291
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 201: NTES Annual Income Statement
$ in millions
INCOME STATEMENT
2007 2008E 2009E 2010E
Revenue 293.9 433.5 529.7 589.2
Wireless & other
8.7 10.7 11.9 13.0
Advertising
37.1 55.5 67.4 83.7
Online Games
248.2 367.3 450.4 492.5
COGS -53.2 -78.2 -92.6 -111.1
Gross Profit 240.7 355.3 437.0 478.1
Operating Expense -80.6 -93.5 -128.5 -141.4
Sales & Mktg. expenses -29.3 -31.1 -45.6 -50.8
G&A expenses -18.9 -23.5 -31.8 -35.3
R&D expenses -19.7 -27.3 -37.1 -41.2
Other expenses 0.0 0.0 0.0 0.0
Share-based compensation -12.7 -11.7 -14.0 -14.0
EBIT 160.1 261.8 308.6 336.7
Adjusted EBIT (excl share-based comps) 172.8 273.4 322.6 350.7
EBITDA 185.9 288.7 345.7 378.5
Net Interest Income 15.0 19.9 25.4 34.5
Net Other Income -6.8 -21.1 0.0 0.0
Pre Tax Profit 168.2 260.5 334.0 371.3
Tax Expense/(Credit) -0.4 -62.3 -52.2 -57.8
Net Profit 167.8 198.3 281.8 313.5
Net Profit (excl 123R option expense) 180.5 209.9 295.8 327.5
Pre Tax EPS (US$) 1.36 2.11 2.68 2.91
After Tax EPS (US$) 1.36 1.61 2.26 2.46
After Tax EPS Diluted (US$) 1.27 1.54 2.14 2.33
After Tax EPS Diluted (US$ excl 123R option exp.) 1.37 1.63 2.25 2.44
Margins (%)
Gross Margin 81.9 82.0 82.5 81.1
Operating Margin (excl 123R option expense) 58.8 63.1 60.9 59.5
EBITDA Margin 63.3 66.6 65.3 64.2
Net Margin 57.1 45.7 53.2 53.2
Net Margin excl 123R option expense 61.4 48.4 55.8 55.6
Sequential Growth (%)
Revenue 9.5 47.5 22.2 11.2
Gross Profit 8.2 47.6 23.0 9.4
Adjusted EBIT 1.8 58.3 18.0 8.7
Pre Tax Profit -0.4 54.9 28.2 11.2
Net Profit (excl 123R exp) 9.4 16.3 40.9 10.7
After Tax EPS 16.6 20.6 39.7 8.8
After Tax EPS excl 123R option expense 15.7 18.8 38.5 8.3
Source: Company reports and J.P. Morgan estimates.
292
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 202: NTES Quarterly Income Statement
$ in millions
1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08E 1Q'09E 2Q'09E 3Q'09E 4Q'09E
Revenue 69.1 70.4 73.1 81.7 91.9 103.0 117.2 122.0 124.1 130.5 135.6 139.4
Wireless & other
2.1 2.2 2.2 2.2 2.7 2.5 2.7 2.8 2.9 2.9 3.0 3.1
Advertising
6.7 7.9 10.4 12.3 10.1 13.9 15.2 16.4 15.0 16.3 17.6 18.5
Online Games
60.3 60.4 60.5 67.2 79.2 86.6 99.3 102.7 106.2 111.3 115.0 117.8
COGS -13.0 -12.4 -13.6 -14.4 -15.6 -18.5 -23.7 -20.6 -20.9 -22.4 -24.3 -25.0
Gross Profit 56.1 58.1 59.5 67.4 76.3 84.5 93.5 101.4 103.2 108.2 111.3 114.3
Operating Expense -15.6 -19.3 -24.4 -21.4 -18.6 -22.3 -24.8 -27.9 -30.8 -31.6 -32.7 -33.5
