Explosive Online Cloud Gaming from China

It is no accident that the PC-based online gaming has become the overwhelmingly dominating game platform in China.  This has been a direct contrast to the gaming console platforms dominated by Nintendo WII, Sony Playstation and Microsoft XBox in most countries around the world.  The reason is very simple.  You can start and play the latest and most exciting games online without purchasing the expensive game console and its format-protected games, which may easily cost more than two month salaries of most working Chinese.  As a matter of fact, there is no need to even own a PC to play the online games.  All you need is to log onto your online account from a PC in a “网吧” internet cafe down the street and the internet super highway will bring you an online virtual world with unlimited, well diversified gaming excitements against millions of other players simultaneously.

JX3 Online from Kingsoft

ZGOL from ConnGame

The easy entry of online virtual gaming has quickly turn China’s low income disadvantage into a massive real market.  In June 2010, statistics showed China has 420 million internet users and 338 million of them are online gamers.  It is amazing to see there are more Chinese online gamers than the entire population of US, and they are still fast growing.  The online gaming in China was started by leasing and licensing of foreign games.  Gradually, it evolved to co-development and totally independent development of online games and systems.  Phenomenal progress has been achieved in the online gaming graphics, actions and speed, story and plots, etc, through fierce competition among the Chinese online game enablers.

Recently, Cloud Computing has been a very hot topic for the future of computer industry, fueling by the dramatic bidding war to acquire 3Par between Dell and HP.  However, few might realize that online gaming has been the most successful application of cloud computing.  Online Cloud Gaming (OCG) processes and interacts millions of cloud PC gaming actions simultaneously with the central and sub-central gaming engines.  Once again, China is leading the OCG development through its massive online player base.  The online gamers will reach more than 350 million this year.  The revenue of the Chinese online gaming industry will pass $5 billion and expand with strong double digit growth rate. 

Online games in China generally fall into two primary categories, i.e., Massive Multiplayer Online Games (MMOGs) and Massive multiplayer Online Role Playing Games (MMORPGs).  The MMOGs is a generic term for games played competitively online without the existence of a persistent online realm such as online MaJiang or competitive card games.  MMORPGs have a preference for persistent online worlds where hundreds of thousands of game players can interact simultaneously, obviously the dominating online gaming system in the market.  

The rapid software development in 3D and 2-1/2D graphics, wide spread of broadband internet access, and fast growing online gamer population will no doubt make the OCG experience to surpass the traditional console or individual PC-based games.  This transition is expected to occur in 2011-2012.  When this transition occurs, China as a leader in the online gaming may quickly copy its massive success inside the China market into the international landscape.  Almost all the Chinese online gaming enablers are traded public companies in the US or Hong Kong stock markets.  From the very beginning, these Chinese online gaming companies would like to be perceived internationally and to grow through international investments.  It will be perfectly natural if they expand their market sight from China into the international market and become the true world leaders.

OCG gaming power will surpass console gaming in 2011-2012.

The OCG is also growing rapidly among the mobile phone users.  By August 2010, there are more than 800 millions of mobile phone subscribers in China and 38% of them are using mobile phone to access internet.  There are more 10 million mobile online players in China Mobile alone (other two major mobile operators China Unicom and China Telecom) and the player growth rate has been phenomenon.  The mobile OCG market in China will get major boosts since China is already becoming the world largest 3G wireless network market.  In addition, the current online gaming can be a great platform to launch new online applications that are rich in 3D graphics, interactions and simulations, such as world exhibition, museums, libraries, etc. 

Although the financial performance and strength of various Chinese online gaming companies are different and their share prices have been up and down riding along the wave of investment community’s opinions.  However, in relevant to the huge potential of OCG, the fast growth rate and the decisive leading position, the Chinese online gaming companies are very much undervalued as a whole.  The entire market value of all these companies adding together is less than half of that of Nintendo alone.

