SNDA

[David Randolph]

1. Profile

Shanda Interactive Entertainment Limited (SNDA), through its subsidiaries, engages in the development and operation of online games in China. It offers a portfolio of online games, which users play over the Internet. The company's content offerings primarily comprise online games, including massively multiplayer online role playing games (MMORPGs) and casual games, as well as online chess and board games, a network PC game platform, and wireless games. MMORPGs are action-adventure based, and draw upon martial arts and combat themes. Casual games are session-based, which can be played to a conclusion within a short period of time. Shanda Interactive also offers wireless games to the users of mobile phones. In addition, the company, through its EZ Center platform, provides users with access to additional content and services, including movies, music, literature works, finance and investment information, travel information, news, and educational programs. As of December 31, 2005, it operated 12 online games, including 7 MMORPGs and 5 casual games. The company was co-founded by Tianqiao Chen and Danian Chen in 1999 and is based in Shanghai, China. Shanda Interactive Entertainment Limited is a subsidiary of Skyline Media Limited.

2. Technical Analysis
2.1. Long Term Chart



SNDA has been bullish, has been bearish and it is long term bullish now.

2.2. Short term chart



The stock has been building an ascending channel, with higher highs and higher lows, which is by definition a bull trend. The 50 days SMA is also above the 200 days SMA.

3. Fundamental Analysis
3.1. Dilution Factor
3.1.1. # Shares Outstanding & Market Cap



The number of ADS outstanding has remained fairly stable over the past 4 years. The current market cap is $2 B.

3.1.2. Balance Sheet Analysis



The company transformed its long term debt in short term debt, since long term debt declined from $275 M in 2005 to just $0.6 M now and the current ratio declined from 5.53 in 2005 to 1.4 in Q1 2007.

I must consider this balance sheet healthy, even though the current ratio is below 2, because cash and marketable securities account for 92% of total current assets. The company has $462.5 M in cash, marketable securities and short term investments.

Considering this information I expect the company to increase the share count by just 1% a year going forward. The dilution factor on my valuation model will be 1.01.

3.2. Revenues & Gross Margin



SNDA's revenues are expected to grow about 20% a year going forward, but Q1 2007 was exceptionally strong, with revenues growing 55.9% from Q1 2006, to a record of $68.8 M.

Gross margin has remained stable around the 60% mark.

Since Q1 2007 was very strong I'm going to be more optimistic than the average analyst and I'll expect 30% revenue CAGR for the next 3 years (1.3 on the valuation model).

3.3. EPS & Net Profit Margin



I enjoy fat margin businesses, and SNDA is clearly one of those. Not as fat as NTES, though. Maybe this means it is possible for SNDA's net profit margin to expand from roughly 33% to 50% or more. That would be a very significant fundamental development.

Net profit margin in Q1 2007 (without the benefit of a sale of SINA's shares) already expanded to 38.37%, therefore I'll consider a net profit margin of 40% in my valuation model.

3.4. EPS Multiple Estimate

The Internet Software & Services industry average earnings multiple is 37.26, but I'll consider just 30 on my valuation model (which is high, but considering China's economy growth rate and the company's internal fundamentals I think it is appropriate).

4. Valuation Model



Inserting the 4 working variables in my valuation model I get to the conclusion that SNDA is attractive at this point, with an expected share price CAGR of 39% for the next three years. The optimal selling price is $48.32 and the stock closed Friday at $28.06.

5. Trading Plan

The trading plan is to buy SNDA, 6.66% of capital as always.

[yukiii]

Looks good should go up tomorrow, with china up big on Monday.
Target $40.00

[Dracull]

David,

Don't you think that you should wait for the stock to reach the support line of the trend, instead of jumping in the middle of the channel? I know that your main vision is the fundamental value of the stock, but the technical analysis is also important....I'm wainting a little bit more on this one.

Cheers.
P.S. -  I'm convincing my wife to go to Ericeira 

[David Randolph]

Looks good should go up tomorrow, with china up big on Monday.
Target $40.00

Yes, China was up a lot on Monday, but down today, so probably not a big factor. I'm glad you like it too

David,

Don't you think that you should wait for the stock to reach the support line of the trend, instead of jumping in the middle of the channel? I know that your main vision is the fundamental value of the stock, but the technical analysis is also important....I'm wainting a little bit more on this one.

