Perfect World Continues To Focus On Web & Mobile Games In 2013

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PWRD: Perfect World logo
PWRD
Perfect World

    Quick Take 

  • The Chinese gaming market saw 35.1% growth in 2012 and reached $9.6 billion. The share of online games and mobile games stood at 94.5% and 5.4% respectively.
  • During 2013-2017, the Chinese gaming market is estimated to grow at 12.3% to $21.6 billion.
  • Perfect World plans to tap market growth by launching a diverse pipeline of MMORPG games in 2013. In addition, it is also developing a portfolio of lighter games that includes web-games and mobile games.
  • We expect the upcoming pipeline of games to stem the decline in Perfect World’s user base in the future.

Perfect World (NASDAQ:PWRD) is a Chinese online gaming company that specializes in developing 3D MMORPGs (massively multiplayer online role playing games). While the Chinese gaming market grew at a strong rate in 2012, Perfect World’s revenues declined during the period due to rising competition, which also contributed to a drop in its user base. Going forward, Perfect World aims to leverage growth in the Chinese gaming market by launching various MMORPGs such as Swordsman Online and Saint Seiya Online. It also plans to launch web games and mobile games to tap growth in these upcoming market segments.

Check out our complete analysis of Perfect World

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What Are The Current Dynamics Of The Gaming Market In China?

The Chinese gaming market grew by 35.1% in 2012 to reach 60.3 billion yuan ($9.6 billion), according to a report released at the China Game Industry Annual Conference 2012. Online games accounted for the largest share (94.5%) of the market followed by mobile games (5.4%) and console games (0.1%). [1]

Owing to rising Internet penetration, the Chinese gaming market is forecast to grow at a CAGR of 12.3% during 2013-2017 to reach 135.2 billion yuan ($21.6 billion). [1]

How Is Perfect World Leveraging Growth In The Chinese Market?

While the Chinese gaming market is growing, Perfect World has faced difficulties in the recent past on account of increasing competition and declining user base. Its revenue declined by 7% annually in 2012 coupled with a drop in profits. Intense competition from other leading players in the industry such as Tencent, NetEase, Shanda Games, ChangYou and Giant Interactive Group contributed to a drop in Perfect World’s Chinese market share from 7.8% in Q1 2010 to 6.7% in Q1 2012. [2] [3] Perfect World has also faced problems due to rising popularity of casual games as its existing game portfolio is majorly focused on MMORPG games.

Going forward, Perfect World intends to leverage growth in the Chinese gaming market by launching a diverse pipeline of games. A number of new MMORGP games are expected to be launched in 2013. In the latest earnings call, Perfect World indicated that Swordsman Online and Saint Seiya Online are in the final stages of development and will be launched later this year. It has also gained exclusive rights to operate Dota -2, a world-famous title with a unique mix of action, real-time strategy (RTS) and role-playing game (RPG) in China.

In addition to launching MMORGPs, Perfect World is also focusing its R&D efforts towards developing web games and mobile games to tap growth in these market segments. It recently introduced a web-game Adventure in the Three Kingdoms in China. [4]

Perfect World also continues to release expansion packs for its existing portfolio of games to maintain their healthy life cycle. In the recent past, several expansion packs were launched including King of the Gods for Battle of the Immortals, Legend of Yellow Emperor for Dragon Excalibur, Heavenly Scripture for Fantasy Zhu Xian, The Wolf for Forsaken World and Call of Heaven for Perfect World. [4]

We think Perfect World’s strategy to launch a diverse pipeline of games and expansion packs could lead to stabilization in its user base in the future.

Our $15.50 price estimate for Perfect World represents near 50% upside to the current market price. Cash (net of debt) is the main reason for our high valuation, which accounts for around 60% of our price estimate for Perfect World’s stock.

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Notes:
  1. China’s Online Game Industry Sales Reached CNY60.28 Billion In 2012, iResearch, January 17, 2013 [] []
  2. Analysys International: Tencent Took Over 25% of China Online Game Market in Q1, 2010, Analysys International, September 09, 2010 []
  3. Tencent’s Online Gaming Dominance Grows as Market Expands to $1.78 Billion, TECH IN ASIA, May 25, 2012 []
  4. Perfect World Announces Recent Business Developments, PRNewswire, March 11, 2013 [] []