Tuesday, June 3, 2008

a little on pwrd

pwrd, the chinese gaming stock, is up this morning on a bullish research initiation. in a research report published this morning, roth capital initiated coverage of pwrd with a buy rating. according to the analysts, the company remains the leading 3D game developer in china, with a proprietary technology platform that allows it to develop games faster and at a lower cost than competitors.

obviously, the recognition of pwrd's attractive technology and potential to develop popular new games is a positive for investors. one plus for the company is its successful successful licensing activities involving its top games ("Zhu Xian," "Perfect World 2" and "Legend of Martial Arts"). these games have been licensed in 13 countries, generating ongoing royalties and helping boost gross margins for the company.

most importantly for investors, the analyst report points to the recent selloff in a number of china-related stocks following the recent sichuan earthquake -- as well as concerns regarding operating margins at the company -- as having created an attractive entry point for investors looking to pick up shares of pwrd. there are a number of catalysts that indicate the company is poised to benefit from over the long term, including the rapid increase of pc and internet access in china and the company's ability to generate new hit games.

stocks like pwrd can be highly volatile because of the uncertainty involved in the gaming industry, as well as the correlation to the more volatile china sector. i view pwrd's investment in research and development as a positive based on the potential for successful new games that would drive shares higher. although there's no guarantee that these investments will pay off, i would point to the company's track record of generating popular games as a solid indicator for future success.

roth also initiated coverage of Giant Interactive (GA:NYSE) this morning with a buy rating. this increase in research coverage of the chinese online gaming sector should also give investors a sense of the potential for buyouts and consolidation in the industry. although i prefer to not use a potential acquisition as a primary thesis for owning a stock, pwrd would be an attractive potential candidate if mergers and acquisitions activity picks up in the sector.

disclosure: none

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