Giant Interactive Group (NYSE: GA) is a leading Shanghai, China-based online game developer and operator and operates in the Multimedia & Graphics Software industry. The company's main focus is on Massively Multiplayer Online (MMO) games. Giant's existing games include the ZT Online series, ZT Online 2 series, Giant Online, XT Online, ZT Online Classic, ZT Online Green, World of XianXia, Glorious Mission, and The Gold Land.
The company's stock is relatively cheap as it currently trades at EV/EBITDA of 7.13 times which is a discount in comparison to most of its closest peers. Apart from this, the company maintains profit margin of 47.81% when its industry's average is 9.86%. Another fundamental metric is the ROE. The industry's average is 16.38% but Giant maintains ROE of 37.32%. The most interesting part is that even at its cheaper valuation, it pays impressive dividends. Its trailing dividend yield is 4.80% while the industry's average is 2.33%.
Formerly known as Giant Network Technology Limited before it changed its name to Giant Interactive Group in 2007, the company was founded in 2004 and its IPO was in 2007. Giant has consistently declared cash dividends right from 2009 till date. In 2011, the company declared a significant special cash dividend of $3 per ordinary share. Presently, the company maintains a total cash balance of $532.31 million with zero debt.
Giant has a good number of competitors in the industry it operates in. Among these competitors is Perfect World (NASDAQ: PWRD). With a market cap of approximately $855.25 million, this company's shares are currently trading at $17.55 as at the close of market on Friday November 1, 2013. Perfect World's trailing profit margin is 14.19% and trailing ROE is 10.04%. In comparison to Giant's trailing profit margin of 47.81% and trailing ROE of 37.32%, it indicates differences of approximately 70.32% and 73% respectively. It yields 2.60% trailing 12 months with payout ratio of 44%. This shows that Giant is more profitable than Perfect World with stronger corporate leadership yet it is trading at a significant discount to Perfect World.
The next competitor in view is NetEase (NASDAQ: NTES). With a market cap of approximately $8.73 billion, NetEase shares are trading at $67.05. In terms of profit, NetEase maintains trailing profit margin of 45.79% and trailing ROE of 24.07%. NetEase yields 1.50% with payout ratio of 12%. NetEase currently has total cash balance of approximately $2.76 billion with a debt of $157.67 million in the most recent quarter.
Catalysts that will further drive Giant's growth
Apart from the growth strategies already put in place by Giant's management, there are significant factors playing out in the market that will further propel the company's growth going forward. They include:
- China's expanding online game market: According to a study carried out by Pearl Research, China's online games market increased ~32% in 2011 to a value of $6.6 billion and is projected to reach $8 billion in 2014. Considering thatChina is not foreign-consoles friendly, the MMORPGs rule the online games market, to the benefit of companies like Giant.
- Fast growth experienced in China's mobile gaming market: According to a report by a market research and analysis firm, Niko Partners, the Chinese mobile games market is expected to grow at a CAGR of 46% from 2012 through 2017. Although the trend has been on since 2006, it exhibited significant increase from 2012 upwards. Just like the online games market, Giant will have its fair share of the projected growth in terms of revenue and earnings.
- Significant growth in the Webgames market: With the visible expansion in Internet usage in China, there has been significant increase in the number of webgame users in the last three years. The number increased from approximately 25 million users in 2010 to approximately 60 million users in 2013, a double-fold increase.
- Growing active paying accounts: There has been an increase in the company's active paying accounts from second quarter of 2012 till date. The same thing applies to its Average Revenue per User (ARPU), although it has remained flat between third quarter of fiscal 2012 to first quarter of 2013, with further release of the company's pipeline products, the upward growth is sure to continue.
It is obvious that Giant Interactive is a highly profitable company with significant upside potential as a result of the projected growth in the online , mobile , and web games markets. An added bonus is the company's solid balance sheet, management's efficient cost control and ability to effectively cater for the gaming preferences of the product users. The impressive dividend yield will likely keep investors happy while they wait for market to finally recognize the true value of Giant Interactive.
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