Amid the hype and spectacle of the Beijing Olympics, don't forget about The9 (NASDAQ:NCTY). The online-gaming company is scoring nicely as it grows Activision Blizzard's (NASDAQ:ATVI) World of Warcraft in China, as yesterday's second-quarter results revealed.

Why squander all the details of this solid report on a single paragraph, when I can take the company's name to heart and spell out The9 reasons why the overseas publisher impresses me?

1. Results
Revenue climbed 69% to $66.3 million. Earnings more than doubled to $0.61 a share. Analysts were only expecting a profit of $0.49 a share. This is the third consecutive quarter in which The9 beat Wall Street estimates by at least 24%.

2. Overcoming adversity
Keep in mind that this was the same quarter in which China suffered its devastating earthquakes. The destruction was far-reaching, and gaming companies like The9 shut down for a subsequent three-day mourning period.

3. Setting the tone
The9 is one of the five publicly traded companies that specialize in online gaming in China. Perfect World (NASDAQ:PWRD), (NASDAQ:NTES), Shanda Interactive (NASDAQ:SNDA), and Giant Interactive (NYSE:GA) all report later this month.

4. Critical mass
As many as 1.3 million people were playing The9's games -- mostly World of Warcraft and Soul of the Ultimate Nation -- at any one time. That's a ton of diehard gamers, until you realize that there are more than 1.3 billion people in China. Having 0.1% of the population playing your games all at once is cool, but it's just scratching the surface. The9 closed out the quarter with 41.5 million registered users.

5. Money
With $208.1 million in cash at the end of the quarter, The9 has roughly $7.50 a share in the bank. The company has already spent money in recent quarters on share repurchases and acquiring stakes in small game developers, and it obviously has money to keep doing so.

6. Diversification
The company has several games in the pipeline, and its investments in promising developers is not coincidental. World of Warcraft won't last forever, and The9 would be better off having proprietary hits in the future, without someone else pulling its puppet strings.

7. Validation
Electronic Arts (NASDAQ:ERTS) acquired a 15% stake in The9 last year. The deal also set up The9 to distribute Chinese versions of EA's online games like FIFA Soccer in China. Rival Activision's acquisition of World of Warcraft parent Blizzard this year makes this relationship awkward, but The9 has proven itself a winner in growing a hot game's presence in China.

8. Valuation
Value investing and China may be odd bedfellows, but have you seen the prices that the country's online gaming companies are fetching these days? They're unbelievably cheap, given the sector's heady growth.



2009 EPS est.

2009 P/E

Perfect World







Shanda Int.




Giant Int.








Source: Yahoo! Finance.

This is a booming corner of the market, yet the five leading players can be had for just nine to 14 times next year's earnings. Many of these companies -- like The9 -- also happen to be blessed with cash-rich balance sheets. In other words, if you back out their net cash positions to arrive at enterprise value, the P/E multiples drop even further, even if you do handicap for the interest income they're generating.

9. Timing
You have to love a Shanghai company posting earnings on the eve of the Olympic Games kicking off in Beijing. The9 probably didn't plan it that way, but it won't mind performing so well when the country's spotlight is at its brightest.

Well played, The9.

Power up, Fool:

NetEase and Shanda are Motley Fool Rule Breakers recommendations. Electronic Arts and Activision Blizzard are Motley Fool Stock Advisor picks. A free 30-day subscription offer is available for either newsletter service.

Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin gaming stocks for a long time. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He owns no shares in any of the companies in this story. The Fool has a disclosure policy.