Have You Considered This “Giant” Performer for Your Portfolio Yet?

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There are a few small companies that one shouldn’t ignore, and Giant Interactive (NYSE: GA) is certainly one of them. The year-to-date stock price chart of the Chinese online gaming company is simply remarkable, appreciating around 30% in 2012. Throw in a dividend-yield of 5.7%, and those who haven’t heard of this stock will start looking up the ticker in Yahoo! Finance for sure.

Three on the Trot

I started following Giant around six months back, just after it reported a successful first quarter. The fact that Giant did well without releasing any major game or expansion pack surprised me, but it also suggested that the company knows how to keep subscribers engaged. In the second quarter, Giant once again came up with a stellar performance.  

Even though the Chinese economy was slowing down, and recessionary conditions were gathering momentum, this company was witnessing a jump in active paying accounts. And in the just-reported third-quarter, Giant once again put up a gigantic performance. Revenue jumped 18.6% from last year to $86.4 million in the quarter, non-GAAP net income improved 20%.

The bump in these metrics was driven by a 9.6% spike in the average revenue Giant generated per user over last year, while the number of active paying accounts went up 7.4% from the prior-year period. The reason behind Giant’s solid performance was once again the ZT Online series, which seems to be Giant Interactive’s legacy game in the making.

The Legacy Game Strikes

ZT Online 1, once again, was the primary revenue driver, while ZT Online 2 has also started contributing to Giant’s coffers. Moreover, the company is slated to release another expansion pack for the popular game next month, which will keep the franchise fresh and also keep players engaged. Giant is doing well to increase the life of this game, as the presence of one strong and addictive game is a major characteristic of a solid gaming company.

For example, Activision Blizzard (NASDAQ: ATVI) has been operating World of Warcraft for seven years now, and the franchise makes for 30% of its revenue. After the release WoW’s latest expansion pack, Mists of Pandaria, the game once again added subscribers last quarter. Thus, Giant is also moving in the right direction with its ZT Online franchise, and continued evolution of this game should help the company derive strong revenue in the future.

A Smart Partnership…

Giant is also diversifying its games, both in terms of audience and also format. Giant had released Qianjun Online, the micro-client version of ZT Online 2 two months back on Qihoo 360 (NYSE: QIHU). This is Giant’s first foray into micro-client gaming, and should prove to be a successful one as installation files of micro-client games are very, very low while performance remains the same. In addition, the success of the original ZT Online 2 game should drive more players to the micro-client version.

Moreover, Qihoo 360’s large user base and security credentials could further help Giant in getting more players for its game. In addition, Qihoo is a growing name in the Chinese internet industry, and its emergence in the search market should bode well for Giant.

…and a Strong Pipeline

Also, Giant’s other games have been doing well. The company is expanding its user base through Allods Online, a 3D game that will receive its first expansion pack in the current quarter. In addition, Giant is of the opinion that it has another blockbuster game up its sleeve. The company finished testing for World of Xianxia in September, and received positive reviews. This game will add another weapon to Giant’s MMORPG (massively multiplayer online role playing game) arsenal and should enable it to rake in more revenue when launched.

Apart from World of Xianxia, Giant has two other games in the pipeline as well. It has finished engineering testing of its two webgames, Genesis of the Empire and The Sky, and expects to launch them in the first quarter next year.

The Bottom Line

Giant is currently a small player in the online gaming market in China, but its stock performance puts even the likes of biggies such as NetEase to shame. It is slowly and steadily growing its business, strategically improving the longevity of its games, and developing interesting new games. Moreover, it is well placed to enjoy the growth of micro-client gaming and online gaming as a whole in the Middle Kingdom.

The Chinese online gaming market is expected to be worth in excess of $9 billion in the next couple of years and I expect Giant Interactive to ride this growth with its addictive games.

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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