Financial Performance of Chinese OCG Companies in US Stock Exchange

Symbol	Recent Price	Market Cap, $M	P/E	P/S	52-wk Range
NTES	38.12	$4,950	17.48	7.19	26.16 - 44.95
SNDA	39.22	$2,340	14.76	2.81	36.33 - 59.92
CYOU	28.62	$1,900	9.58	5.15	24.85 - 36.40
GAME	6.04	$1,720	8.16	2.36	4.99 - 11.49
GA	6.3	$1,430	12.88	8.04	6.03 - 8.25
PWRD	26.13	$1,310	8.81	3.64	20.75 - 50.40
NCTY	5.19	$132	N/A	1.17	3.70 - 8.97
GIGM	1.95	$108	N/A	0.72	1.88 - 4.95
CAEI	0.74	$40	N/A	0.58	0.58 - 1.79
NTDOY	31.89	$32,680	16.59	1.97	28.26 - 43.95

The current under valuation and depressing share prices of these Chinese OCG companies have provided a rare opportunity for a great return of long term investment.  The significant share appreciation may come from several fundamental drivers including: strong organic growth through more and more players online, new addition from mobile online gaming, and new revenue from new applications and international markets.  Once the OCG becomes a serious challenger to the traditional console game providers, the OCG companies will be attractive and become immediate acquisition targets of the traditional console game providers.  Moreover, although China has fiercely resist calls for a quick rise of exchange rate, there is no doubt that the dollar will fall and the Renminbi will rise eventually.  The income made in China and other international markets will certain be worth more US dollars in the near future.  The investment in these Chinese OCG companies will get a bonus hedge against the devaluation of US dollar.

SNDA, Shanda Interactive Entertainment, produces and maintains a large number of OCG in China developed by Western, Korean and other Chinese gaming companies.  It was among the first companies that started the online gaming in China and is currently leading the industry with some of the most popular MMORGs.  Founded in 1999, Shanda has enjoyed the rapid revenue growth rate of over 50% per year, quickly approaching $1 billion.  Shanda has more than 10% of market share in the Chinese online gaming.  It is also a major player in advanced casual online games, online chess and board games, e-sport game platform and a variety of cartoons, literature works and music. 

NTES, NetEase, is a popular online portal in China and also a provider of online gaming services through its in-house development or licensing of MMORPGs.  It stands out in the space of OCGs with the release of many popular MMORPGs including Fantasy Westward Journey, Westward Journey Online II, Westward Journey Online III, Tianxia II, Heroes of Tang Dynasty, and Datang, as well as the licensed game, Blizzard Entertainment's World of Warcraft, etc.  The Westward Journey and its game engine, based on the ancient westward travels on the Silk Road, have become the most popular MMORPGs in China based on PCU statistics.  The company also has paid listings on its search engine and Web directory, and classified advertising services, as well as an online mall, which provides opportunities for e-commerce and traditional businesses to establish their own storefront on the Internet.  Further, NetEase offers community services and entertainment content, such as cartoons, games, astrology, and jokes from over 100 international and domestic content providers.

CAEI, China Architectural Engineering, the new kid in the block, was taken over by the Chinese online gaming pioneer Tang Jun, who used to be the CEO of Shanda, as a ticker shell with the infusion of his new OCG venture ConnGame.  The merger, however, has received very negative receptions from the street, fearing the worst outcome from the combination, i.e., the OCG business has no positive perspectives and the existing Engineering business will loss its bread and butter income because of the current international financial crisis.  These fears are based on groundless concerns because CAEI’s Engineering business has been restructured back to China market. It is stabilized and thriving again.  ConnGame’s new games and game engines are about to make big hits in China and around the world.  Success in any of these two businesses will ignite a major run-up in its depressed share price.  Now imagine what will happen, if CAEI will integrate ConnGame’s OCG platform and expertise into its Engineering business to create innovated applications and completely new business incomes? 

Sky is the limit!

Answer to a Financial Led Economy Turn Around

Two years into the White House, with the dominating control of both House and Senate, Obama and the Democratic Party are facing a difficult mid-term election.  Americans across the country are unhappy.  Yes, Chicago lost the Olympic bid.  Yes, the Climate Treat did not sign at the UN Summit.  More problems are showing up when the landmark Health Bill starts to implement.  Then there was the worst oil spill in Mexican Gulf. 

But Stupid!  It is the poor economy that hurts and angers the people.

Obama clearly understands the danger of this troubled economy to the fate of his Democrats.  He is in rush to propose hundreds of billions of dollars to jump up the sick economy and try to change voter’s perceptions.  He knows it is people’s perception to decide their vote.  Remember, Obama was awarded a Nobel Prize not to what he has achieved but to a wishful perception he may achieve in future.

