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Shanda Games Limited (GAME) Message Board

  • paultradestoday paultradestoday Mar 1, 2010 9:12 AM Flag

    Citi Downgrade

    Downgrade to Hold with target price of US$9.00 - Weak 1Q10 guidance
    could mean the monetization impact of Mir2 is lasting longer than we
    originally thought, which will likely drive estimate cuts and hit stock
    sentiment. As a result, we cut our 2010E and 2011E revenue/earnings
    estimates by -24%/-28% and -25%/-25% respectively, and think investors
    will want to see ARPU reversion to normalized levels again before turning
    more positive. We downgrade Shanda Games to Hold/Low Risk (2L) and lower
    our target price to US$9.00 (from US$12.50), based on 13x (unchanged)
    adjusted 2010E non-GAAP EPADS of US$0.70.

    * Weaker 1Q guidance was a negative surprise - GAME reported solid 4Q09
    results, meeting company guidance and Street estimates. However,
    surprisingly, it guided 1Q10 total revenues to decline 10-15% below 4Q09,
    mainly due to a material ARPU impact resulting from the new expansion
    pack released on its flagship game, Mir2, at the end of December 2009. As
    Mir2 still contributes >50% of total revenues, a significant drop of ARPU
    is unlikely to be fully offset by: 1) Strong rebound in casual games in
    1Q, and 2) Consolidated revenues from recent acquisitions of Goldcool and
    Mochi Media. While management stated that the active users and paying
    users remain stable, it does not have visibility on when the ARPU level
    will resume to a normalized level.

    * Why not a Sell? - Our new target multiple of 13x 2010E is in-line with
    the 10x-13x trading range of overall online gaming companies. Given our
    28% downward adjustment on EPS, even applying a low end 10x multiple
    suggests a fair value of $7.00. While the stock is down ~34% since IPO
    and 19% YTD, and the share price could see some near-term pressure, we
    believe downside could be supported by its newly announced US$150m share
    repurchase program.

    * 1Q10 guidance - Revenues for 1Q10 were guided to US$166.3m-US$176m and
    OpM at mid-30%.

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