Sales & Mktg. expenses -5.1 -5.9 -10.6 -7.8 -5.1 -7.4 -8.9 -9.8 -11.2 -11.1 -11.5 -11.8
G&A expenses -3.5 -5.1 -5.3 -5.0 -5.1 -5.3 -6.4 -6.7 -7.4 -7.8 -8.1 -8.4
R&D expenses -4.4 -4.7 -5.1 -5.6 -5.7 -6.6 -7.2 -7.9 -8.7 -9.1 -9.5 -9.8
Other expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Share-based compensation -2.6 -3.6 -3.5 -3.0 -2.7 -3.0 -2.4 -3.5 -3.5 -3.5 -3.5 -3.5
EBIT 40.5 38.8 35.1 45.9 57.7 62.1 68.7 73.5 72.4 76.6 78.7 80.9
Adjusted EBIT (excl share-based comps) 43.1 42.3 38.6 49.0 60.4 65.2 71.1 77.0 75.9 80.1 82.2 84.4
EBITDA 46.2 45.5 41.8 52.6 63.9 68.6 74.4 82.1 81.1 85.7 88.3 90.6
Net Interest Income 3.0 3.7 3.9 4.4 4.4 4.6 5.8 5.1 5.5 6.1 6.6 7.2
Net Other Income -0.1 -1.2 -1.6 -4.1 -7.3 -3.8 -9.9 0.0 0.0 0.0 0.0 0.0
Pre Tax Profit 43.4 41.3 37.4 46.2 54.8 62.9 64.7 78.6 77.9 82.6 85.3 88.1
Tax Expense/(Credit) 4.4 0.3 2.7 -7.2 16.4 15.1 18.5 12.3 12.2 12.9 13.3 13.7
Net Profit 39.0 41.1 34.7 53.4 38.4 47.8 46.1 66.3 65.7 69.7 72.0 74.3
Net Profit (excl 123R option expense) 41.7 44.6 38.2 56.5 41.2 50.9 48.5 69.8 69.2 73.2 75.5 77.8
Pre Tax EPS (US$) 0.34 0.33 0.31 0.38 0.45 0.52 0.51 0.64 0.63 0.66 0.68 0.70
After Tax EPS (US$) 0.31 0.33 0.28 0.44 0.32 0.39 0.36 0.54 0.53 0.56 0.58 0.59
After Tax EPS Diluted (US$) 0.29 0.31 0.27 0.41 0.30 0.37 0.36 0.51 0.50 0.53 0.55 0.56
After Tax EPS Diluted (US$ excl 123R option exp.) 0.31 0.34 0.29 0.44 0.32 0.39 0.38 0.54 0.53 0.56 0.57 0.59
Margins (%)
Gross Margin 81.2 82.5 81.4 82.4 83.0 82.0 79.8 83.1 83.2 82.9 82.1 82.0
Operating Margin (excl 123R option expense) 62.4 60.1 52.8 59.9 65.7 63.3 60.6 63.1 61.2 61.4 60.6 60.5
EBITDA Margin 66.9 64.6 57.2 64.4 69.5 66.6 63.5 67.4 65.4 65.6 65.1 65.0
Net Margin 56.5 58.3 47.5 65.4 41.8 46.5 39.4 54.3 53.0 53.4 53.1 53.3
Net Margin excl 123R option expense 60.3 63.4 52.3 69.1 44.8 49.4 41.4 57.2 55.8 56.1 55.7 55.8
Sequential Growth (%)
Revenue 3.9 2.0 3.8 11.8 12.4 12.0 13.9 4.0 1.7 5.2 3.9 2.8
Gross Profit 3.0 3.5 2.5 13.2 13.3 10.7 10.7 8.4 1.8 4.8 2.9 2.7
Adjusted EBIT 4.9 -1.8 -8.8 27.0 23.4 7.9 9.1 8.3 -1.5 5.5 2.6 2.7
Pre Tax Profit 5.4 -4.7 -9.5 23.5 18.6 14.8 2.8 21.5 -0.8 6.0 3.2 3.2
Net Profit (excl 123R exp) 5.6 7.1 -14.4 47.8 -27.1 23.6 -4.6 43.8 -0.8 5.8 3.1 3.1
After Tax EPS 7.4 8.1 -13.9 54.7 -28.2 24.5 -3.4 43.2 -1.4 5.5 2.7 2.7
After Tax EPS excl 123R option expense 6.1 10.1 -12.8 48.6 -26.9 23.5 -4.8 43.4 -1.4 5.2 2.5 2.6
Source: Company reports and J.P. Morgan estimates.