Hi Dracull, yes, probably SNDA will eventually touch the base of its ascending channel, but that can be at a higher price than today's price. However I don't blame you for trying to get it a bit cheaper, that would have worked with the stocks I bought recently (doesn't mean SNDA won't shoot higher right away).

P.S. -  I'm convincing my wife to go to Ericeira

Life is good in Ericeira, take her for a lunch at Cesar's restaurant (no, it's not mine ) and then for a walk in Santa Marta's park on a sunny day (but not on a holiday). I'm positive she'll be convinced.

[yukiii]

Looks good should go up tomorrow, with china up big on Monday.
Target $40.00

Yes, China was up a lot on Monday, but down today, so probably not a big factor. I'm glad you like it too

up 2.4% today
Asian Stocks Rise as Japan's Jobless Rate Drops; Mizuho Gains
By Chen Shiyin and Chua Kong Ho

May 29 (Bloomberg) -- Asian stocks advanced for a second day after reports in Japan showed an unexpected drop in unemployment and a rise in household spending.

Mizuho Financial Group Inc. climbed to a three-month high, on speculation the improving economy will allow the Bank of Japan to lift interest rates, widening lenders' profit margins. China's CSI 300 Index rose to its third straight record as households poured more money into equities, drawn by a rally that's made the benchmark the world's best performer this year.

``The positive economic data from Japan is helping sentiment for the rest of the region,'' said Leslie Phang, who helps manage about $1 billion at Commonwealth Private Bank in Singapore. ``China's continued rally also augurs well for Asia as a sudden sell-off will spook investors.''

[David Randolph]

Hi yukiii, I guess it depends on the Index used. I've been following China by the Shangai SE B index, which was down 3.41% today:



Bloomberg uses this Index, but perhaps your CSI 300 Index is a better gauge.

[nicknite20]

David,
Why would you want to get into SNDA when you have a winner like GIGM?
The upside potential in GIGM is far higher..
Nick

[yukiii]

Support on this is $27.00 buy now at $27.85, or take a chance it goes to support. I am in at $27.85

[yukiii]

David,
Why would you want to get into SNDA when you have a winner like GIGM?
The upside potential in GIGM is far higher..
Nick

Why do you think GIGM potential is much higher then SNDA? I don't see it.

[wxmang]

GIGM has a 5 year 40% Growth Rate with a low PEG of I think 0.5
SNDA has a 5 year 20% Growth Rate with a higher PEG relative to GIGM.

[yukiii]

GIGM has a 5 year 40% Growth Rate with a low PEG of I think 0.5
SNDA has a 5 year 20% Growth Rate with a higher PEG relative to GIGM.

Don't look at the past, this year GIGM 25% growth next quarter 0% growth, this past quarter neg growth.
SNDA 68% growth, next quarter 30% growth past quarter 43% growth.
SNDA much better Value

[wxmang]

Point taken.
Thanks Yukii

[yukiii]

I sold my GIGM today and bought SNDA, I wiil see what GIGM does next quarter.

NEW YORK, May 23 (newratings.com) - Analysts at CE Unterberg Towbin reiterate their "buy" rating on Shanda Interactive Entertainment Limited (SNDA.NAS). The target price has been raised from $34 to $40.

[nicknite20]

yukii:"Don't look at the past, this year GIGM 25% growth next quarter 0% growth, this past quarter neg growth."

GIGM next qtr 0% growth? I respectfully disagree..how did you come up with that?

Revenues grew 50% over last quarter, 95% year on year. Net Income grew 165%

I'll continue holding GIGM.

Lets compare notes (& returns) over the next 3 months.


http://www.gigamedia.com.tw/

[yukiii]

yukii:"Don't look at the past, this year GIGM 25% growth next quarter 0% growth, this past quarter neg growth."

GIGM next qtr 0% growth? I respectfully disagree..how did you come up with that?

Revenues grew 50% over last quarter, 95% year on year. Net Income grew 165%

I'll continue holding GIGM.

Lets compare notes (& returns) over the next 3 months.


http://www.gigamedia.com.tw/

GIGM reported a sharp rise in first-quarter profit and revenue, but forecast sequentially lower revenue growth on a percentage basis in the current quarter.

GigaMedia attributed seasonal factors, notably a downturn in online gaming during the summer, and increased competition in its markets for the expected decline.

I you look at the last few quaters you have .17 .14 next 2 quarter estimated at .15 and .15
Where is the 165% growth now or going forward. Don't fool your self....