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Giant Interactive Group Inc. (GA) become a Zacks #1 Rank (Strong Buy) after reporting solid third-quarter results last month, which included a positive earnings surprise of 11.1%. Furthermore, this online game developer and operator has a forward price-to-earnings (P/E) multiple of just 6.6, which makes it attractive for value investors.

Impressive Q3 Results

On November 13, Giant Interactive reported third-quarter earnings of 20 cents per share, which was flat on a year-over-year basis but better than the Zacks Consensus Estimate.

Revenue jumped 18.6% year over year to $86.0 million, which also topped the Zacks Consensus Estimate. The year-over-year growth in revenue was driven by strong performances from online games (up 18.0% year over year) and licensing revenue.

During the quarter, Active Paying Accounts (“APA”) for online games increased 7.4%, Average Concurrent Users (“ACU”) advanced 4.9% and Peak Concurrent Users (“PCU”) improved 1.4%. Average Revenue per User (“ARPU”) for online games jumped 9.6% year over year to RMB238 ($37.57 using currency exchange rate of $1= RMB0.15788 as of September 30, 2012).

Giant Interactive expects fourth quarter 2012 results to improve sequentially on the back of the micro-client version of the ZT 2 and World of XianXia games.

Earnings Estimates Move Higher

The Zacks Consensus Estimate for 2012 has jumped 6.7% to 80 cents per share over the last 60 days, representing year-over-year growth of 8.1%. The Zacks Consensus Estimate for 2013 advanced 4.9% to 85 cents over the same period, reflecting a year-over-year increase of 6.8%.

Reasonable Valuation

In addition to a low P/E, the stock looks attractive with respect to its price-to-book (P/B) multiple of 2.5. A P/E below 15.0 and a P/B ratio less than 3.0 generally suggest a value stock. Additionally, Giant Interactive’s PEG ratio of just 0.47 indicates that the stock is reasonably valued given the estimated growth of 13.8%.

Moreover, Giant Interactive’s Return on Equity (ROE) of 42.6%, Return on Investment (ROI) of 42.6% and Return on Asset (ROA) of 30.9% are better than the industry averages.

Historically, share prices have shown positive correlation to earnings growth. The uptrend in the 2012 earnings estimate should encourage investors as the stock is likely to follow the trend.

Shanghai based Giant Interactive primarily develops and operates massively multiplayer online role playing games (MMORPGs) in China. Currently, the company operates 11 online games, out of which 9 are self-developed. Its oldest game – ZT Online – was introduced in January 2006. This $1.23 billion company earned revenues of $284.8 million in 2011.

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