Shanda Interactive Entertainment
Bought May 28, 2005 at $32.08
(daily chart from Google)
Shanda Interactive Entertainment (SNDA) is a Chinese gaming company, specializing in massively multiplayer online role playing games -- sort of the modern equivalent of Dungeons and Dragons, only played online with thousands of other people in a virtual world. As odd as that may sound, these games are extremely popular in asia and,
indeed, in the U.S. Though home and mobile internet access is still not terribly advanced in China, internet cafes are extremely widespread, and online gaming at these cafes is a very well received and inexpensive form of entertainment.
Shanda has a lot of competition, but they are one of the few very big players in the space, with several games active at any one time. The most popular games often have hundreds of thousands of concurrent players, so you can see that even if players pay only a few cents for their time in the game the income adds up quickly for Shanda and their competitors, which include Netease, Sina, Tom Online, The9 and others, many of them very small with only one or two games available. Shanda has a few very popular multiplayer online roleplaying games, as well as a good selection of what they call "casual games".
Why did I buy it?
I first got interested in Shanda when I saw that they had bought a large interest in Sina, Yahoo's China portal partner and a Chinese internet leader by all accounts. I read further and saw that Shanda was growing very quickly with a very high profit margin (most of the cost of online gaming is frontloaded with development and testing -- the money that keeps rolling in after that for the years the game is in use all comes at very high margins). To go beyond that, it also had -- and continues to have -- a very low PE ratio for such an explosively growing stock with good future prospects. Current PE is in the neighborhood of 35, and the growth rate for the past year has been hitting 100% year over year, with growth of at least 50-60% projected for future years by the analysts who follow this stock. Take those analyst's guesses with a grain of salt, but it seems like a reasonable guess to me given the growth in internet penetration in China and the popularity of their games. Around this same time, I subscribed to the Rule Breakers newsletter from Motley Fool and they recommended it as well, with a nice writeup on both SNDA and one of its competitors, Netease.
Finally, I also got a very good feeling about the CEO of the company. Chen Tianqiao is 32 years old, but he is the wealthiest man in China and it appears he's hungrily trying to become the Bill Gates of China (good article on him in Forbes recently, and another in Business Week). With the acquisition of a big Sina position and the partnership with a hardware company to develop a Shanda Box that would serve online game content to the home as well as being basically the equivalent of a limited media center PC, with ability to also provide music (via partnership with Universal) and other internet access, this company is becoming much more than a gaming play. While risky, I see this as another great way to diversify and drive more users to Shanda's content.
In general, I just really like the idea of a high margin business that's providing a popular service to Chinese residents (instead of just counting on cheap Chinese labor) -- growth will come from the increasing standard of living in China and the extending tentacles of Shanda's diversification into related businesses. And I especially like the fact that the PEG (Price/Earnings Ratio divided by growth rate) is about .5 -- anything below 1 is an indicator that the company might be undervalued, as I believe Shanda is despite it's relatively lofty PE.
What do I think will happen in the coming years?
I think Shanda will continue to grow very, very quickly, though there's also the possibility that they could be a major acquirer of another big Chinese player (as was speculated after the partial Sina acquisition). I expect growth to taper off over time but to stay very robust, going from the current 100% growth down to perhaps 30% year over year on average over the next five years or so.
I also think that the gaming platform and the new games coming out, especially their release of Dungeons and Dragons, will be enough to make the company very successful for the coming years -- but that the home Shanda Box and their other internet diversification and content delivery portal strategies will drive traffic and advertising and possibly drive big upside surprises in earnings.
I expect a very bumpy ride -- Shanda does not provide guidance, so analysts may well be way off base or get surprised. I generally prefer companies that don't provide guidance, not only because it confounds the analysts and makes them work harder but also because it tends to indicate a long-term focus by management and less of a short-term "hitting the numbers" obsession.
When or why would I sell?
I don't see any reason why I might sell over the coming several years, but there are a few possibilities. If Chinese authorities begin to overregulate online gaming, I might consider lightening my position. If the company is sold to another, I would probably sell out -- one thing I'm buying is the management here, so it is important to me that it continue to be run by Tianqiao Chen (even if I can't spell his name). If other short term problems come up, such as one or two unsuccessful game releases or big success by a competitor with a new game, I would probably consider any drop in SNDA as a buying opportunity.
More information about Shanda:
The China Stock Blog has some good pieces on SNDA and other Chinese investments -- one good post is here, but there are others there worth reading as well -- indexed at http://www.chinastockblog.com/ticker_snda/.
Motley Fool covers SNDA pretty well too, especially now that it's an official pick of one of their subscription services. You can view their company info here, or just search their site for commentary (or join Rule Breakers to see the full writeup and get their more detailed analysis and followup).
SNDA's annual report (10K) and other filings are available from the Edgar database from the SEC, as are those of all public companies. The 10K is a must read before investing, all SNDA filings can be found here.
