Giant Interactive shares decline after 2Q report

Giant Interactive Group Inc. shares fell Thursday after the company reported second-quarter earnings that met analysts' views but declined to give third-quarter guidance, which prompted an analyst to downgrade the stock.

American Depositary Shares of the Shanghai-based online gaming company fell 22 cents, or 2.3 percent, to $9.43. The stock has traded between $8.46 and $20.46 since Giant began trading publicly in November.

Late Wednesday, Giant said it earned 20 cents per ADS on $73.6 million in revenue; analysts polled by Thomson Reuters expected a profit of 20 cents per share on $72.2 million in revenue.

The company said it would not give third-quarter guidance because of changes it made in July to the revenue model for its flagship game, "ZT Online." Giant believes the changes will impact revenue in the near term but, over time, increase the number of players and active paying accounts.

In a client note, Roth Capital Partners analyst Adam Krejcik downgraded the stock to "Hold" from "Buy" and lowered his 2008 and 2009 estimates for the company, saying his initial rating has been incorrect.

"While we think Giant has the ability to 'right the ship,' given our expectations for a challenging (second half of 2008) and lackluster pipeline we no longer feel comfortable recommending shares of Giant," he said.

The analyst noted an increase in operating expenses during the second quarter, and said he expects Giant to keep feeling operating margin pressure.

He also said that checks indicate playing levels in July and August are "flat to down" for "ZT Online" and "Giant Online."

"We believe Giant desperately needs new content and we do not have very high expectations for 'Empire of Sports' or 'King of Kings III,' both of which have been pushed out to (the first quarter of 2009) and could be delayed further," said Krejcik, who has a $10 price target for the stock.