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Perfect World - A Chinese Gaming Stock That Could Drive Up Your Portfolio

April 28, 2014 | About:

Chinese online game developer Perfect World (PWRD) has appreciated strongly in a year and was a good buy. A year earlier, it was believed that the company would be able to rescue itself, considering the weakness in its business as temporary. However, one year later, the condition is not good at all, and Perfect World’s revenue has declined, earnings dropping continuously, and the turnaround expected since last year didn’t arrive.

But, despite taking several wrong steps, the stock has soared this year with solid results for Perfect World cheering investors. The stock’s performance is in line with Chinese gaming giants such as Giant Interactive (GA) and NetEase (NASDAQ:NTES) this year, but the business performance is nowhere close.

Growth Expectations

Management is very optimistic regarding growth. The company has a robust gaming pipeline and it has launched a number of games across various platforms in addition to a few expansion packs. Earlier Perfect World was suffering due to lack of new games, but its recent launches would hopefully hold the sliding revenue.

Perfect World is aggressive on mobile games, web games and MMO (massively multiplayer online) games. It released a web game, Gourmet Adventurer, in China after releasing a number of web games in the previous quarter. Going forward the company plans to introduce more web games which is really important for its business.

There’s a huge market for web games and Perfect World’s competitor, Giant Interactive, is already several steps ahead in this market. Giant is porting its successful MMO games into the web game format and has partnered with Qihoo 360 to distribute such games. Giant’s games are quite successful and as it operates these games on the secure and expansive system of Qihoo is accelerating growth.

If Perfect World establishes itself into the web games market, then it is bound to experience some revenue inflows. Moreover, if the company’s efforts in developing mobile games materialize then more success is expected. Perfect World has launched three mobile games in China this month and realizes that it has delayed their venture into mobile.


But, with the market for mobile games being quite crowded the monetization is not as appealing as for MMOs. For instance, Giant Interactive is already testing the waters in mobile, and if it releases its successful online games onto the platform, then competition would become even stiffer. Similarly, NetEase, one of the biggest players in the industry is extremely serious about its mobile venture.

Similar to Perfect World, even NetEase plans to launch quite a few mobile games this year, but it is already very well established in this market as it saw 75 million installations of its mobile games in the previous quarter. Apart from this NetEase has an impressive 29 million daily active users. Looking at other players such as Glu Mobile, and it is quite clear that Perfect World will have to aggressively bring its games on to the mobile platform.

The Pipeline and Conclusion

Going forward, the company packs its MMO pipeline with games such as Swordsman Online, DOTA 2, and Holy King set to be launched. Optimistically, the moves in all these fronts will bring the much required revenue growth and enable the company to profit from the booming Chinese online gaming market.

In addition to these moves, Perfect World continues to expand in Europe and Korea, which should strengthen the company’s overseas business further. Thus, the company’s key areas might start to boost if it executes on all these fronts.

But then, the investors must cautiously invest in the company because if Perfect World’s turnaround couldn’t materialize over the next quarter or two, then its time to move on.

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