One Giant Chinese IPO

Yao Ming isn't the only giant in China. Online game specialist Giant Interactive (NYSE: GA  ) went public this morning, giving investors one more way to play the growing leisure market in one of the world's hottest economies.

The offering was priced at $15.50, raising gross sale proceeds of $886.6 million. Shares of the company behind the popular ZT Online game opened 18% higher and were creeping slightly higher in the afternoon.

As far as hot Chinese IPOs go, Giant is dwarfed by some of last month's champions. Insurance brokerage CNinsure (Nasdaq: CISG  ) opened 56% higher yesterday. China Digital TV (NYSE: STV  ) popped 75% higher during its first day on the market in October. Even fellow video game specialist Perfect World (Nasdaq: PWRD  ) had a heartier pop after its summertime debut.

What's holding Giant's gains in check? Well, perhaps it's the better than $4 billion market cap the IPO is carrying around. Market leader NetEase.com (Nasdaq: NTES  ) commands just a $2.8 billion market cap.

Through the first half of 2007, NetEase has posted $139.5 million in net revenue, with $124.8 million of that coming from online games. During those same six months, Giant has posted just $90.3 million in revenue, generating lower net profit margins than NetEase along the way.

So why is Giant worth more than NetEase? Well, Giant is growing quickly, as ZT is a "giant" hit in China. NetEase's growth, on the other hand, has been stagnant in recent quarters.

NetEase's pause should worry Giant investors, though. Companies like NetEase and Shanda (Nasdaq: SNDA  ) have had that moment of market superiority in the sun, only to see hot properties like ZT and The9's (Nasdaq: NCTY  ) World of Warcraft eat into the multiplayer gaming market.

The market has also been hesitant to put too much faith into the online gaming sector. The government's crackdown on Internet cafes, and its regulation of usage restraints for minors earlier this year, have kept valuations modest. In fact, despite the red-hot market for Chinese equities, online gaming stocks are fetching some surprisingly low valuations.

2008 EPS est.

2008 P/E est.

NetEase

$1.22

17.1

Shanda

$1.82

21.6

The9

$2.06

15.4

This doesn't mean one should dismiss Giant. However, it will need to keep growing at a healthy pace to justify the new ceiling valuation for Chinese gaming stocks.

Higher ceilings aren't a bad thing, as long as the floor doesn't give out below.

Some other differing thoughts on buying into China now:


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