A Chinese Growth Story That You Shouldn't Miss

The Chinese online gaming market is on a roll, and so is Giant Interactive (UNKNOWN: GA.DL  ) , one of the larger game developers in the region. Competing against the likes of bigger players such as Tencent (NASDAQOTH: TCEHY  ) and NetEase (NASDAQ: NTES  ) , Giant has held its ground well on the back of successful games such as ZT Online and World of Xianxia.

Giant has reported a string of solid quarterly performances in the recent past, delivering revenue growth 15 times on the trot. Its recently reported third quarter was no different either. Giant's revenue grew 8.6% in the previous quarter from the year-ago quarter while non-GAAP net income increased 8.8%. More importantly, active paying accounts increased 4.2% from the prior-year period to 2.34 million as World of Xianxia's launch was successful, and expansion packs for ZT Online also helped.

You might be thinking that Giant's year-over-year growth figures aren't too exciting, but then, the company trades at just 11.8 times earnings even though it has appreciated a tad above 60% this year. In addition, its recently initiated semi-annual dividend puts the yield at a sizable 5.60%. Giant looks financially sound as well since it has less than $100 million in debt and almost $600 million in cash.

Giant's impressive strategies
Giant is employing different strategies to grow its revenue channels. Its ZT Online franchise has been running successfully and Giant has been introducing more content to keep gamers engaged, like it did in the previous quarter. To bolster its portfolio, Giant introduced World of Xianxia earlier this year. This game has been successful in beta testing and contributed to revenue growth in the previous quarter.

Now, Giant is looking to add one more revenue driver in the form of Jianghu, its massively multiplayer online (MMO) gaming flagship for 2014. Giant has already spent three years developing Jianghu and it will be entering its testing phase next month.

To amplify the reach of its online games, Giant is collaborating with Qihoo 360 Technology (NYSE: QIHU  ) . The two of them partnered last year to operate the micro-client version of ZT Online 2, while World of Xianxia is also being operated on Qihoo's platform. The partnership with Qihoo could be an important driver for Giant Interactive, as Qihoo's network covers 461 million active PC Internet users in China. This is approximately 96% of total active Internet users in the country. 

Moreover, Qihoo is known for its security products, which could be another reason why Giant has elected to operate its games on its gaming platform. The security aspect has probably helped Qihoo gain more business. In the previous quarter, Qihoo's gaming revenue had increased 155% year over year, while paying gaming accounts increased to 440,000 from 360,000 in the prior quarter. 

Giant is diversifying its portfolio by aggressively moving into other gaming platforms such as web games, mobile games, and micro-client games. The company has already started rolling out web games such as Supreme Tai-Chi and Genesis of the Empire. The initial response to these games has been positive, according to Giant, and the company plans to port these games to other platforms as well to maximize revenue generation.

In mobile, Giant is slated to introduce its first two games in the coming quarters. One of these would be ZT Online Mobile, which is a good move since the company would be able to leverage the success of the online version of the game in mobile. 

Aiming high despite stiff competition
The web game market is expected to grow at a rate of 40% annually in China and Giant could be well on its way to benefit from it. Management believes that its expansion across platforms will help it gain more market share, and this is important since Giant is competing against bigger companies such as Tencent and NetEase as mentioned earlier.

Tencent is the leading game operator in China. It is also the provider of the popular WeChat messaging service. Tencent recently introduced a new feature in WeChat that would allow users to play freemium games (free to play but users need to pay for in-game purchases). In addition, Tencent management has also stated that the company would aggressively consider buying game developers while also developing more free-to-play content, according to Reuters. 

NetEase, on the other hand, has been focusing on developing its own games as it looks to reduce its dependence on Activision Blizzard's World of Warcraft. NetEase has already launched Heroes of Three Kingdoms and Dragon Sword, and now plans to win over more gamers by aggressively marketing its games. NetEase is also looking to keep gamers engaged by releasing expansion packs, something that it has already done in case of Ghost II and Fantasy Westward Journey II, and can be expected to follow this strategy in the future as well.

The bottom line
Despite the presence of such big players, Giant has managed to increase its subscriber count as seen in the previous quarter. Going forward, Giant's platform diversification strategy and game development should help the company to increase its business further. A cheap valuation, a fat dividend yield, and the fact that earnings are expected to increase at a robust rate of 16% per year for the next five years are some more reasons why Giant Interactive is still a good investment despite its solid run this year.

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