Perfect World (PWRD): Represents the current strength of Chinese stocks

By Paul Goodwin, Editor of Cabot China & Emerging Markets Report
From Cabot Wealth Advisory 8/6/13 Sign up for free Cabot Wealth Advisory

My stock pick for today is a good representative of the current strength of Chinese stocks that trade on U.S. exchanges. The company is Perfect World (PWRD), an online game developer and operator that specializes in three-dimensional massively multiplayer online role playing games (MMORPGs). Perfect World’s big titles include Perfect World, Legend of Martial Arts, Perfect World II, Zhu Xian, Chi Bi, Pocketpet Journey West and Forsaken World. There are also casual games (like Hot Dance Party) and 3D and 2.5D games, but it’s the MMORPGs, based on the Angelica 3D game engine, that provide the lift.

Following screening rules I set up earlier, has PWRD increased in price over the past three months? The chart shows that PWRD closed on May 6 at 11.93. And it opened today at 21.94, which makes for an 83% price increase. Check.

Trading above 10? Check.

Adequate trading volume? Average daily trading volume for PWRD is 800,000 shares. Check.

Revenue and earnings growth? Well, Perfect World’s revenue was up 31% in 2011, but actually declined 7% in 2012. And both revenue and earnings were off slightly in the first quarter. (The company will announce Q2 results on August 19, after the market closes.) The after-tax profit margin was 23.6% in Q1.

Institutional sponsorship peaked back in 2009–2010, which is understandable, since the stock price dropped below 10 in 2011 and stayed there for all of 2012. Big investors are often reluctant to mess with stocks whose prices are in single digits.

PWRD sells at a reasonable P/E ratio of just 12, and the stock pays a respectable dividend with a forward annual yield of 1.9%.

So how about the story? Well, the online game business in China is certainly robust, and most Chinese portals offer some casual games and some combat games. Personally, I’m not qualified to judge the quality of Perfect World’s games, how frequently they’re updated and how often new titles are introduced.

Many of those questions will likely get at least partially answered in the upcoming Q2 earnings release on August 9. A dedicated growth investor will make it a point to listen to the conference call after the release to hear how management talks about the company’s performance, its plans and its projections for future revenue, earnings and new games.

I don’t have Perfect World in the portfolio of Cabot China & Emerging Markets Report right now. It certainly qualifies on the basis of price appreciation, but I’m waiting to see how the earnings report goes. I think my initial price screen has given me (and you) a very interesting stock to follow. Let’s see how it does.

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