Now, at this crucial moment, which of the followings do you perceive Obama’s true policy on US businesses and economy?

A.    Anti-business and manipulating the economy to achieve his Democratic agenda.  He has increased Union power by imposing hefty tariffs on importing steels, tires, etc.  He kept government’s expansion by tax hikes.  He wants to have total government control over banks and investments through demonizing and a notorious financial bill.

B.    Pro-business and pushing to revive US superpower economy.  He punished Toyota over brake recalls in order to help American auto makers GM, Ford, and to take the Japanese profits back to US car dealers.  He pressed to get $30 billion compensation from the worst BP oil spill (which then mysteriously disappeared after the damage fund setup and an American becoming BP CEO).  He did all he can to give everyone the health coverage and extend the unemployment benefits several times so that the government programs can continue.

Actually, the answer relies on C and C is Citibank.

Citibank was hardest hit during the worst financial crisis.  It lost billions of money and its share price plunged from $50 to $1.  US government had to provide $45 billion TARP money and other guaranties to rescue Citibank.  The backing of government and the infusion of billions of dollars stabilized the business of Citibank.  In return, Citibank restructured its business and streamlined its strategy.  More than a year ago, Citi repaid US $20 billion and converted the remaining $25 billion into 7.7 billion shares of Citibank common stocks.  Today, Citibank is among the best funded banks and thriving through aggressive international expansion.

In March 2010, US Treasury announced plan to sell its Citi common share holdings to the open market in a slow and controlled manner.  Since its selling started in late April, the US has sold a total of 4.1 billion shares.  In average, Citi’s daily trading volume is about 500 million shares, adding the total trade volume in the same period to around 60 billion shares.  In another word, the government’s share selling is less than 7% of total trading so far.  Because of the government disposing, the Citi share price was pushed down ~30% from $5 to $3.6.  In fact, the share prices of all major financials have been pushed down to mirror the trend of Citi until today.

Looking at this, one must question the true intention of the share selling of the Obama government.  It seems to have achieved its punishment of Citi, imposing the control over the banks and vandalizing American’s anger towards the greedy bankers.  However, the tax payers did not make the money they supposed to make because of the significant drop in share price.  The Citi and the entire financial industry got the punishment and had to operate under extensive stress.  The banks had no choice but to protest themselves by restricting business lending.  When there is lack of funds for lending, businesses are hard to grow or even to survive.  As a result, the entire US economy suffers.  The only beneficiaries from all these actions are government officials, they have firmly maintained their supreme grasp to control and manipulate the banks and other financial institutions.

It is true that banking and investment alone cannot turn around this poor economy.  However, it is definitely impossible to thrive the economy, if the banks and financial institutions are depressed under water to nervously test the deep bottom.  The new Financial Bill and the regulations have drawn the no-crossing lines for them, but the Obama government is still holding one of their legs.

Now, the government has two different options to show it is business friendly, instead of the current slow selling.  First, if Obama government still wants to keep control of banks and enjoy its power, it should halt all Citi share selling right now for 5 years and might even “buy back” more bank shares.  This will stop the slow bleeding of Citi and other banks.  Several years down the road, the share prices of all the banks will be recovered and irreversible.  The government can then sell these shares at a much higher price and it gets both control and the money.

The other option is to sell all the remaining Citi holdings immediately at once.  Today, Citibank’s business is fundamentally health and profitable.  It expands rapidly in the emerging Asia, Latin America, Africa markets.  Citibank certainly wants to buy some shares back from government.  Sovereign funds and big investment funds are eager to acquire Citi share as well.  They can purchase the shares slowly in the open market.  Why not complete this process now at one time?  Once the government holding is depleted, the huge burden and pressure on top of Citibank and other financial institutions will be removed.  They will then be motivated to accelerate their business lending and investment activities.  This will jump up the entire US economy.  Worry about another financial crisis?  The new Financial Bill will hold the line for the banks to behave in good faith.  Look for a win-win situation, nothing seems better and more effective.  Banks get the relief, tax payers get more money quickly, the US economy will get a big boost, and the government takes all the credit.

Does Obama truly wants to jump start the US economy? 

C is the answer.