expect international growth to drive a significant portion of its revenues in the coming years.
Proprietary Game Engine
Perfect World has a proprietary 3D game engine and game development platform which it uses to create almost all of its games. This enables it to rapidly launch new games with a low development cost and minimal time to market.
New Game Launches in 2013
Perfect World launched Saint Seiya Online and Neverwinter in Q2 2013. Swordsman Online, Dota 2 and Holy King are also in the pipeline. We expect these new games to drive incremental returns for Perfect World in the future.
Increasing Focus on Web Games and Mobile Games
Perfect World is increasingly focusing on mobile and web games to strengthen its gaming portfolio with lighter games. It has launched a number of such games in 2013 and future R&D spend could increase due to such development activities.
Enhanced focus on International Expansion
Facing intense competition in the Chinese market, Perfect World is eyeing international expansion to grow its revenues. The company recently licensed and launched various games in the international markets. It has also undertaken organizational changes to strengthen its focus on overseas market.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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