Aside from China, Perfect World is also present in the overseas markets of North America, Europe, Korea, and Southeast Asia. Perfect World states that one-fourth of its revenue comes from international regions and the company intends to strengthen the overseas business further. For instance, Perfect World has a subsidiary in the form of Cryptic Studios in the U.S., which developed Neverwinter, and management stated that the game has done well in North America and Europe.
Although China is the epicenter of online gaming, Perfect World needs to diversify. The company is trying to get a piece of the market by developing web games (Heaven Sword and Dragon Saber are in closed beta testing) in addition to developing massively multiplayer online games, but the road ahead looks difficult.
A difficult fight ahead
The MMO (massively multiplayer online) gaming market in China is highly competitive and Perfect World’s peers are already ahead of it.
For instance, Giant Interactive Group Inc (ADR) (NYSE:GA), which already has a popular franchise such as ZT Online in its portfolio, will be launching World of Xianxia going forward. Giant Interactive Group Inc (ADR) (NYSE:GA) expects this game to become its next blockbuster and management stated on its last conference call that World of Xianxia has already became accretive with the game being in closed beta testing.
In addition, the fact that Giant Interactive Group Inc (ADR) (NYSE:GA) has collaborated with Qihoo 360 Technology Co Ltd (NYSE:QIHU) to operate online games is certainly an advantage. According to iResearch, Qihoo 360 Technology Co Ltd (NYSE:QIHU) covers 96% of active PC Internet users in China and it witnessed a 112% jump in revenue from its gaming platform in the previous quarter. Qihoo is known for its security products, and as such, a combination of a secure platform and a wide reach should help Giant Interactive Group Inc (ADR) (NYSE:GA) and make things difficult for Perfect World.
Then there’s NetEase, which has been looking to decrease its dependence on Activision Blizzard‘s World of Warcraft by developing its own games. After launching Heroes of Three Kingdoms and Dragon Sword, NetEase is going to throw its marketing weight behind these games as it aims for more subscribers.
The strategy seems to be working so far as NetEase was able to overcome a drop of 600,000 subscribers for WoW in the previous quarter that witnessed revenue jump a commendable 20%. Hence, these moves by Perfect World’s competitors will make things difficult for the company. Also, after comparing its valuation to peers, investors should consider booking profits enjoyed from Perfect World so far.
The takeaway
Trading at 12.6 times trailing earnings, Perfect World is slightly more expensive than Giant Interactive, whose trailing P/E multiple stands at 11.4. However, the key difference is that Giant’s business is growing while Perfect World is trying to recover.
NetEase trades at a slightly expensive 15 times earnings but the company’s growth has been picking up of late as evident in the previous quarter. Considering everything, Perfect World isn’t the best way to benefit from online gaming in China and it would be prudent to look at its peers instead.
The article Is This the Perfect Way to Benefit From Online Gaming in China? originally appeared on Fool.com and is written by Harsh Chauhan.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Giant Interactive Group (NYSE:GA) and NetEase.com.
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