Weekly Chinese Internet Notes: Perfect World Invests In Canadian Game-Maker To Sustain Its Mojo

The inability to develop new games in-house can lead game developers to look far and wide for alternatives. For instance, in our Chinese Internet notes this week, we analyze Perfect World‘s(NASDAQ: PWRD) holding company’s purchase of a 3% stake in Canadian game-developer Digital Extremes. Along with this sale to Perfect World, Digital Extremes also sold a 58% stake in itself to Sumpoo Food Holdings, a large meat supplier in Fujian province of China. ^[1] Sumpoo Food Holdings is the holding company of Multi Dynamic Games Group.

We have a valuation of ~$18 per share for Perfect World as opposed to the market price of ~$21. It gained about half a dollar per share in trading last week. We have forecast revenues of Perfect World to be $594 million in 2014 while the Reuters consensus estimate is $629 million for the same. ^[2]

See our complete analysis of Perfect World here

Perfect World’s Thinning Game Pipeline

In the second half of 2014, the only new game released was a 2D turn-based cartoon-style RPG mobile game CrossGate Mobile. On the PC game front, Perfect World has been unable to release any new games this year. Instead it has been releasing expansion packs for its existing games to try and prolong their life-cycle. This has been contrary to our expectations expressed in our Q2 earnings report analysis of this company (See New Games Fuel Perfect World’s Growth In Q2). Perfect World has historically maintained a market share that varies between 6 and 7% of the Chinese online gaming market. ^[3]  It has been trying to preserve its market presence by releasing expansion packs for its existing games. ^[4]

In July, Perfect World released the expansion pack Shaolin Kongfu for its 2D turn-based MMORPG Return of the Condor Heroes. In August 2014, it released the expansion pack Call of Jianghu for its 3D cartoon MMORPG Legend of Martial Arts. ^[5] We have written earlier on the release an expansion pack for its MMORPG (Massively Multi-player Online Role Playing Game) Neverwinter, titled Rise Of Tiamat. Neverwinter has been a very successful title for Perfect World. Within a month of its launch, over two million people had registered to play the game. It has also been credited with helping Perfect World’s international subsidiaries register 15% Y-o-Y revenue growth last year. (See our earlier Weekly Chinese Internet Notes)

Why Digital Extremes?

Digital extremes earned a revenue of $27 million in the half-year period ended 30 April 2014, giving it pre-tax a profit of $8.7 million. In the 12 months leading upto this period, the company had earnings of only $24.6 million and pre-tax profit of $5.5 million. ^[6]This sudden jump in revenues can be attributed to the stellar performance of one of its games. It is the owner of one of the world’s most popular online games, Warframes. In August this year, Warframes user base was 10 million, double the February figure. ^[7] This is a big jump from February when it had gained only about 5 million users since its launch in March 2013. ^[8]

Warframes is a free to play game that earns revenues through in game purchases, which is how Perfect World’s games earn most of their revenues as well. It is believed that Perfect World’s participation in the deal was aimed at having exclusive distribution rights to this game in China, which will help it bolster market share in the absence of new game releases.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap | More Trefis Research

1. Digital Extremes Sold [↩]
2. Perfect World Page At Reuters [↩]
3. Chinese Online Gaming Market Share Breakup 2009 [↩]
4. Chinese Online Gaming Market Share Breakup Q1 2012 [↩]
5. Perfect World Business Developments [↩]
6. Digital Extremes sells Shares [↩]
7. 10 Million Users Now Registered [↩]
8. Warframe Passes 5.5 million users [↩]