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Shanda Games: This Chinese Gaming Stock Is Risky

May 27, 2014 | About:

After experiencing a great run for the past six months, Shanda Games (NASDAQ:GAME) was hit hard after it reported its recent results. Although the company beat the consensus estimate, its key operational metrics declined along with a weak performance of its massively-multiplayer online (MMO) games. Moreover, its online gaming segment wasn’t doing as well as its mobile division, and it looks like competition from bigger rivals such as NetEase and Giant Interactive further affected its performance.

A Weak Performance

According to analysts at Morgan Stanley, revenue from Shanda’s top PC games Mir II, Dragon Nest, and Woool declined in the range of 12%-25% on a year-over-year basis. These three games accounted for around 53% of Shanda’s revenue in the previous quarter. This is a major cause of concern for the company. In addition, it had to close the operation of RIFT, which is a MMO game, as it didn’t perform up to management’s expectations.

Shanda is currently sailing through troubled waters as far as online gaming is concerned. And looking forward, there seems to be no relief for the company. The company has high hopes for its latest launch, Final Fantasy XIV, and claims that it has received “very favorable user feedback.” According to statistics, it has been downloaded more than 1.5 million times in just over three months since being re-launched in Japan and continues to gain more users.

Turnaround Strategies

Shanda will perform some more tests in the second quarter before releasing the complete version of Final Fantasy XIV. If the company manages to draw gamers' attention in this MMO franchise, then it could see some positive performance in the upcoming quarters. In addition, the company has another game named Dungeon Striker under its sleeve for launch in Japan and China next year while another title, Age of Dawn, is about to enter closed beta testing.

Management plans to expand its MMO game portfolio in the next two to three years by adding more games. But as of now, Shanda doesn't have any game that could provide it with the necessary boost. On the contrary, other gaming companies seem to perform very well in the MMO segment. Both NetEase and Giant Interactive are playing with a good strategy in this market and their games seem to be doing quite well.

Competitors Doing Well

NetEase is reducing its dependence on Activision’s World of Warcraft, as the company has found success with its self-developed games such as Heroes of Three Kingdoms and Dragon Sword. Moreover, it has launched some new content for its longest-running games, Fantasy Westward Journey II and Westward Journey Online II. By 2015, it plans to launch Crisis, a first person shooter game and Revelations, which is a 3D epic fantasy game.

With these new launches in place, NetEase is well positioned. Moreover, its marketing ability is more than that of Shanda, as it has a cash balance which is five times more than that of Shanda. In this way, it could put pressure on its smaller rival by aggressive promotions and launching high quality games.

Mobile Moves

For Shanda, the mobile gaming business has performed well. In fact, it was the only unit which has performed for Shanda. This segment has increased 50% quarter over quarter, which was mainly driven by the success of Arthur in China. Mobile gaming accounts for around 14% of its overall revenue and the company is working hard to increase this further. Shanda plans to launch a new game in China named Guardian Cross, which was developed by Square Enix. Along with that, it would launch two of its self developed games namely Dragon Nest and the Hell Lord.


Although Shanda has been doing good business in the mobile segment, but it accounts for only a small portion of the total revenue. The company could expect a bounce back only if its MMO segment starts delivering. Considering all the above factors, it seems best for investors to wait on the sidelines for the moment, as we could see more down side.

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