PWRD Notes:

9/6/07 – Initiation from CIBC and SIG

• Leading game developer – proven track record – strong pipeline

• Creative content – shorter lead time – frequent in-game expansion packs and upgrades (leads to longer game lifespan)

• New competitors hitting the market – industry is “hit driven” leading to higher risk.

• Massively Multiplayer online Role Playing Games (MMORPG) have realized returns of 40-45% on invested capital

• Online game sector to grow at 26% rate from 2006-2011 in China

• Competitors such as SNDA (29% market share of online gaming) vying for market share – makes success a function of who captures interest of gamers – creativity and short lead time to market are strengths of PWRD

• PWRD haws 9 titles in pipeline through 2008

• CIBC forecasting nearly 100% growth in revenue and EPS in 2008 but slowing to industry growth rate of 26% in 2009. Estimated EPS in 2007: $0.54 – 2008: $1.07 – 2009: $1.35

• Currently trades at premium to peers due to strong EPS visibility as 2 primary games in early stages of life cycle and 9 releases scheduled.

• Online game play is #1 internet application in China in terms of time spent – appeals to 30 and under age group

• Online entertainment more appealing as “one child” law reduces playmates, no widespread sports leagues to follow, and censorship makes traditional TV entertainment less appealing

• Revenue model evolving from time-based charges to paying for items in the game. – low cost to enter may drive additional traffic that will eventually spend on items

• Possible shortage of 3-D graphic designers may help to thwart competition

• Competitor NTES (26% market share of online gaming) has weak pipeline and likely to defend market share through strategic acquisitions

• NCTY (15% market share) had tough quarter due to infrastructure upgrade but should release multiple games in ’07 and ‘08

• PWRD has 5% market share in online gaming but has developed leadership in 3D item based MMORPGs

• Beginning to license games overseas – CIBC skeptical this could drive meaningful revenue

• Management has stated intention to make strategic acquisitions

• Gross margins near 80% and operating margin over 40%

• Currently operates 4 games:

  • Perfect World I (time based revenue)

  • Legend of Martial Arts (item based)

  • Perfect World II (item based)

  • Zhu Xian (fantasy – item based)

• 3D game developing engine gives PWRD competitive advantage in developing 3D games quickly and with quality

 

CIBC Report 11/13/07

-          Q3 revenue $28.5m and EPS $0.29 (consensus was $22.8m and $0.15)

-          Average quarterly spend per user increased to $18.2 from $13.3

-          CIBC Raising estimates to $0.29 fro Q4 and $0.83 for 2007

-          Company reports average concurrent users of 513k – up 15% from Q2 and 80% from last year

-          Strength from new ZhuXian game as well as large scale marketing campaign (perfect storm) and new expansion packs in all games

-          Although R&D spend was higher in absolute monetary terms, margins keep improving due to higher revenues

-          Pipeline continues to be robust with 2 new games going beta in Q4

o        Chibi (MMORPG) will be released along with highly publicized movie of the same name in early 2008

o        Hot Dance Part (casual game) – will be PWRD’s first causal game launched

-          Two new agreements to enter online gaming marketing in Indonesia and Russia

SIG Report 11/9/07

-          Flattish Q4 guidance appears conservative but still higher than broad expectations

-          Strong balance sheet with cash of $189m or $3.34 per ADR

-          GAAP earnings may underestimate strength as purchases are amortized over the useful life of the item

-          International expansion could significantly add to the company’s growth

Pali Research 11/9

-          “We believe it is important to look into Q1 2008 and beyond”

-          New game launches serve as a driver for revenue growth and expansion packs serve to maintain those levels.

EPS Release and conf call 2/25/08

-          Q4 revenues 35.4m up 20.8% sequentially and 325.2% y/y

-          EPS 0.36 or net income of $20.0m

-          Average concurrent users 624,000 up 12.8% sequentially and 159.9% y/y

-          ARPU up 3.8% sequentially and 85.2% y/y

-          Successful launches of expansion packs, Perfect World II in Korea and Beta Launches of new games

-          Gross margin 85.1% versus 83.4 last quarter and 77.9% y/y

o        Cost savings with fewer leased servers coupled with strong revenues

-          $205.1m cash reserves

-          Entered overseas licensing agreements with Cubinet Interactive to license “Legend of Martial Arts” in Vietnam and “ZhuXian” in Vietnam, Thailand, Malaysia and Singapore

-          Q1 revenue expected 7-10% higher sequentially

-          Increasing international exposure has been a primary focus

o        New office in US to strengthen understanding of market and recruit top talent

-          Four games still in development stages – commitment to diversify product stream (with risk of cannibalization)

 

Pali Research 2/25/08

-          EPS report demonstrates PWRD’s ability to grow with existing games as well as new launches

o        Life cycle of games not as short as many believed

-          Stronger than expected Q1 guidance

 

SIG Report 2/25/08

-          Margins strong while still devoting capital to marketing

-          Total of 7 new games to be launced in ‘08

o        Less of a hit driven story than competitors due to 3D game engine

Plenty of room for growth both by adding users as well as increasing ARPU