293
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 203: NTES Annual Balance Sheet
$ in millions
2007 2008E 2009E 2010E
Cash and Cash Equivalents 552.2 844.6 1,194.5 1,571.5
Account Receivables 22.1 23.8 27.5 31.0
Inventory - - - -
Total Other Current Assets 14.7 18.6 21.7 24.1
Total Current Assets 589.1 887.0 1,243.7 1,626.7
Gross Fixed Assets 61.5 90.1 126.0 165.2
Accumulated Depreciation (37.1) (60.4) (84.2) (112.0)
Net Fixed Assets 24.4 29.7 41.8 53.3
Other Long Term Assets 8.8 15.8 16.0 16.0
Long Term Investments and Associates - - - -
Total Long Term Assets 33.1 45.5 57.8 69.2
Total Assets 622.2 932.5 1,301.5 1,695.9
ST Debt and Current Portion of LT Debt 85.2 - - -
Accounts Payable 33.2 41.8 51.4 61.8
Other Current Liabilities 51.1 80.4 92.9 104.8
Total Current Liabilities 169.6 122.2 144.3 166.6
Long Term Debt - - - -
Other Long Term Liabilities 1.4 0.1 0.1 0.1
Total Long Term Liabilities 1.4 0.1 0.1 0.1
Share Capital 0.3 0.4 0.4 0.4
Share Premium - 15.9 72.6 131.2
Other Reserves 22.6 109.6 110.7 110.7
Retained Earnings 428.4 684.4 973.5 1,286.9
Preferred Stock - - - -
Total Equity 451.3 810.2 1,157.1 1,529.3
Total Liabilities and Equity 622.2 932.5 1,301.5 1,695.9
Source: Company reports and J.P. Morgan estimates.
294
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 204: NTES Annual Cash Flow Statement
$ in millions
2007 2008E 2009E 2010E
Net Income 167.9 198.3 281.8 313.5
Add Non cash Expenses/(income) - - - -
Depreciation and Amortization 13.2 15.2 23.2 27.8
Extraordinaries (0.0) (0.0) - -
Other Non-Cash Items 12.7 11.7 14.0 14.0
Changes in Working Capital: - - - -
(Increase)/Decrease Receivables (4.6) 0.5 (3.4) (3.5)
(Increase)/Decrease Inventories - - - -
(Increase)/Decrease Other Current Assets (6.8) (2.4) (2.9) (2.4)
Increase/(Decrease) Payables (0.8) 5.3 9.2 10.4
Increase/(Decrease) Other Current Liabilities (4.7) 24.4 11.6 11.9
Net Cash from Operations 176.7 253.0 333.3 371.5
Cash Flow from Investing - - - -
Purchase of Property, Plant & Equipment (7.8) (18.2) (35.0) (39.2)
Purchase/Sale of Other LT assets (6.1) (6.2) - -
Purchase/Sale of Investments - - - -
Net Cash from Investing Activities (13.8) (24.4) (35.0) (39.2)
Cash Flow from Financing - - - -
Issuance/Repayment of Debt (18.4) (93.5) - -
Change in other LT liabilities (0.1) (1.5) - -
Change in Common Equity - net (65.1) 89.0 42.5 44.6
Payment of Cash Dividends - - - -
Other Financing Charges, Net (50.0) 16.0 0.0 0.0
Net Cash from Financing Activities (133.6) 10.1 42.5 44.6
Net Effect of Exchange Rate Changes/Others - - - -
Net Change in Cash and Cash Equivalents 29.3 238.7 340.9 377.0
Cash at End of Period 552.2 844.6 1,194.5 1,571.5
Source: Company reports and J.P. Morgan estimates.
