Pali Says Accumulate Giant Interactive (GA) on Weakness
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Pali Research lowered its price target on Giant Interactive (NYSE: GA) from $20 to $14, following the company's Q2 earnings, which were reported Wednesday after the close. The firm maintains a Buy rating.
Despite the in-line Q2 results, the firm believes Giant's "inability to provide Q3 guidance has added a lot of uncertainty to its 2H08 and FY09 outlook, which directly led to the initial sell-off in the stock." On the other hand, Pali believes that shares of Giant have bottomed and recommends that investors accumulate the stock on this recent weakness.
Pali cites four reasons for its maintained Buy rating:
- the slowdown during Giant's Q3 is likely temporary.
- business should rebound in Q4 given "the launch of the final open beta testing for Giant Online and the new expansion pack for ZT online.." The firm also cites two new games, Empire of Sports and King of Kings III as potential catalysts for growth in Q1.
- Giant Interactive's stock is undervalued; shares are currently trading at a discount to its peer group in China. Pali calls NetEase (Nasdaq: NTES) a "very similar" comparison to Giant: "both have huge cash positions, both rely on in-house developed games, both operate a limited number of games, both have similar business profiles and growth prospects", yet NetEase trades at 10.6x CY09 expected EV/EBITDA while Giant trades at only 4.7x CY09 EV/EBITDA. Pali arrives at its new price target by apply NetEase's multiple of 10.6x to Giant's adj-09 EBITDA estimate of $229M, plus $1 billion in cash.
- Giant's $150 million buyback program is expected to commence soon, and Pali believes this will create a floor on the stock price.
On a P/E basis, Pali said its lowered price target is based on 15.4x the firm's FY09 EPS estimate of $0.91. With shares of Giant trading around $9.20 in pre-market action, the firm's price target represents a potential gain of more than 50% from current levels.
Giant Interactive Group, Inc. develops and operates online games in China.
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