Novice Investing - Attracting Shanda Interactive

Date: Monday 01st 2008f December 2008 04:26:34 PM

Attracting Shanda Interactive - 02/28/2006

By: Hari Wibowo

We have talked briefly about Shanda Interactive Entertainment Ltd. (SNDA) last December. At the time, we were intrigued with the prospect of owning a gaming company in a growing economy with solid balance sheet. At the time, analysts expect Shanda to deliver $ 1.46 earning per share for year 2005. With share price trading at $ 16.50 and a positive net cash of $ 3.61, Shanda was sure look like a fine investment candidate.

Fast forward today, Shanda just announced a loss of 94 cents for the fourth quarter of 2005. Things look bad when you consider that sales for the quarter is down 16% year over year. Things may look bad on the surface but digging further, there are still some sparks left for Shanda's shares.

For starter, this is the first quarter that the company initiated a new revenue model announced last summer. Instead of charging users to use its server, they now can play for free. Shanda tries to make money on value-added service such as buying and selling Avatar. At the time, management stated that some short-term revenue bump should be expected, which they did, with the announcement of fourth quarter of earnings. So, where is the spark?

Here is the spark. Let's consider this. Despite the new initiative, revenue for the online gaming revenue fell 20%. This can be considered good. What? Yes, you heard it. This means that Shanda can still maintain 80% of its revenue *despite* its new revenue model. How many companies can do this? Not many. If Apples start giving iPod away for free and charging customers only for its i-tune music, how much drop in revenue will it experience? Nobody knows for sure since they aren't doing it yet. But, just for your information, an i-Pod will costs you $ 49 at the very least while one song of i-tune will cost a mere $ 0.99. Replacing $ 49 in revenue with $ 0.99 is not an easy task. We are just talking about the first quarter here, which is normally the worst time for transition model like this. Surely, revenue can at least grow 10% from the depressed 4th quarter level.

Shanda also reported a 94 cents loss for the fourth quarter. This is not as bad as you think if you dig around deeper. 90 cents charge was incurred due

to the purchase of stake in Actoz, a South Korean online gaming company. Without it, Shanda would have reported a loss of 4 cents per share. This is almost equal to break-even. The question for long-term investor is this. Would you mind giving a chance for Shanda to turn around? At its first quarter of using a completely new revenue model, it can achieve a break-even point. Will profitability be expected in the coming quarter? I sure believe so, considering that the drop in revenue is not as severe as other cases where a company changes its revenue model dramatically.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Shanda Interactive Entertainment Ltd. (SNDA) or any other securities.

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