295
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Ninetowns, Neutral, ($0.83)
We remain Neutral on Ninetowns as the company’s core B2G (business-to-
government) segment and its new B2B (business-to-business) segment continue to
face a tough business environment due to the continuing slowdown in the global
trade sector. Our Dec-09 price target is US$2.0 (down recently from Dec-08 price
target of US$2.8), which is at a discount to our DCF valuation and current net cash
per share due to market concerns about potentially higher losses going forward,
which are likely to keep the stock price under pressure.
• Ninetowns’ e-filings software sales have faced a tough business environment
over the last couple of years due to a free alternative distributed by the
government. In recent months, the ongoing export slowdown and quality issues in
some of China’s sectors (e.g., food and toys) have further adversely impacted
Ninetowns’ SME client base for both B2G and B2B offerings.
• Ninetowns has also continued to see operating losses as it works on developing
its new B2B segment. While Ninetowns has responded to the tougher business
environment by expanding its pay-per-transaction model for enterprise software
to several regions (to continue to gain new trade enterprises and retain existing
clients) and taking cost cutting measures such as workforce reduction (from 400
employees to a current headcount of 300), we expect earnings to stay under
pressure in the foreseeable future due to muted B2G revenues and early stage of
B2B monetization.
• Potential 2009 drivers: In our view, the following factors could drive shares in
2009: (1) return to profitability (upside risk) or larger operating losses (downside
risk), and (2) if Ninetowns were to become a potential acquisition or partnership
prospect (due to customer list of over 130k exporters and importers, and cheap
valuation).
Our current and newly introduced 2010 estimates are in the table below:
Table 205: Ninetowns Financial Snapshot
$ in millions, except per share data
2H'08E F'08E F'09E F'10E F'08E Y/Y F'09E Y/Y F'10E Y/Y
J.P. Morgan
Revenue 7.0 14.4 12.5 13.9 4% -13% 12%
EBITDA -2.4 -6.6 -0.2 1.5 NM NM NM
GAAP EPS -0.11 -0.23 -0.09 -0.04 NM NM NM
Adj. EPS -0.11 -0.22 -0.08 -0.03 NM NM NM
Consensus
Revenue NA NA NA NA NM NM NM
EBITDA NA NA NA NA NM NM NM
GAAP EPS NA NA NA NA NM NM NM
Adj. EPS NA NA NA NA
NM NM NM
Source: J.P. Morgan estimates. *Note: Adj. EPS excludes share-based compensation expense.
296
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Our Estimates and Outlook for 2009
We forecast net revenue of US$12.5MM, down 13% Y/Y, and a GAAP loss of
US$0.09 per share (vs. GAAP loss of US$0.23 per share for 2008), or adjusted (ex-
share-based expense) loss of US$0.08 per share (vs. loss of US$0.22 per share for
2008). We forecast enterprise software revenue of US$9.0MM (72% of total
revenue), down 19% Y/Y, software development service revenue of US$3.1MM
(25% of total revenue), up 4% Y/Y, and B2B revenue of US$0.4MM (3% of total
revenue), up 6% Y/Y.
With respect to margins, we forecast gross margin at 75.1% for 2009, up from 72.4%
for 2008 (due to expected lower gross loss in B2B segment). We expect adjusted
operating margin (ex-share-based expense) of -34.9% (operating loss) for 2009,
narrowing from -74.4% for 2008, and adjusted net margin (ex-share-based expense)
of -22.1% (loss) for 2009, narrowing from -52.9% for 2008.
