Perfect World’s Earnings Should Help Calm Fears On Chinese ADRs

Perfect World (NASDAQ:PWRD) will announce its earnings for Q1 2012 on May 21. It is one of the top online gaming companies in China, where it competes with the likes of NetEase (NASDAQ:NTES), Tencent, Shanda Interactive, Giant Interactive, and ChangYou. It also operates localized versions of its games in international markets such as Europe, North America and Japan, and licenses its games to publishers in other markets, where its offerings compete with the games such as World of Warcraft by Activision Blizzard (NASDAQ:ATVI) and Warhammer Online by Electronic Arts (NASDAQ:EA).

Check out our complete analysis of Perfect World

We have a $24 Trefis price estimate for Perfect World, which implies around 90% upside from the current market price. Games in China account for around a third of its value while the international gaming operations account for 20%.

Games in China

Perfect World had one of the biggest MMORPG player base in China in 2009, with around 1.8 million active paying users, but has seen a continuous decline since then. We expect its active paying users to decline to about 1.26 million in 2012 as competition in the Chinese online gaming space continues to increase. Perfect World continues to launch new games and expansion packs to retain its paying user base, but its recent offerings haven’t seen much traction. The shrinking user base is in part attributable to the rising popularity of casual social games, which are luring gamers away from traditional MMORPGs.

We currently estimate the user decline to slow down in the coming years, but if Perfect World continues to cede ground to its competitors, the actual user numbers could fall much below our estimate, and this could mean a significant downside to our price estimate for Perfect World. You can check the chart above to measure the impact of any user decline on Perfect World’s value.

Games Outside of China

Perfect World also operates localized version of its games in international markets outside of China and has seen a steady increase in its revenue from international game operations in the past. It recently launched Blacklight: Retribution and Forsaken World in multiple internationals markets, and we expect it to continue to attract international gamers with new games and expansion packs, resulting in steady revenue growth. However, it faces stiff competition in the global MMORPG market which itself has seen users being siphoned off by casual social games.

Since its games outside of China account for around 20% of its total value, any decline in international gaming revenues could mean a hit to our price estimate.

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