I was never in doubt that Chinese online gaming company Giant Interactive Group Inc (NYSE:GA) would turn out to be one of the best investments that one could make in 2013, and the stock’s year-to-date appreciation of close to 50% tells me that I was right. But if you’ve missed this gravy train so far, then worry not, as Giant Interactive Group Inc (NYSE:GA) still has gigantic prospects going forward.
The company’s recently released first-quarter results prove that its business is going strong and it is well positioned to ride the growth of online gaming in China. Giant Interactive Group Inc (NYSE:GA) reported revenue of $92.2 million in the previous quarter, up almost 13% from the year-ago period and slightly ahead of analyst estimates. Non-GAAP net income also jumped 6.3% from last year to $55.2 million, or $0.22 per share, a penny ahead of Street estimates.
If you’re wondering why Giant Interactive Group Inc (NYSE:GA)’s revenue and earnings didn’t grow at a rapid pace as they did last quarter, then let me tell you that the company didn’t launch any new games in the quarter in view of the Chinese New Year, when most of the gamers are away from their computers. Despite this seasonal effect, Giant Interactive Group Inc (NYSE:GA) still managed to post growth in the metrics that matter.
Solid strategies
The company’s strongest title, ZT Online 2 and the game’s micro-client version held steady as always, resulting in the top-line jump. Giant Interactive Group Inc (NYSE:GA) revved up these games by pushing out expansion packs in the quarter, and the company’s strategy of making this game a long lasting one seems to be working just fine. Giant would be releasing another expansion pack for the game later in the year, and the most remarkable thing about it is that it is taking feedback from gamers to develop the next version.
Going forward, Giant expects to make further advances this year. Its next expected blockbuster, World of Xianxia, is now in closed beta testing and is performing ahead of the company’s expectations. The game is expected to accelerate Giant’s revenue growth and it seems to be on the right path. Thus, the company will have two solid catalysts in the form of ZT Online and World of Xianxia to push up its revenue this year.
Also, Giant is tapping into the fast growing market for web games by rolling out The Sky. The game includes features from ZT Online, and there’s no doubt that it’s receiving good reviews. Moreover, another important thing to note is that Giant has partnered with Qihoo 360 to distribute the game. The relationship between the two companies seems to be growing by the day, as Giant had first started operating ZT Online 2’s micro-client version on Qihoo’s platform, and World of Xianxia will follow suit.
The huge active user base of Qihoo is a pretty big advantage for Giant. According to iResearch, Qihoo is the largest provider of mobile security and internet products in the Middle Kingdom and possesses the second ranked internet browser. Throw in a monthly active user base of 411 million and the company’s secure platform, and it becomes clear why Qihoo is the ideal choice.
Mobile isn’t important now, but might be
In addition, Giant is looking to make headway in mobile as well. Although the company believes that MMORPG (massively multiplayer online role-playing game) is the most important gaming trend in China due to its superior monetization as compared to mobile, it is still not leaving mobile untouched. Giant expects to push out one mobile game this year, and expects it to add further momentum to its top line.
The foray into mobile, although understated, is still an important move. For instance, the rapid growth of mobile devices, along with declining PC sales and the impending refresh of the console cycle, has hurt prospects of traditional video game publishers such as Activision Blizzard, Inc. (NASDAQ:ATVI). Activision’s 2013 revenue and earnings are expected to be below analysts’ expectations due to the reasons stated above.
Moreover, management has warned that the company is in for some tough times in the second half of the year as its most well-known franchise, World of Warcraft, shed 14% of subscribers. Competition from mobile games and other knock-off, free games has hurt Activision Blizzard, Inc. (NASDAQ:ATVI). The company needs to explore other avenues, such as porting WoW to mobile devices, which it had considered earlier. It had released five mobile games in 2012, but its success would depend on the experience its games on mobile would deliver.
But, it should be kept in mind that Giant draws its revenue from online games and they are doing pretty well. The mobile initiative would come in handy to benefit from the booming casual gaming market and Giant’s overseas expansion. The company is looking to ink partnerships with game publishers abroad and is also on the hunt for licensing opportunities.
Giant expects sequential improvement in revenue in the ongoing quarter, driven by World of Xianxia, with more developments slated later in the year.
Still a buy
Most importantly, if you thought that Giant shares would be too expensive now after their solid run this year, then there’s good news even on this front for you. It trades at just 12 times trailing earnings and a forward P/E of just 8. Giant doesn’t have any debt and possesses $484 million in cash.
Apart from these, Giant has a track record of paying solid cash dividends annually, like it did in February this year when it announced a dividend of $0.42 per share, equivalent to a yield of 6.7% then. Beginning this year, Giant will start paying a semiannual cash dividend, and considering that the company has a payout ratio of 44%, I think it will be able to sustain its dividend going forward.
Thus, Giant still remains a great investment and its business seems all set to get better. If you haven’t hitched a ride yet, there’s still time to buy into this solid online gaming company.
The article This $8 Stock Is Set to Scale Greater Heights originally appeared on Fool.com and is written by Harsh Chauhan.
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