China's Internet users reached 384 million by the end of 2009, more than the total population of the United States, according to the latest statistics released by the China Internet Network Information Center.
"Sixty percent of the Internet users here (China) are under the age of 30," Richard Ji, Internet analyst at Morgan Stanley, told
The New York Times
. "In the U.S., it's the other way around. And in the U.S., it's about information. But in China, the No. 1 priority is entertainment."
This presents a tremendous growth opportunity for Chinese online companies that are into gaming, news, content search and other online services. Massively multiplayer online role-playing game, or MMORPG, has grown at a rapid pace and revenue has witnessed compound annual growth rate of 100% over the last five years, yet it still remains an underpenetrated market.
IDC predicts that the China online gaming market will post a CAGR of 14.7% in the next five years and account for subscription revenue of RMB 50.8 billion ($7.5 billion) by 2014.
We have identified five stocks that we believe can ride this growth. They include
Giant Interactive Group
Shanda Interactive Entertainment
( SNDA) and
. These stocks are trading at attractive forward PEs of 13.24, 12.44, 9.18, 13.30 and 13.19, respectively.
According to analysts polled by
, Giant Interactive is expected to report revenue of $216 million during FY10, representing a year-over-year increase of 13%. Sohu's revenue is estimated at $596 million, a year-over-year increase of 16%, Perfect World's revenue is forecasted at $409 million, a year-over-year increase of 30%, Shanda Interactive's is at $897 million, an increase of 17%, and Netease.com at $821 million, is a year-over-year increase of 49%.
is widely expected to be the primary beneficiary of the
exit from China, we reckon that Sohu.com could also leverage this opportunity. Sohu's Chairman, Charles Zhang, has already unveiled a three-point strategy for the company's Sogou search engine to gain a strong foothold in China.
Giant Interactive Group
Giant Interactive Group is an online game developer and operator in China that focuses on massively multiplayer online games, or MMOs, that are played through networked game servers in which a large number of players are able to simultaneously connect and interact.
During fiscal year 2009, the company reported total revenue of $190.9 million, a year-over-year decline of 17.6% over 2008 levels. However, strengthening of their core game ZT Online and with expected contributions from new games such as ZT Online Green Edition, the company expects to see a return to sustainable top-line growth in first-quarter 2010. The company's revenue has grown at a CAGR of 55% over the last four years.
During February 2010, Giant Interactive signed an exclusive agreement with
, a leading Internet portal and online game publisher in Russia, to operate Allods Online, a 3D free-to-play fantasy MMORPG with a science fiction twist.
The stock closed at $7.68 in trade on April 27. It is currently trading at an attractive forward PE of 13.24, much lower than its Korean peer
( WZEN), which trades at a PE of 26.75.
Sohu.com is an Internet company in China, providing news, information, entertainment and communication. The company's business segments consist of advertising, online gaming and wireless business. The company's revenue has grown at a CAGR of 49% over the last five years.
On April 26, the company reported its first-quarter 2010 revenue of $129.5 million, up 12% year-over-year, thereby exceeding the high end of the company's guidance. Online gaming revenues, contributing 56.0% to total revenues, increased 17% year-over-year.
The company anticipates more advertising spending to drive growth in fiscal year 2010, due to events such as the World Cup, Asian games and World Expo, which are expected to increase advertising spending.
Perfect World is an online game developer and operator in China. The company primarily develops online games based on its game engines and game development platforms. The company's current portfolio comprises of MMORPGs, including Perfect World, Legend of Martial Arts, Perfect World II and Zhu Xian among others.
Last month, Perfect World agreed to acquire
C&C Media Co., Ltd.
a Japanese online game operator, for $21 million. This strategic acquisition will help the company further penetrate into the Japanese online game market to capture the growth opportunities there and allow itself to effectively expand its overseas operating capabilities.
Perfect World's revenue has grown at a CAGR of 193% over the last four years. The company's active paying account, or APA, and average revenue per active paying account (ARPAPA) increased during fourth-quarter 2009 by 40.0% and 4%, respectively, over fourth-quarter 2008 levels.
Shanda Interactive Entertainment
Shanda Interactive Entertainment is an interactive entertainment media company. The company operates an integrated service platform on which users enjoy an array of online entertainment content, including MMORPGs, casual games, light casual games and online literature.
Shanda Interactive Entertainment's revenue has grown at a CAGR of 34% over the last five years. According to a research report by Mirae Asset, Shanda could be the only company seeing meaningful year-over-year increase in traffic, thanks to AION, but also to an online poker game called Sanguosha, which it launched in January 2010.
Recently, Shanda Games licensed Luvinia Online, a 3D fantasy MMORPG developed by its online game company Simo Technology, to Japanese game operator Gameon Company for approximately $1 million. The Japanese version is expected to enter commercial operation this year.
NetEase.com operates an interactive online community in China and is a provider of Chinese-language content and services through its online games, Internet portal and wireless value-added services businesses.
NetEase's revenue has grown at a CAGR of 35% over the last five years, with online gaming revenue growing at 33%. During fourth-quarter 2009, ARPAPA increased by 57% year-over-year.
Recently, Sohu IT news reported that NetEase.com may be mulling a chance to buy into the joint venture between
and a Shanghai investment company to operate MSN in China. This development could help NetEase export some of its games into the U.S. and Europe. Microsoft still has very powerful game distribution channels.