Perfect World Co. (PWRD) advanced the most in more than four years, leading gains in Chinese stocks traded in the U.S., as expansion into overseas markets spurred a doubling in profit and a special dividend.
Online-game developer Perfect World jumped 28 percent on March 16 in New York, the best performer on the Bloomberg China- US 55 Index (CH55BN). The gauge of the most-traded Chinese stocks in the U.S. rose 0.6 percent last week, bolstered by video sharing website Youku Inc. (YOKU)’s acquisition of competitor Tudou Holdings Ltd. (TUDO) China Eastern (CEA) Airlines Corp. traded 1.4 percent below Hong Kong stock, the biggest discount in almost two weeks.
Perfect World’s profit in the fourth quarter was 68 percent above the average analyst estimate as the company bolstered sales of existing games and moved into other markets. The company said on March 15 it will offer a $2 special dividend. Youku said on March 12 it will buy Tudou in a stock swap that values the takeover at $1.1 billion. The merger is a sign China’s video website sector needs consolidation, according to Tian X Hou, a senior analyst at T.H. Capital LLC.
“Perfect World’s special dividend plan and its much higher-than-expected earnings last quarter helped boost its stock,” said C. Ming Zhao, a Boston-based analyst at Susquehanna International Group LLP, who raised his target price on the company’s American depositary receipts to $19 from $18. “The Youku-Tudou merger and some companies’ good earnings has drawn investors attention back to company fundamentals.”
$95 Million of Dividends
Beijing-based Perfect World said in the March 15 statement that it will distribute about $95 million to shareholders in April in a special dividend plan. Net income for the last quarter of 2011 more than doubled from a year ago to 260 million yuan ($41 million), or 5.45 yuan per ADR, according to the statement. Analysts had forecast adjusted net income of 3.53 yuan for each ADR, data compiled by Bloomberg showed.
American depositary receipts of Perfect World climbed to $16.01 on March 16 in the biggest one-day gain since July 2007.
The ADRs trade at 4 times the company’s estimated earnings for the next four quarters, data compiled by Bloomberg shows. Electronic Arts Inc. (EA), a U.S. online video games provider, trades at 18 times, the data show. The multiple is 50.5 for Zynga Inc. (ZNGA), the San Francisco-based social-gaming company that held its initial public offering in December.
Zhao at Susquehanna said Perfect World continued to benefit from sales of its existing game inventory, which helped limit marketing expenses. Expansion into markets including Brazil, Indonesia and the U.S. also boosted revenue, he said.
China ETF Drops
Jonathan Chan, an analyst at CCB International Securities Ltd., on March 16 upgraded Perfect World to outperform -- meaning it will gain more than the overall market return -- from neutral, and raised the target price to $15.80 from $11.85. Three other analysts reiterated their recommendations to buy the stock on March 16.
The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., fell 0.3 percent to $38.76, extending its loss last week to 0.7 percent. The Bloomberg China-US 55 Index was little changed at 104.82 on March 16.
Tudou, based in Beijing, jumped 145 percent last week to $37.71, a record weekly gain. Tudou’s shareholders will receive 1.595 ADRs of Youku for each Tudou ADR they own in the stock- swap deal, according to their joint statement on March 12. Tudou’s ADRs retreated 3.3 percent on March 16.
Shanghai-based Youku climbed 8.2 percent last week after the acquisition. Its ADRs slid 4.4 percent to $27.06 on March 16 after soaring 27 percent on March 12 to $31.85.
China Eastern Discount
The Shanghai Composite Index (SHCOMP) advanced 1.3 percent to 2,404.74 on March 16, paring its loss last week to 1.4 percent. The Hang Seng China Enterprises Index (HSCEI) for Chinese companies traded in Hong Kong declined 0.2 percent to 11,216.39, down 0.4 percent for the week.
ADRs of China Eastern, the country’s third-largest carrier by market value, dropped for a third day, losing 1.1 percent to $18.23 on March 16. The ADRs, each representing 50 common shares in the company, traded 1.4 percent below its Hong Kong stock, which added 0.7 percent to HK$2.87, the equivalent of 37 U.S. cents. The discount was the most since March 6.
Profit at Chinese airlines may drop 50 percent in the first quarter this year, China Business News reported on March 15, citing a research note from Ping An Securities Co., a unit of China’s second-largest insurer.
The yuan weakened 0.2 percent last week to 6.3227 per dollar, according to the China Foreign Exchange Trade System. The steady appreciation of China’s yuan has ended as the government allows bigger swings in the currency, Jim O’Neill, chairman of Goldman Sachs Asset Management International, said in a Bloomberg TV interview in London on March 16.
Chinese Premier Wen Jiabao said on March 14 that the yuan may be near “equilibrium” and that policy makers will allow greater exchange-rate volatility.
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