Walter Hutchens’ Blog

Yesterday the Chinese online gaming company Giant Interactive listed on the New York Stock Exchange. It will trade under the ticker symbol GA.

GA’s online game Zheng Tu (translated as ZT Online) is extremely popular in China. Sometimes more than a million people are simultaneously online playing it.

GA competes with Shanda, Netcom and Perfect World, all of which are also listed in the US. Perfect World just listed in July, and already its shares have appreciated 65%.

It’s interesting that GA listed on the NYSE rather than Nasdaq which is more typical for high-tech companies. Also, it’s interesting that they listed in America at all. Many PRC IPOs, including the recent jumbo ones like Bank of China, have listed only in Hong Kong, avoiding the US exchanges entirely. Conventional wisdom has been that Sarbanes Oxley has deterred many foreign issuers from listing in the U.S. In contrast, GA’s colorful founder Shi Yuzhu said he wants to show that his company (and he still owns most of it) can comply with the world’s most rigorous listing standards.

There are scores of Chinese companies listed on the NYSE and Nasdaq. Most of these stocks have been top performers this year. In fact the exchange traded Chinese index fund that trades under the ticker symbol FXI has risen more than 120% in the last 12 months. Here’s what the 6-month chart alone looks like:

GA didn’t have a dramatic first day pop. It debuted on a day when the market was generally down, and I imagine lots of investors don’t yet understand the 1) online game businesses generally and 2) status of GA’s Zheng Tu in particular. To the extent some investors think of gaming at all, they may just understand the console business—that an XBox, PlayStation 3 or Nintendo Wii generates sales for the console maker, game writer and the retailer who sells both the game machine and the software that makes it worthwhile.

For most of us older folks online gaming is just not within our sphere of experience. I grew up in the Atari age, with the graphically-starved Pong for goodness sake, so I can see the problem of recognizing the potential here, particularly when investors don’t have children who play these games and the model of online gaming itself is less familiar (outside of the World of Warcraft subculture).

However, in China online gaming is compelling for several reasons. For one, it takes less capital to go play a game in an internet cafe for a few hours than to buy an expensive console. That’s a big advantage in a developing economy. China’s internet cafes are now often quite posh and inviting. They are filled with fast computers, big widescreen LCD monitors and customers wearing headphones so they don’t disturb other patrons as they engage in combat. Plus there are just massive numbers of existing and potential customers in China.

This opportunity to sell lots of game access is happening 1) in China 2) in Chinese and 3) online, all of which helps explain why some investors just don’t get it yet.

By contrast, lots of US investors do understand that 1) China is big, 2) growing fast, 3) search is important, so they have bid up Bidu’s shares dramatically in recent months.

I am a Bidu skeptic for various reasons. Leninist political controls and the “national champion” state-planning model don’t strike me as particularly compatible with the Internet ethos over the long term. I’m not aware of anything innovative Bidu has done (quite unlike Google), and finally I don’t understand why Bidu is spending any money in Japan when their own potential market is so vast. But even if I’m eveutally right, I may be wrong for a long time—many people may continue to make lots of money investing Bidu shares for the foreseeable future. Plus, I may just be flat wrong; Bidu may eventually be the Google of what will one day be the world’s largest and most lucrative internet market, and they may not need to innovate but rather can simply prosper using a copy-to-China model under the umbrella of some kind of government beneficence.

In any event, I am bullish on GA. Given 1) their success so far in China and 2) that they now have about 800 million dollars to spend on further development and acquisitions, I expect GA’s stock to appreciate over time.

I picked up a few shares yesterday; we’ll see if the hypothesis proves right.

Giant’s name in Chinese is 巨人网罗, romanized as Juren wangluo.