Chinese Web Gamers at 51% Discount a Buy to Opennheimer

Chinese online gaming stocks trading at a 51 percent discount to the nation’s equities listed in the U.S. is a signal to buy the shares on prospects the companies will use cash to pay dividends, according to Oppenheimer & Co.

Web game developers Shanda Games Ltd., Ltd., Giant Interactive Group Inc., NetEase Inc. and Perfect World Co. Ltd. traded at an average 6.7 times estimated earnings yesterday, compared with a multiple of 13.7 for stocks on the Bloomberg China-US Equity Index. This gives them one of the most enticing valuations in the technology and Internet sector, Andy Yeung, a New York-based analyst at Oppenheimer, said by phone yesterday.

“Valuations are getting very low, and very attractive to investors,” said Yeung, whose ratings on the companies range from market perform to outperform. “These companies are becoming value stocks.”

Once the companies have developed the games they face low costs to offer them to players, helping boost their cash piles, according to Jeff Papp, an analyst at Oberweis Asset Management. That leaves the companies open to paying out shareholders through dividends and share buybacks, he said by phone from Lisle, Illinois yesterday.

Changyou boosted its cash from operations to $276.6 million in the fiscal 2011 year, from the $1.7 million in 2006. The Beijing-based company declared a special cash dividend of $3.80 in August for each American depositary receipt, following 14 percent growth in second-quarter profit that beat analysts’ estimates.

‘Shareholder Value’

NetEase authorized a share repurchase program of as much as $100 million in November, as well as a special cash dividend of $1 per American depositary share. The Beijing-based company more than tripled cash from operations through September last year from 2007.

“They can extract more shareholder value by paying out more recurring dividends,” Papp said. “That’s something that’s going to happen more often and that can help attract more attention to the names.” Oberweis holds shares of Giant Interactive, Changyou and NetEase.

Shares of Shanghai-based Shanda Games are trading 4.7 times its estimated profit, the lowest level among the five online game operators. The valuation of Beijing-based NetEase is 10.2 times its earnings, the highest among the five.

Online game operators are exposed to product-cycle risk and have come under scrutiny from the Chinese government, which has restricted the number of hours the games can be played by minors, Oppenheimer’s Yeung said. These factors have made investors cautious on the sector, depressing valuations, he said.

Prices Gain

Perfect World surged 6.4 percent in New York to $12.68, the highest level since April 27, after adding 2 percent in 2012, less than the China-US gauge’s 10 percent advance last year. Giant Interactive extended its rally to a sixth day, gaining 4 percent to $6.48, after climbing 33 percent last year. jumped 3 percent to $29.12, the highest price since October 2011. Shanda advanced 0.6 percent in its third day of gains to $3.12, while NetEase added 1.4 percent to $43.4. After today’s close, the stocks were trading at 6.9 times estimated earnings on average, shrinking their discount to the Bloomberg China-U.S. gauge to 50 percent.

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