Giant Interactive CFO

Giant Interactive Group Inc.’s shares are undervalued by more than 60 percent as the maker of the “ZT Online” game is hurt by allegations of irregularities at other Chinese companies, Giant’s chief financial officer said.

The 47 percent rally in Giant’s New York-traded stock this year represents a recovery after accounting scandals tarnished the image of Chinese equities in the U.S., Jazy Zhang, 44, said in an Aug. 14 interview. Giant, a Shanghai-based company that develops role-playing games, trades at 8.7 times estimated profit for this year, compared with an average multiple of 10.2 in the past five years, according to data compiled by Bloomberg.

“Put us in the global context, let’s remove the label ‘Chinese company’ and just say ‘a company’ instead, what is fair valuation for the company? I think it’s fair to give us a PE multiple of 15,” Zhang said.

The average estimated price-to-earnings ratio of 16 Chinese Internet companies, including NetEase Inc. and Qihoo 360 Technology Co., is 41.3, according to data compiled by Bloomberg. Giant fell 1.7 percent yesterday in New York trading.

Giant’s shares plunged 42 percent in the two years through 2011 as Chinese companies listed in the U.S. encountered heightened scrutiny from investors after some went public through reverse mergers and were later revealed to have misreported financial information.

In reverse mergers, a closely held firm buys a shell company already public on an exchange, allowing them to list shares without the scrutiny of a public offering.

Accounting Scandals

The accounting scandals “really scared the investment community,” Zhang said. “They really thought all Chinese companies cooked their books and that’s not true.”

That view has changed during the past few years as more U.S. investors traveled to China to do their due diligence, said Zhang, who spent 16 years in the U.S., earning an MBA from the University of Southern California and becoming a certified public accountant.

Investors are also latching on to the company’s improving prospects as it releases updated versions of “ZT Online” and introduces one to two mobile games this year, Zhang said. The success of “World of Xianxia,” a 3-D game in which large numbers of players compete within a virtual world, will help the company achieve “double-digit” earnings growth, she said.

Sina, Tencent

Giant’s competitors in the U.S. and Hong Kong also surged this year. Ltd., which develops online computer games, has risen 13 percent; Shanda Games Ltd. has jumped 46 percent; and NetEase, the operator of China’s second-largest online games website, has soared 49 percent. The Bloomberg China-US gauge of the most-traded Chinese companies in the U.S. has declined 3.1 percent.

Sina Corp., whose Twitter-like service features games, surged 58 percent, while Tencent Holdings Ltd., which offers games in its WeChat instant messaging service, jumped 48 percent in Hong Kong trading. Sina posted a second-quarter loss on a charge related to an asset sale as it boosted spending on new services on mobile applications.

Tencent, China’s largest Internet company by market value, posted profit that missed analyst estimates as it boosted spending on e-commerce and marketing to compete against Alibaba Group Holding Ltd.

“Competition among Chinese gaming companies is really intense, and the large amount of free games has pinned their margins,” said Ricky Lai, an analyst at Guotai Junan International Holdings Ltd. in Hong Kong. “More subscribers are migrating to mobile platforms that have lower average revenue per user.”


Giant listed in New York in 2007. Its shares plunged 8.6 percent on Aug. 7 after the company forecast third-quarter revenue would be “flat to moderately up” from the previous period. The forecast had more to do with a company decision to be conservative with projections as it faces the possibility serious players may not like updated versions of its games, Zhang said.

“I think in the near term the stock may be range-bound, especially after this year’s rally,” Andy Yeung, an Internet stock analyst at Oppenheimer & Co. in New York, said by e-mail.

China’s Internet game industry also would benefit from fewer competitors, Zhang said.

“From a business standpoint, it makes sense for some consolidation,” Zhang said. “The truth of the matter is, who wants to be bought? If you look around, all the large publicly traded gaming companies have a load of cash.”

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