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The following excerpts explain why Zacks senior Chinese market analyst Paul Cheung, CFA remains neutral on Perfect World Co., Ltd. (PWRD), the leading Chinese 3D online game developer and operator:
'Perfect World announced its first quarterly report after listing on Nasdaq in July 2007. Its revenue and earnings showed strong growth, which exceeded market expectations. We think Perfect World's results demonstrate that it has the ability to develop and operate 3D online games despite the fierce competition in the Chinese online gaming market.
'However, we are concerned about how long the company can maintain this growth momentum because the management team only expected one sequential growth in the fourth quarter. Based on our estimate for fiscal year 2007 earnings per ADS, the stock is trading at 51.9x, which is higher than the industry average and its Chinese peers. Based on our estimate for fiscal year 2008 earnings per ADS, the company is trading at 23.8x, which is far below the industry average.
'Using a P/E multiple of 25.0x our fiscal year 2008 earnings per ADS estimate yields a six-month target price of $29.50 which we believe reflects the company's prospects. Therefore, we are initiating coverage on Perfect World with a Hold rating. '
Read the full analyst report on PWRD.
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