Saturday, August 16, 2008

PWRD - Perfect world, perfect stock?

PWRD- Perfect world is a Chinese online game producer. PWRD focuses on 3D role playing games ( MMORPG). Their business model is very simple, they do free-to-all games that you can install and play. You will however need to buy “items” on-line to enhance your player’s power and abilities (item-based-revenue model). These games are very addicting and viral, as a result “communities” of players are built in short period of time and expand exponentially. Perfect World, Legend of Martial Arts, Perfect World II, Zhu Xian, Hot Dance Party and Chi Bi are some of their games but the latest and probably one of the most promising one Pocketpet Journey West. Company is about to launch a “second life” type of platform as well.

Key metrics:
-ACU (concurrent users) 660,000 in 1Q 08, an increase of 177.8% from 1Q 07
-APC (paying customers) 1.7 million in 1Q 08, and an increase of 144.7% from 1Q 07
-ARPU was RMB151 in 1Q 08, and an increase of 58.2% from 1Q 07
- Company spends $0.6M per game and has 650 R&D staff , the cheapest COGS of the sector.
- Eps is growing at 225% 2.62 vs 0.82 in 1Q07.
- Sales is growing at a 2600% rate 303.2 vs 11.2 in 1Q07
- Gross margin is growing at a staggering 87% yoy and profit margin 53% yoy
- Virtually debt free (35M debt can be paid with their cash at hand of 226M)
- CFO grew at 410% and FCF at 142% yoy to 18M
Given a PE of 22 Forward PE Curr.Year of 15, Next year 11.9 and eps growth rate of 35% I calculated a 3 months price target of 30$.
Company is benefiting from a booming online gaming market, increased purchasing power of Chinese players, cheap R&D ($0.5M to develop a new game), and will get additional revenue with Overseas licensing : RMB38.7 million in 1Q 08 an increase of 265.6% from 1Q 07.

So to sum it all up, a debt-free company with tremendous growth ahead, a PE of 22, margins of 87% and exploding EPS that looks like a perfect stock to me. Only cloud in the picture watch the competition.



Disclaimer: I own PWRD stock. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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