Gaming is Cheap in China

China may be scaling back its economic growth targets, but don't tell that to the country's youthful gamers.

Giant Interactive (NYSE: GA  ) posted encouraging quarterly results last night. Revenue climbed 34% to $78.6 million, fueled largely by a 28% spike in active paying users but also aided by a reasonable uptick in revenue per user.

The company behind the popular ZT Online franchise posted a profit of $0.17 a share that was in line with Wall Street's expectations.

Now that we've seen several of China's leading online gaming companies close out 2011 in healthy fashion, it's a good time to explore how cheap these stocks truly are. Let's go over the earnings multiples that these companies are fetching based on analyst estimates for this year and next year.

Company

2012 P/E

2013 P/E

Giant Interactive 7 6
NetEase.com (Nasdaq: NTES  ) 11 10
Perfect World (Nasdaq: PWRD  ) 4 4
Changyou.com (Nasdaq: CYOU  ) 5 5
Shanda Games (Nasdaq: GAME  ) 5 5

Source: Yahoo! Finance.

With the exception of NetEase, all of these stocks are trading at forward earnings multiples in the mid-single digits.

It's not as if NetEase is expensive. It's fetching a ridiculously low multiple for a pioneer that posted revenue and earnings growth of 28% and 25%, respectively, in its latest quarter.

Are there risks involved in both investing in China and betting on multiplayer online games? Absolutely. However, the low valuations reveal opportunities for those willing to take chances.

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Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Motley Fool newsletter services have recommended buying shares of NetEase.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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