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Online gaming leaders pull earnings surprises

Sherman So

Burning Crusade helps lift The9 above rivals

The online gaming sector's strong momentum on the mainland is continuing, with most industry leaders posting better than expected profits in the final months of last year.

Of the top five online gaming companies, Netease, Shanda, The9 and Perfect World beat analysts' revenue and profit forecasts for the fourth quarter. The9 reported the best results, after launching Burning Crusade, the highly anticipated upgrade to its hit game World of Warcraft in September.

'[The9] benefited from a complete quarter of the Burning Crusade,' said Alicia Yap, a Citigroup analyst.

Sales growth of 34 per cent quarter on quarter and 50 per cent year on year again made The9 the mainland's third-largest online gaming company. Revenue was US$61.3 million in the fourth quarter, beating Giant Interactive's US$59.6 million. Profit soared 125 per cent to US$11.8 million from last quarter, though still 18 per cent lower than a year earlier.

Still, Ms Yap said The9 may struggle to keep up the pace. Gamers had waited long for Burning Crusade, launch of which had been delayed since last summer, and that anticipation drove up sales substantially in the fourth quarter.

'Gamers want to try out all the new content and features,' said Ms Yap. 'Afterwards, they play less and go back to their regular hours.'

She said the Lunar New Year also would hurt The9's first-quarter revenue this year as gamers who work in cities returned to their hometowns in remote areas, where broadband connections were more scarce.

There were also concerns about whether The9 could renew its licence with US-based Blizzard for World of Warcraft when it expires next year, said Dick Wei, China internet analyst at JP Morgan. 'They can renew the licence but at what price?' he said.

Ms Yap's top pick in the sector is smaller rival Perfect World. Its revenue grew 20 per cent from last quarter and 325 per cent from a year earlier to US$35.4 million. Profit for the quarter was US$20 million, a turnaround from a US$3 million loss a year earlier.

Perfect World, unlike The9, developed its own games rather than licensing them from others, said Ms Yap. This contributed to its much higher net margin of 56 per cent, compared with The9's 20 per cent.

The company has the best technology of mainland online game providers. 'It has its own 3D engine and can develop a new game in six months, while others take several years.'

She said investors were previously concerned the company could only increase its revenue by launching new games. But in the fourth quarter, it launched only expansion packs for existing games.

'Still, they could achieve significant growth,' said Ms Yap. 'I think their growth is sustainable.'

The two top online gaming firms, Shanda and Netease, are still growing despite their relatively old games.

'Netease's strong quarterly growth of 9 per cent was beyond people's expectations,' said Ms Yap. 'We did not have high hopes for Netease.'

The second-largest gaming firm has failed to launch a new hit for more than two years. But the performance of its existing lead titles, Fantasy Westward Journey and Westward Journey II, seemed to be longer-lasting than people had expected, with both seeing higher sales during winter holidays.

To boost revenue, Ms Yap said Netease, which develops its own games, is working toward licensing a major hit title from aboard.

The performance of Shanda, the largest mainland gaming company, has been the most predicable in the sector, said Ms Yap. 'They continued to deliver and beat their own guidance,' she said.

Although most of the games Shanda runs are past their prime, by consistently adding new games and new expansion packs to existing titles, the company has been able to raise its revenue steadily.

Its fourth-quarter revenue grew 9 per cent quarter on quarter to US$97.8 million and is expected to rise 6 to 9 per cent in the first quarter.

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