Information and quotes from Yahoo, MSN, Motley Fool and Clearstation available here
Technorati tags shanda, Chen Tianqiao, mmporpg
Bought May 28, 2005 at $32.08
(daily chart from Google)
Shanda Interactive Entertainment (SNDA) is a Chinese gaming company, specializing in massively multiplayer online role playing games -- sort of the modern equivalent of Dungeons and Dragons, only played online with thousands of other people in a virtual world. As odd as that may sound, these games are extremely popular in asia and,
Shanda has a lot of competition, but they are one of the few very big players in the space, with several games active at any one time. The most popular games often have hundreds of thousands of concurrent players, so you can see that even if players pay only a few cents for their time in the game the income adds up quickly for Shanda and their competitors, which include Netease, Sina, Tom Online, The9 and others, many of them very small with only one or two games available. Shanda has a few very popular multiplayer online roleplaying games, as well as a good selection of what they call "casual games".
Why did I buy it?
I first got interested in Shanda when I saw that they had bought a large interest in Sina, Yahoo's China portal partner and a Chinese internet leader by all accounts. I read further and saw that Shanda was growing very quickly with a very high profit margin (most of the cost of online gaming is frontloaded with development and testing -- the money that keeps rolling in after that for the years the game is in use all comes at very high margins). To go beyond that, it also had -- and continues to have -- a very low PE ratio for such an explosively growing stock with good future prospects. Current PE is in the neighborhood of 35, and the growth rate for the past year has been hitting 100% year over year, with growth of at least 50-60% projected for future years by the analysts who follow this stock. Take those analyst's guesses with a grain of salt, but it seems like a reasonable guess to me given the growth in internet penetration in China and the popularity of their games. Around this same time, I subscribed to the Rule Breakers newsletter from Motley Fool and they recommended it as well, with a nice writeup on both SNDA and one of its competitors, Netease.
Finally, I also got a very good feeling about the CEO of the company. Chen Tianqiao is 32 years old, but he is the wealthiest man in China and it appears he's hungrily trying to become the Bill Gates of China (good article on him in Forbes recently, and another in Business Week). With the acquisition of a big Sina position and the partnership with a hardware company to develop a Shanda Box that would serve online game content to the home as well as being basically the equivalent of a limited media center PC, with ability to also provide music (via partnership with Universal) and other internet access, this company is becoming much more than a gaming play. While risky, I see this as another great way to diversify and drive more users to Shanda's content.
In general, I just really like the idea of a high margin business that's providing a popular service to Chinese residents (instead of just counting on cheap Chinese labor) -- growth will come from the increasing standard of living in China and the extending tentacles of Shanda's diversification into related businesses. And I especially like the fact that the PEG (Price/Earnings Ratio divided by growth rate) is about .5 -- anything below 1 is an indicator that the company might be undervalued, as I believe Shanda is despite it's relatively lofty PE.
What do I think will happen in the coming years?
I think Shanda will continue to grow very, very quickly, though there's also the possibility that they could be a major acquirer of another big Chinese player (as was speculated after the partial Sina acquisition). I expect growth to taper off over time but to stay very robust, going from the current 100% growth down to perhaps 30% year over year on average over the next five years or so.
I also think that the gaming platform and the new games coming out, especially their release of Dungeons and Dragons, will be enough to make the company very successful for the coming years -- but that the home Shanda Box and their other internet diversification and content delivery portal strategies will drive traffic and advertising and possibly drive big upside surprises in earnings.
I expect a very bumpy ride -- Shanda does not provide guidance, so analysts may well be way off base or get surprised. I generally prefer companies that don't provide guidance, not only because it confounds the analysts and makes them work harder but also because it tends to indicate a long-term focus by management and less of a short-term "hitting the numbers" obsession.
When or why would I sell?
I don't see any reason why I might sell over the coming several years, but there are a few possibilities. If Chinese authorities begin to overregulate online gaming, I might consider lightening my position. If the company is sold to another, I would probably sell out -- one thing I'm buying is the management here, so it is important to me that it continue to be run by Tianqiao Chen (even if I can't spell his name). If other short term problems come up, such as one or two unsuccessful game releases or big success by a competitor with a new game, I would probably consider any drop in SNDA as a buying opportunity.
More information about Shanda:
The China Stock Blog has some good pieces on SNDA and other Chinese investments -- one good post is here, but there are others there worth reading as well -- indexed at http://www.chinastockblog.com/ticker_snda/.
Motley Fool covers SNDA pretty well too, especially now that it's an official pick of one of their subscription services. You can view their company info here, or just search their site for commentary (or join Rule Breakers to see the full writeup and get their more detailed analysis and followup).
SNDA's annual report (10K) and other filings are available from the Edgar database from the SEC, as are those of all public companies. The 10K is a must read before investing, all SNDA filings can be found here.
Information and quotes from Yahoo, MSN, Motley Fool and Clearstation available here
Technorati tags shanda, Chen Tianqiao, mmporpg
This article posted by One Guy @ 6/27/2005 02:29:00 PM 0 comments
Add to: del.icio.us *Furl *Google *Spurl *reddit *StumbleUpon *Yahoo MyWeb *
Add to: del.icio.us *Furl *Google *Spurl *reddit *StumbleUpon *Yahoo MyWeb *
