Restrictions Challenge Shanda

We keep our Hold recommendation on Chinese online gaming company Shanda Interactive Entertainment Ltd. (SNDA), as we remain concerned about how long it can maintain this growth momentum without new, hit games in this competitive market. Moreover, the industry faces Chinese government regulations. Near term, we believe Shanda’s second-quarter revenue will be affected by its decision to suspend game operation for three days after the Sichuang earthquake.

Shanda operates in a highly competitive and rapidly changing industry. To extend its business, the company will have to contend with players like NetEase (NTES ), Giant Interactive (GA - Snapshot Report), The9 Ltd (NCTY - Snapshot Report) and Perfect World (PWRD - Snapshot Report). The company is also facing tough competition from other Internet portals like QQ.com and Sohu.com (SOHU - Analyst Report), which also have developed and operated some hit online games.

Moreover, to restrict online-game addiction, especially of underage players, the Chinese government has made it mandatory for online-game providers to limit the use to three hours per session. Besides, the game players are also required to use their real name to get permission. We think this might negative impact gaming companies.

Based on our earnings estimates for fiscal 2008 and 2009, the stock trades far below the industry average. Using a P/E multiple of 13.0x our fiscal year 2009 earnings per ADS estimate yields a target price of $34, which we believe reflects Shanda’s prospects.

Read the full analyst report on SNDA

Read the full analyst report on NTES

Read the full analyst report on SOHU