Perfect World Fundamentals Improve

Morgan Stanley released a study today saying the Perfect World (NASDAQ:PWRD) fundamentals have improved, but valuations are reasonable and maintain a equal-weight stock rating.

The following is a summary of the report:

Benefiting from the new game, the perfect world's revenue has been accelerated, with a year-on-year increase of 20% in the third quarter, down 4% per cent in the first half. However, the company's operating profit grew by only 1% per cent year-on-year, influenced by spending on mobile and gaming promotion. We will be more optimistic about the stock once the company's profits show a continuous improvement. Maintain a "hold-wait" rating.

Earnings exceed expectations: total revenue of 833 million yuan, an increase of 20%, compared with the company's guidance forecast of 2% higher than the limit. Diluted per share ads (the United States Depository shares) income of 2.41 yuan, the chain growth of 46%, the year-on-year growth of 36%. Because of the lower tax rate, so better than our expectations.

We like: 1 "holy Warrior Star", "Dota 2" and "laughing" and other new games will continue to achieve their diversity of the game mix; 2 benefited from the strong performance of the new game, the third quarter average simultaneous online user growth of 5%, year-on-year growth of 29%; 3 Net cash is $428 million trillion, about 40% to 45%;4 of its market value. The company expects fourth-quarter revenue to grow by 2% to 7%, up from 25% to 31% year-on-year.

We do not like: Although the operating profit rate rose 4% on a month-on-month, it fell 3% to 13% Year-on-year, because research and development costs and marketing costs have increased.

Involved in host games? The perfect world has acquired both the video-game bus and the pocket bus, two of China's leading gaming portals, with a focus on host gamers. The company may expand to host game content areas. We believe that the plan needs to overcome some problems: 1) Although the host game in China's gray market coverage is very wide, in the Chinese government has not officially lifted this area; 2 host game revenue is usually one-time, do not have the repetition of online games; 3 Chinese gamers are concerned about privacy issues and are unwilling to pay for content.