A Growth Recipe for Shanda

The Chinese gaming market is booming at a time when businesses are scrambling for cover over the European debt crisis and a potential slowdown in the Chinese economy. And despite the dour mood, the Chinese online gaming market is expected to pass $8 billion by 2014.

So, how does online Chinese gaming company Shanda Games (Nasdaq: GAME  ) stand to gain from this? Before we get into that, let's take a closer look at Shanda's recent first-quarter numbers...

The scores
Shanda's total revenue for the first quarter increased by about 15% to $220.5 million from the prior-year period, while net income also increased by 12% to $53.5 million.

In contrast, industry peer Giant Interactive (NYSE: GA  ) managed to grow its top line by 31% from the prior-year period.

While Shanda has seen revenue improve due to better overseas sales, the company still derives the majority of its revenue (92.7%) from its domestic market in China. The company's domestic revenue increased by about 8.7% from the year-ago quarter, while overseas revenue was up by about 50%.

But should these figures make you enthusiastic? Not entirely.

According to Chinese research company Niko Partners, the percentage of revenue from massively multiplayer online role-playing games, or MMORPG, has declined quite a bit over the past few years. And with most of Shanda's revenue coming from this space, the company needs to diversify its targeted segments.

Fortunately, Shanda is taking the multiplatform strategy seriously. The company is developing games across a series of platforms including mobile, Web, and micro-clients, which give the user added flexibility in downloading only those parts of a game that are required. Micro-client versions of games are becoming increasingly popular as the number of gamers grows across China. Moreover, the company is also diversifying geographically, though the share of revenue from other non-domestic markets still remains in single-digit percentages.

The Foolish bottom line
Shanda surely seems to be taking the right steps toward growth. And despite the economic uncertainty, the company seems to be doing well for itself with its expansionary strategies. However, in the near term, it does face competition from other gaming biggies such as Tencent and Giant Interactive. What do you think about Shanda's prospects? Let us know by leaving your comments in the box below.

Also don't forget to stay up to speed with the latest news and analysis on Shanda by adding it to your watchlist. It's free and lets you stay on top of the latest news and analysis for your favorite companies.

If Shanda's story doesn't interest you, you can check out a free report brought to you by The Motley Fool called " Discover the Next Rule-Breaking Multibagger." Hurry up and check it out while it's still available.

Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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