The9 Limited

The9 is tapping China's gaming obsession for big profits. The company grew revenues 69% in the second quarter. It has surprised on earnings 3 out of the last 4 quarters by an average of 33.60%. The9 has a forward P/E of only 8.93.

Company Description

The9 Limited (NCTY - Snapshot Report) develops online games for the Chinese market. The company's current game line-up consists of MU, Blizzard Entertainment's World of Warcraft, Soul of The Ultimate Nation, Granado Espada, and Joyful Journey West.

The9, headquartered in Shanghai, also has exclusive licenses to operate games in Mainland China including Hellgate:London, Emil Chronicle Online, Field of Honor and Atlantica.

Net Income Rises 129% in a Record Second Quarter

On Aug 8, The9 reported second quarter earnings and easily surprised on estimates by 27.08%, or 13 cents. Net income jumped 129% to $16.9 million from $7.4 million in the second quarter of 2007. Net income was also 29% higher than the first quarter of 2008.

Earnings per share soared 118% to 61 cents from 28 cents per share in the year ago period. Analysts expected 48 cents per share.

Revenues also grew 69% year over year to $66.3 million. The subscription-based games were the big winner in the quarter, rising 69% year over year and 6% from the first quarter of 2008 due mainly from higher concurrent user levels and user usage levels for World of Warcraft. The segment includes revenues from game playing time, merchandise and installation package sales.

The company saw continuing growth in the World of Warcraft and Soul of the Ultimate Nation games during the quarter. Despite shutting down its servers for 3-days in honor of the earthquake victims, NCTY attained aggregate peak concurrent users of approximately 1.3 million with World of Warcraft itself surpassing 1 million.

As of Jun 30, the company has 41.5 million registered users.

Consensus Estimates Rise for the Third Quarter and the Full Year

Covering analysts are bullish on the company as estimates continue to rise. Third quarter estimates are up 7 cents to 55 cents per share in the last 60 days. For the full year, consensus estimates jumped 13 cents to $2.08.

Analysts also expect 2008 year over year earnings growth of 74.55%.

Value Fundamentals

The9 has solid value characteristics. The company is trading at 8.9x projected earnings. Its price-to-book is 1.20. NCTY has an excellent 5 year average return on equity (ROE) of 14.92%.