Our Estimates and Outlook for 2010
For 2010, we forecast net revenue of US$13.9MM, up 12% Y/Y, and GAAP loss of
US$0.04 per share, or adjusted loss of US$0.03 per share. We forecast 2010
enterprise software revenue of US$9.7MM (69% of total revenue), up 7% Y/Y,
software development service revenue of US$3.8MM (27% of total revenue), up
22% Y/Y, and B2B revenue of US$0.5MM (4% of total revenue), up 40% Y/Y.
On margins, we forecast gross margin at 76.5% (up slightly Y/Y), adjusted operating
margin of -18.5% (narrowing Y/Y), and adjusted net margin of -8.3% (narrowing
Y/Y).
Price Target, Valuation and Rating Analysis
We remain Neutral on Ninetowns. The stock is trading at over 50% discount to
FY08E net cash of US$2.66/share. We believe such a significant discount to net cash
is unjustified; however, we remain Neutral due to the very low business visibility for
the company and likelihood of continued operating losses. We recently revised down
our price target to US$2.0 (Dec-09) from the prior US$2.8 (Dec-08) due to the
weaker-than-expected results in 1H08. We set our price target at a discount to our
DCF valuation of US$2.2 (also discount to current net cash per share of US$2.6) due
to continued market concerns about potentially higher losses going forward, which
are likely to keep the stock price under pressure.
Risks to Our Rating and Price Target
Upside risks to our rating and price target include: 1) possibility of Ninetowns
becoming a target for acquisition or strategic partnership; 2) higher-than-expected
monetization from the new B2B segment; and 3) significant conversions of free e-
filing software users to paid service customers. Downside risks include: 1) further
decline in existing core revenue base; 2) larger-than-expected investments in the B2B
business; and 3) disruption in good working relationship with the PRC Inspections
Administration.
297
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 206: NINE Annual Income Statement
$ in millions
INCOME STATEMENT
2007 2008E 2009E 2010E
Revenue 13.8 14.4 12.5 13.9
Enterprise software
10.3 11.1 9.0 9.7
Software development service
3.4 3.0 3.1 3.8
Other
0.1 0.3 0.4 0.5
COGS -3.1 -4.0 -3.1 -3.3
Gross profit 10.8 10.4 9.4 10.7
Operating expense -24.3 -21.6 -14.0 -13.5
Sales & mktg. expenses -5.5 -5.6 -3.7 -3.5
G&A expenses -11.5 -11.5 -7.8 -8.0
R&D expenses -4.3 -4.4 -2.5 -2.1
Other expenses -3.0 0.0 0.0 0.0
Share-based compensation -0.3 -0.4 -0.3 -0.3
EBIT -13.5 -11.2 -4.6 -2.9
Adj. EBIT (ex-123R expense) -13.3 -10.7 -4.4 -2.6
EBITDA -10.0 -6.6 -0.2 1.5
Net interest income 1.9 1.2 1.4 1.3
Net other income -19.9 1.1 0.0 0.0
Pre-tax profit -31.6 -8.9 -3.3 -1.6
Tax expense/(credit) 0.0 0.2 0.2 0.1
Net profit -30.8 -8.1 -3.0 -1.5
Adj. Net profit (ex-123R exp.) -4.7 -7.6 -2.8 -1.2
Pre-tax EPS (US$) -0.90 -0.25 -0.09 -0.04
After-tax EPS (US$) -0.88 -0.23 -0.09 -0.04
Diluted EPS (US$) -0.88 -0.23 -0.09 -0.04
Adj. Diluted EPS (ex-123R exp., US$) -0.13 -0.22 -0.08 -0.03
Margins (%)
GPM 77.9 72.4 75.1 76.5
OPM (ex-123R exp.) -96.0 -74.4 -34.9 -18.5
EBITDA margin -72.5 -45.5 -1.9 10.9
Net margin -222.8 -56.0 -24.4 -10.4
Adj. Net margin (ex-123R exp.) -33.9 -52.9 -22.1 -8.3
Sequential growth (%)
Revenue -28.4 4.3 -13.4 11.7
Gross profit -37.3 -3.1 -10.2 13.7
Adj. EBIT n.m. n.m. n.m. n.m.
