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The Play's The Thing At Shanda Interactive

Online gaming in China is exploding, driven by the growth of Internet and broadband usage. In particular, nongambling online action games involving multiple players worldwide are expected to grow to 2.6 times current levels by 2010, to a $1.8 billion business, says Tian X. Hou, senior analyst at C.E. Unterberg, Towbin. She says Shanghai's Shanda Interactive Entertainment (SNDA), China's largest developer and operator of such games, is "the best pure-play investment in the industry." Players don't pay to play, but they "buy" items such as virtual weapons or vehicles to use in the game. Shanda also derives revenues from ads in the games. The stock, which has bumped up from 13 in July to 19.87 on Dec. 13, will keep climbing, says Hou, because of the games' popularity and Shanda's rich pipeline of new products that will be out in 2007. In addition, notes Hou, Shanda's fundamentals are strong, with operating earnings poised to jump from $44 million in 2006 to $75.9 million in 2007 and to $96.8 million in 2008. Revenues are growing robustly, too. Hou sees profits rising from 26 cents a share in 2005 to 71 cents in 2006, $1 in 2007, and $1.22 in 2008. Also bullish are Michael Tieu of Brean Murray Carret and Dick Wei of J.P. Morgan Securities (JPM).

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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