The Way of the Online Dragon

06-Dec-2010

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

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By Liu-Yue (Louie) Lam, Co-Founder, CEO, Oxstone Capital Management

GAME, Shanda Games – China, $5.51, 11/30/10

Shanda Games is a gaming company that develops and operates its own online games in China.  Its online game portfolio includes the very popular MMORPGs (massive multiplayer online role playing games).  Shanda games was spun off from its parent company – Shanda Interactive Entertainment.

During my China travels with my father; visiting family throughout 11+ provinces and 20+ cities in China, I often use internet cafes to check my email.  My observations from visiting over 50+ internet centers across 20+ Chinese cities are the following:

  • No matter where I go – from the most remote places in China to the smallest villages – I can always find reliable and fast internet connections.  This is an incredible discovery for me.
  • The second most important observation is whenever you go to any internet café in any city you will find an incredibly large number of Chinese youths spending endless hours in these internet cafes playing online games all day long.

China’s internet market has now climbed to 420 million, more than the entire population of the United States. However, the penetration rate of internet users still remains low at only 31.8 percent, compared with a more mature U.S. market of near 70 percent.  You can expect the Chinese population will continue to increase their use of digital media such as instant messaging, social networks, gaming, and streaming video.

Online gaming is incredibly popular to Chinese youths as I have observed first hand.  However, China remains a very difficult market for foreign companies to compete, mostly due to local market-specific factors such as language barriers, different regulatory policies and cultural differences.  Homegrown online gaming companies such as Shanda Games have a natural competitive advantage over foreign competitors and will have a sustainable competitive edge in China’s online gaming market.

An inspection of its institutional investors provides added comfort in my due diligence process.  Highly regarded fund companies such as Longleaf and Fidelity also owns shares.  Top institutional ownership also include highly regarded hedge funds like Tiger Global Management, Citadel, and Sovereign Wealth Fund of Singapore.  Shanda Games has no debt and a cash rich balance sheet. Trailing P/E of 8x and forward PE/ of 7.6x seems quite a low multiple for a rapidly growing company. This is an incredibly profitable business model that spins off excess cash flow.  Net margins are at 29% and operating margins are at 33%.  Shanda Games is creating shareholder value with an ROE of 66% and ROA of 29%.

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