Pre-tax profit n.m. n.m. n.m. n.m.
Net profit (ex-123R exp.) n.m. n.m. n.m. n.m.
Diluted EPS n.m. n.m. n.m. n.m.
Adj. Diluted EPS (ex-123R exp.) n.m. n.m. n.m. n.m.
Source: Company reports and J.P. Morgan estimates.
298
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 207: NINE Annual Balance Sheet
$ in millions
2007 2008E 2009E 2010E
Cash, cash equivalents and term deposits 91.9 92.9 88.0 87.7
Account receivables 5.0 4.4 4.1 4.7
Inventory 0.9 0.6 0.5 0.6
Total other current assets 2.5 2.1 1.8 2.0
Total current assets 100.3 100.0 94.5 95.0
Gross fixed assets 27.8 33.6 36.3 39.2
Accumulated depreciation (2.5) (5.6) (8.2) (11.0)
Net fixed assets 25.4 27.9 28.1 28.2
Other long term assets 30.9 31.8 31.8 31.8
Long term investments and associates - - - -
Total long term assets 56.2 59.7 59.9 60.0
Total assets 156.6 159.7 154.4 155.0
ST debt and current portion of LT debt
Accounts payable 5.9 3.4 1.1 1.1
Other current liabilities 4.3 3.8 3.6 4.1
Total current liabilities 10.2 7.3 4.7 5.2
Long term debt - - - -
Other long term liabilities 2.9 2.3 2.3 2.3
Total long term liabilities 2.9 2.3 2.3 2.3
Share capital 0.1 0.1 0.1 0.1
Share premium 116.8 127.5 127.8 129.4
Other reserves - - - -
Retained earnings 26.5 22.5 19.4 18.0
Preferred stock - - - -
Total equity 143.4 150.1 147.4 147.5
Total liabilities and equity 156.6 159.7 154.4 155.0
Source: Company reports and J.P. Morgan estimates.
299
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Table 208: NINE Annual Cash Flow Statement
$ in millions
2007 2008E 2009E 2010E
Net income (30.8) (8.1) (3.0) (1.5)
Add non cash expenses/(income) - - - -
Depreciation and amortization 3.3 4.2 4.1 4.1
Extraordinaries 25.1 (0.6) - -
Other non-cash items 3.4 0.4 0.3 0.3
Changes in working capital: - - - -
(Increase)/decrease receivables (1.7) 1.0 0.3 (0.6)
(Increase)/decrease inventories (0.0) 0.5 0.0 (0.1)
(Increase)/decrease other current assets 1.6 0.6 0.3 (0.2)
Increase/(decrease) payables (2.3) (3.0) (2.3) 0.0
Increase/(decrease) other current liabilities 1.2 (0.9) (0.3) 0.5
Net cash from operations (0.4) (5.9) (0.6) 2.6
Cash flow from investing
Purchase of property, plant & equipment (27.9) (2.6) (2.8) (2.9)
Purchase/sale of other LT assets - 0.1 (1.5) (1.3)
Purchase/sale of investments 35.5 - - -
Net cash from investing activities 7.6 (2.6) (4.3) (4.2)
Cash flow from financing - - - -
Issuance/repayment of debt
Change in other LT liabilities - (0.9) - -
Change in common equity - net 0.2 (0.3) - 1.3
Payment of cash dividends - - - -
Other financing charges, net - 2.3 (0.0) 0.0
Net cash from financing activities 0.2 1.1 (0.0) 1.3
Net effect of exchange rate changes (0.6) - - -
Net change in cash and cash equivalents 6.8 (7.3) (4.9) (0.4)
Net change in term deposits (36.0) - - -
Total cash balance at beginning of period 114.2 91.9 92.9 88.0
Total cash balance at end of period 91.9 92.9 88.0 87.7
Source: Company reports and J.P. Morgan estimates.
