Perfect World’s Earnings Preview: International Markets In Focus

20.15
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PWRD: Perfect World logo
PWRD
Perfect World

Perfect World (NASDAQ:PWRD), a Chinese online gaming company, will be announcing its Q2 2012 earnings on Monday, August 27. Though the company has been registering a continuous increase in its revenue, over the years the growth rate has slowed down. Perfect World has lost market share in the past couple of years, primarily because of increasing competition in the online gaming space due to the entry of heavyweights such as NetEase, Tencent, Shanda Interactive and Giant Interactive, among others; and the rise of casual gaming in the Chinese as well as the overseas markets. As the company continues to focus on preparing for upcoming new game launches in the latter half of the year, we do not expect to see any significant gains this quarter.

The company has lost over 50% of its stock value since September 2011, which we feel makes the stock a perfect buying opportunity. We assign a price estimate of $20 for the Perfect World stock, which is at a premium of over 90% to the current market price. (Read Our Article: Perfect World Shares Are Still Dirt Cheap)

Check out our complete analysis of Perfect World

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Enhanced Game Portfolio

During the first quarter Perfect World continued to build up a rich pipeline of diverse game portfolio. Additionally, to ensure the long-term sustainability of existing games, it is also increasingly focusing on content enhancement. Recently, the company released a series of expansion packs, including Tournament of Warrior Couples for Dragon Excalibur, Dance of Lucky Stars for Hot Dance Party, Fantasy Zhu Xian 2.0 for Fantasy Zhu Xian, and Scroll of Time Travel for its flagship title Zhu Xian.

While Perfect World II and Forsaken World continued to deliver strong performance in Q1 2012, the company is gearing up for the launch of two martial arts MMORPGs, Heaven Sword and Dragon Saber, and the Return of the Condor Heroes in the latter half of 2012. It is also working on other games such as  Swordsman Online,  Saint Seiya Online and a series of casual web-based games.

Effective Globalization Strategy

While its Chinese user base has shrunk over the last couple of years, dragging down its overall revenue growth, we estimate Perfect World’s international gaming revenue to have nearly doubled in 2011. The company has been focusing on expanding its presence in international markets such as Europe, America and Japan through its subsidiaries as well as by licensing its games to other game publishers in other countries such as Indonesia and Brazil.

Perfect World recently acquired US-based Cryptic Studios aiming to add additional world-class titles to its portfolio. The latter is working towards developing the much-anticipated game Neverwinter and certain other projects.

Going forward, we expect Perfect World’s overseas gaming licensing to drive revenue growth as its Chinese game operations have gradually taken a back seat. Q1 2012 was a slower season for in-game monetization activities for overseas operations, as the company primarily focused on preparing for new game launches and content enhancement in 2012. Thus, how the company fares in the international market is something we would look out for in the upcoming Q2 2012 results.

High R&D Expenses

Though the R&D expenditure increased significantly in Q4 2011, the same registered a slight decline in Q1 2012 primarily due to a decrease in staff cost. However, we expect Perfect World’s R&D spend to continue to increase going forward, as it will be forced to invest more in R&D to remain competitive in the international markets as well as retain its foothold in the domestic gaming scene.

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