Perfect World New Coverage: $21 Trefis Price Estimate

Perfect World (NASDAQ:PWRD) is one of the top online game companies in China. It specializes in MMORPGs (massively multiplayer online role playing games) and competes primarily with other game developers like NetEase (NASDAQ:NTES), Tencent, Shanda Interactive, Giant Interactive, and ChangYou. Besides its game operations in China, it has also set up subsidiaries in various regions like North America, Europe and Japan, and has launched several localized versions of its games, including Perfect World, Jade Dynasty, Battle of the Immortals and Forsaken World there. It has also acquired or partnered with game studios like Runic Games, Cryptic Studios and Zombie Studios to expand its international reach. The company sets itself apart in the China market by licensing its games to other publishers globally, and earns licensing fees and ongoing royalties. Its international offerings compete with MMORPGs like World of Warcraft by Activision Blizzard (NASDAQ:ATVI), and Warhammer Online by Electronic Arts (NASDAQ:ERTS).

We currently have a $21 Trefis price estimate for Perfect World, which is nearly double its current market price.

Perfect World’s Major Business Divisions

• Games in China
• Games (International)
• Game Licensing, Film & TV

Declining Active User Base in China Worrying

Perfect World had one of the biggest MMORPG player base in China in 2009, with around 1.8 million active paying users, which dropped to about 1.28 million in 2010 as the competition in the Chinese online gaming space intensified. Its most recently launched games in 2010 and 2011 failed to gain much traction, which also contributed to the decline in user numbers.

The shrinking user base could also be explained by the rising popularity of casual social games, which are luring gamers away from traditional MMORPGs. We expect the decline to slow down considerably in the coming quarters as Perfect World launches expansion packs for its existing games and launches new games like Heaven Sword and Dragon Saber.

We currently forecast a marginal decrease in the active paying customers in the next couple of years. You can tweak this graph to see how any change in the number of active paying customers could affect Perfect World’s price estimate.

International Game Operations and Game Licensing

While its Chinese game operations have shown a decline in user growth in the past few quarters, its international game operations and game licensing businesses continue to generate increasing amounts of revenue year-on-year. We expect its international game operations and licensing business to generate a significant portion of its overall revenue in the coming years.

Tweak these charts to understand how any changes in its international game operations and licensing revenues impact Perfect World’s Trefis price estimate.

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