The9 Ltd. ADRNCTY

Morningstar Rating

Stock Research and Analysis

by Iris Tan

Online gaming continues to be one of the most lucrative and fast-growing businesses for Internet companies in China. However, The9's outlook is highly uncertain, in our view.

The industry is dominated by a few local companies, with Shanda SNDA, NetEase Read more

Bulls Say

The9 has amassed plenty of hit games that have successful operational records in other regions.

The9's licensing strategy enables the company to react to market trends promptly by introducing gaming themes or designs catering to player needs.

In September 2008, The9 announced a share repurchase program to buy back up to $50 million of its outstanding share. By end of 2008 the company had spent $9.7 million on the share repurchase. Read more

Bears Say

As a result of heavy reliance on game licenses, The9's profitability is modest for the industry. Its margins will be under pressure as competitive bidding for popular game licenses heats up.

Tier II and Tier III cities in China are the next lucrative and fast-growing markets for online gaming, but The9's expansion into these areas is hampered because of the higher hardware requirements of its 3-D games.

Locally developed massively multiplayer online games are the major trend in the Chinese market because of their Chinese-themed story lines. The popularity of The9's foreign-licensed games is not guaranteed amid intense competition.

The9's cost of new customer acquisition seems higher than its Chinese peers', ranging from $7.35 to $29 per new player. This reflects its difficulty in attracting players for its new games. Read more

Strategy

After losing the contract renewal for WOW in China, The9 is looking to drive future revenues by licensing and launching popular foreign games in the Chinese market. Besides its efforts to accumulate Read more

Management

Co-founder, chairman, and CEO Michael Jun Zhu controls about 20% of The9's outstanding equity. Bosma, a financial investor in the company, is the second-largest shareholder with about 18% equity stake. Electronic Arts owns about a 15% stake. In 2007, Read more

Profile

The9 is an online game operator in China. It primarily licenses 3-D online games from third-party game developers. The9 has plenty of titles developed by leading game studios Read more

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