Growth investors are having no problem feeding at the online-gaming trough in China. Perfect World (Nasdaq: PWRD) became the latest speedster to earn its racing stripes, with this morning's monstrous second-quarter report.
Revenue soared 56% to $76.3 million. Earnings hit the accelerator even harder and soared by 60% to $38.4 million, or $0.72 a share. That was good enough to beat even the analysts' lofty targets of 50% top-line growth and $0.64 a share on the bottom line.
You're not misreading the earnings as they relate to revenue. Net margins did clock in at 50.3%, so a little more than half of every dollar generated in revenue survived the income statement's digestive tract.
The high-margin nature of Web-based games and China's kind taxation rates combine to produce profit margins that will make stateside companies blush.
Shanda (Nasdaq: SNDA) and NetEase.com (Nasdaq: NTES) have been leading the way in this sector for years, but as the market continues to expand and China's young people have increasingly more money to spend, newer entrants such as Giant Interactive (NYSE: GA), Changyou.com (Nasdaq: CYOU), and Perfect World are having an easier time harmoniously carving out their own respectable chunks.
There are risks, of course. Beyond the prospects of buying into a booming yet politically volatile nation, investors should also remember that China has spent the past few years casting a dubious eye toward the addictive nature of Web-based gaming. Controversial "treatment clinics" have popped up. Usage curbs at Internet cafes have kicked in. And censorship standards always pose a potential stumbling block. Activision Blizzard's (Nasdaq: ATVI) World of Warcraft, for example, had its re-entry into China delayed this summer, with regulators forcing the company to clean up some of the game's gangland principles.
Yet Perfect World still offers a risk worth taking. You know those high-octane spurts we discussed earlier? Perfect World is fetching just 15 times this year's projected profitability, along with a mere earnings multiple of less than 13 if you look out to 2010.
A lot can change between now and then, although in the near term, analysts are likely to revise their guesstimates higher.
Online gaming is still a winner in China, even if it's one that needs to be monitored closely.
Three more ways to play in China:
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