300
Global Equity Research
05 Januar
y
2009
Imran Khan
(1-212) 622-6693
imran.t.khan@jpmorgan.com
Shanda, Overweight, ($30.75)
We maintain our Overweight rating on Shanda, the largest item-based (free-to-play)
online game operator in China and our top pick in the online games sector. Our price
target for Shanda is US$35, which implies 14.5x FY08E and 13.0x FY09E diluted
GAAP EPS, or 13.9x FY08E and 12.5x FY09E adjusted diluted EPS.
• We expect Shanda's large diversified game portfolio of 23 MMORPGs and 16
casual games (in operations and in pipeline) will continue to deliver consistently
solid revenue growth going forward. We also believe Shanda’s large active
account base (paying and non-paying combined) of ~70 million could be further
monetized through cross-selling of new games and sequels (e.g., Legend of
Mir2), and in-game advertising. Furthermore, Shanda has demonstrated that it aas
the leading on-ground sales team in China to acquire new users – a significant
advantage during the current macro slowdown.
• We expect Shanda to emerge stronger in the online game industry post the
current financial crisis. With a strong cash position and the largest online game
revenue base in China, we believe: (1) Shanda is seeing better employee
retention, (2) cash-strapped game start-up teams are more willing to sell to or join
Shanda, and (3) Shanda has the financial strength to license additional games at
more competitive costs.
• We also maintain our view that: (1) Shanda’s strong marketing capability and
operating platform will enable it to further monetize its aging, but very well
known, games Mir2 and Woool, (2) Shanda’s “sequels” strategy of existing
games (such as Mir2 WaiZhuag) will deliver stable longer-term growth, (3)
Shanda continues to expand its game pipeline and diversify game-specific risks,
and (4) Shanda has the most extensive free-to-play model experience among
peers, which should continue to benefit the company.
• 2009 drivers: In our view, the following factors will drive shares in 2009: (1)
Shanda consistently delivering good results, (2) new games attracting greater than
expected user traction, and (3) share buyback of up to US$200MM over the next
few quarters (Shanda ended 3Q08 with cash of US$458MM, short-term
investments of US$129MM and convertible debt of US$175MM).
Our current and newly introduced 2010 estimates are in the table below:
Table 209: Shanda Financial Snapshot
$ in millions, except per share data
4Q'08E F'08E F'09E F'10E F'08E Y/Y F'09E Y/Y F'10E Y/Y
J.P. Morgan
Revenue 144.0 514.0 652.7 736.2 57% 27% 13%
EBITDA 64.5 243.2 298.0 335.6 72% 23% 13%
GAAP EPS 0.63 2.42 2.69 3.05 46% 11% 13%
Adj. EPS 0.65 2.53 2.80 3.16 -5% 11% 13%
Consensus
Revenue 143.4 510.4 614.1 685.7 56% 20% 12%
EBITDA 64.4 234.9 276.4 280.4 66% 18% 1%
GAAP EPS 0.62 2.38 2.76 3.23 43% 16% 17%
Adj. EPS 0.63 2.41 2.71 3.10 -9% 13% 14%
Source: J.P. Morgan estimates and Bloomberg. *Note: Adj. EPS excludes share-based compensation expense.
. 308 .6 336.7
Adjusted EBIT (excl share-based comps) 172.8 273.4 322.6 350.7
EBITDA 185.9 288.7 345.7 378.5
Net Interest Income 15.0 19.9 25.4 34.5
Net. in Common Equity - net (65.1) 89.0 42.5 44.6
Payment of Cash Dividends - - - -
Other Financing Charges, Net (50.0) 16.0 0.0 0.0
Net Cash from Financing