Bettting on Shanda Interactive

SHANGHAI (TheStreet) -- I have been in China for the last week visiting with different companies. Throughout the trip, I'm going to be reporting on it in regular updates in TheStreet as well as RealMoney.

On Monday, I met with Shanda Interactive Entertainment (SNDA) in Shanghai. Going into the meeting, I had no idea that Chinese gaming and Internet stocks were going to have such a strong week. What sent the entire sector rocketing higher was Sohu.com's (SOHU) positive earnings results which showed advertising revenue strongly ahead of analysts' expectations. This sent other Chinese portals like Sina(SINA) and online gaming companies like Changyou(CYOU) rocketing higher. Changyou is the publicly-traded online gaming company owned by Sohu.

The good news of Sohu showed that China's economy is still hot and growing, bringing more and more advertising revenue and usage to Web companies there.

Which brings us back to Shanda. The company is as old as other first-generation Chinese Internet companies like Sohu and Sina, yet they haven't been as high-flying of late -- especially after missing their second-quarter earnings' estimates by 12 cents a share. The key questions are why have they lost their mojo and can they get it back?

There are two Shanda-related companies which trade in the U.S.: Shanda Interactive, which is the original parent company with whom I met, and Shanda Gaming (GAME), which is the online gaming business subsidiary of Shanda Interactive.

Shanda Gaming was spun-out from Shanda last year to better let investors assign its value as a stand-alone from the parent. However, investors have tended to ignore both the online gaming company and the parent since that spin-out. The enterprise value to EBITDA ratios of Shanda and Shanda Gaming are 3.6x and 5.2x respectively. Contrast that to Sohu's and its online gaming subsidiary Changyou's of 10x and 8.6x. It's clear that Shanda has been lost in the shuffle.

The parent Shanda relies on its online gaming group as its cash cow to bring users back. It has done a great job over the last 10 years of producing a number of hit games. It's also established its platform as a popular enough forum for developers to build and show their games on. The company is relying on the belief that its open and popular platform will continue to attract gamers. Most of their games are played online on computers, but they are working to allow more and more games to be available to play on mobile phones, including the very popular iPhone 4 and iPad from Apple(AAPL).