China Is Playing to Win

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What does it mean when five companies that specialize in online multiplayer games in China step up to the earnings stage, and all five far exceed Wall Street's profit expectations?

I'll tell you. It means that the key players are growing, and it's not coming at the expense of their rivals. The same niche -- which hit a bump last year when the Chinese government began curbing the growth of Internet cafes -- is back in the game.

You saw it yesterday. Shares of Perfect World (Nasdaq: PWRD) soared 12% higher after the company posted stellar results. Revenue soared 325% to $35.4 million, as a meager quarterly loss a year ago was transformed into a $0.34-a-share profit. Analysts were braced for earnings of just $0.27 a share, with $29.7 million on top.

Shanda Interactive (Nasdaq: SNDA) then took the baton and ran it all the way to the finish line last night. Earnings grew by 22%, to $0.54 a share, though non-GAAP profitability -- the metric analysts use in gauging Shanda's performance -- rocketed 68% higher to $0.58 a share. Revenue climbed by a healthy 52% to hit $97.8 million. (Rewind to the company's third-quarter earnings here.)

The pros were also well short on Shanda, looking for an adjusted profit of just $0.45 a share on $93.5 million in revenue.

Shanda and Perfect World are making the most of their growing assortment of established titles, expansion packs, and new games. They balance their gaming exposure by offering some flagship games as pay experiences, with other multiplayer diversions positioned to cash in when hooked players pony up for virtual accessories.

The companies certainly know how to draw crowds. Shanda watches over 3.5 million active paying accounts, while the fast-growing Perfect World has now lapped the 1.5 million mark of active paying users.

It was a great Monday for the niche, but it was also one that could have been easily predicted after watching peers NetEase.com (Nasdaq: NTES), Giant Interactive (NYSE: GA), and The9 (Nasdaq: NCTY) all trounce expectations.

If I saw it coming last week, surely you must have, too.

Five for five, my friend
"It's time to get excited again about the online gaming industry in China," I wrote on Thursday after NetEase and Giant lapped their respective profit targets. "After a pair of blowout quarters last night from two of the five stand-alone players -- with the other three set to report over the next few trading days -- it's shaping up to be a growth market again."

Now that we have a scorecard of all five companies, it looks like the sector is a star pupil.

	Q4 est.	Q4 actual
NetEase.com	$0.30	$0.41
Giant Interactive	$0.16	$0.19
The9	$0.25	$0.40
Perfect World	$0.27	$0.34
Shanda Interactive	$0.45	$0.58

I'll confess that I'm surprised to see all five players proving that their corporate realities are far grander than Mr. Market's perceptions. I had the lingering doubt that all of this growth had to be coming at the expense of weaker players.

Naturally, not every company is growing at the same pace. The younger Perfect World and Giant are running faster than their established peers. However, the market itself is clearly growing.  

This opens the door for even smaller players making a push in this space, like CDC (Nasdaq: CHINA) or even a stateside juggernaut like Electronic Arts (Nasdaq: ERTS), which has a play here through its minority stake in The9.

Either way, the message is clear. It took four out of five dentists to endorse sugarless gum to get folks to chew Trident. Now you have five out of five online multiplayer fantasy game specialists in China letting you know to put your money where their virtual mouths are.

And chew.

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