Why Giant Interactive’s Upcoming Earnings Don’t Matter

According to IDC, the Chinese online gaming market is expected to grow at a robust compound annual growth rate (CAGR) of 15.6% till 2017. There are numerous options to benefit from this market, such as NetEase (NASDAQ: NTES  ) , Shanda Games, Perfect World, etc. However, online game developer Giant Interactive (UNKNOWN: GA.DL  ) has trumped the others in terms of returns to shareholders.

Giant has gained slightly over 60% this year, and that's just one part of what investors could like about the company. Despite solid gains, Giant still trades at a very reasonable 12 times trailing earnings and sports an eye-catching dividend yield of 5%. Its games have been doing well and Giant is looking to launch another blockbuster franchise going forward.

That's why, when Giant Interactive shares crashed 9% after it released its second-quarter results in August, there was an opportunity for investors to add to their long positions. When Giant shares crashed, Fool contributor Alex Planes remarked, "This company might not be growing as quickly as some, but it seems stable enough to provide consistent dividend-driven gains, at the least."

Some impressive moves
Giant took a beating after management offered cautious third-quarter guidance. However, as long-term investors, one should focus on how the company's long-term prospects look like. Hence, investors shouldn't really focus much on the company's upcoming third-quarter results this week. To benefit from the strong growth expected in the Chinese online gaming market, Giant is making some impressive moves and that's what should matter.

The company is looking to diversify its revenue stream by introducing another strong title in the form of World of Xianxia. Giant expects this game to become its next blockbuster and initial signs have been positive. The game's closed beta testing has been successful and it has already started contributing to revenue. World of Xianxia attracted a solid number of users in the second quarter and the company has received positive feedback from subscribers. 

If World of Xianxia is successful, it will diversify Giant's revenue stream. At present, Giant's ZT Online franchise has been driving results. In the previous quarter, gamers spent more while playing ZT Online 2 as they progressed through the game. Giant management said that they would be releasing another expansion pack in the third quarter to keep gamers engaged. 

A key partnership
Driven by ZT Online's success, Giant's active paid accounts were up 5% in the previous quarter to 2.3 million. Once World of Xianxia is launched, this metric can rise further. To aid the growth of its games, Giant has chosen Qihoo 360 Technology's (NYSE: QIHU  ) platform to operate its games. This is a very important move on Giant's part as Qihoo covers 461 million active PC Internet users in China, accounting for 96% of total active users. 

Qihoo is well-known for its security products and its gaming platform has been growing at a good pace. In the second quarter, Qihoo's revenue from gaming was up an impressive 155% year over year. The number of paying gaming accounts hit 440,000 as compared to around 360,000 in the prior quarter. Qihoo runs 270 games on its gaming platform and it is clear that it is gaining good acceptance.

This strategic partnership should help Giant bolster its position in the Chinese online gaming market in the wake of moves by bigger players such as NetEase. NetEase has been decreasing its reliance on Activision Blizzard's World of Warcraft -- which it operates in China -- by developing its own games. NetEase launched Heroes of Three Kingdoms and Dragon Sword recently and the company plans to attract more gamers by investing heavily in marketing.

As a result of such moves, NetEase managed to overcome a drop of 600,000 WoW subscribers in the second quarter, and turned in an impressive revenue jump of 20%. NetEase has also released expansion packs for games such as Ghost II and Fantasy Westward Journey II to keep gamers interested. However, Giant has held its ground well despite strong competition from the likes of NetEase and by going with Qihoo, it can expand its reach further.

The takeaway
Giant is pretty cheap, as mentioned earlier, and with earnings expected to grow at a rate of 18.4% annually for the next five years, it looks like an intriguing deal even after rising strongly this year. Its recently initiated semi-annual dividend is another strong reason why investors can still consider buying the stock and not worry much about its upcoming earnings release.

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  • Report this Comment On November 06, 2013, at 1:45 PM, Raphael1990 wrote:

    I hope the CEO says something like "flat revenue guidance" again then we can buy at 10% dicount tomorrow.

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