NetEase, Inc (ADR) (NTES), Changyou.Com Ltd (ADR) (CYOU): A Closer Look at 4 Online Gaming Companies in China

The Foolish fundamentals

Now that we have met some of the major players in China’s online gaming industry, let’s take a look at a fundamental comparison between these four companies.

Source: Yahoo Finance, 8/21/2013

Although NetEase appears to be trading at a premium compared to its peers, that premium valuation is well deserved, considering its more robust top and bottom line growth. Investors interested in Changyou.Com Ltd (ADR) (NASDAQ:CYOU) should keep an eye on its advertising revenue growth, which has been considerably lagging NetEase’s. Even though NetEase is the largest company, it also has a low debt-to-equity ratio and strong profit margins.

Shanda shareholders need to watch the company’s cash balance after its two big acquisitions, which might exacerbate rather than solve the company’s lack of top and bottom line growth. Giant Interactive’s sluggish paid user base growth threatens to keep in in the little leagues, as its 2.3 million active accounts are a tiny drop in the pond of 538 million Chinese Internet users.

A Foolish final thought

The world of Chinese online gaming is a fascinating, high growth one, but it can be a tough one to navigate without a full understanding of which games are popular, the payment methods behind them, and the government regulation of the industry. You can learn more about how this lucrative industry operates in my previous article on Changyou. In addition, the gaming console ban could end sometime this year, which could shift the balance between the console and PC gaming industries significantly.

With the Internet penetration rate currently at 53% in China, compared to 81% in the United States, Internet-based gaming, advertising, search and e-commerce companies still have a lot of room to grow. With some due diligence, investors can separate the winners from the losers in this high growth sector, and uncover some excellent long-term, high-growth investments. 

The article A Closer Look at 4 Online Gaming Companies in China originally appeared on Fool.com and is written by Leo Sun.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Giant Interactive Group (NYSE:GA) and NetEase.com. 

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.