China Gaming Stocks on Fire

 | Mar 21, 2012 | 11:00 AM EDT
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The Chinese gaming sector has been on fire lately, notably (NTES) and Perfect World (PWRD).

Perfect World has been a difficult stock for me. I was long the stock last year around this time when the stock traded around $20. I felt it was undervalued and had a nice slate of games coming out for the balance of 2011. But the company had a series of bad announcements with excessive costs and anemic growth. It then even got swept up in some accusations from a Chinese blogger of fraud.

The stock tumbled to a low of near $8 late last year.

But since then the stock has been regaining ground. But it got a major boost when it announced very positive earnings last week.

It grew its average concurrent users last quarter. Its international growth looked very strong. It beat on the top and bottom lines and gave a rosy forecast. It also announced a $2-a-share dividend.

Overnight, the stock galloped 30%. It's up again today significantly and back over $17.

NetEase has also had a very strong 2012. It's now up to $5 after starting the year in the low $40s. The company has done a solid job of developing its new titles.

What does it mean for others in the sector?

Like Perfect World, Giant Interactive (GA) was similarly beaten down last year after a couple of bad earnings reports. Its stock dropped to $2 from $8 in a matter of days. Since then, it's been on the comeback trail. It's back in the $5s at the moment.

It's one good quarterly announcement away from a similar move up to Perfect World like last week. Last week, GA beat on revenues and matched earnings. It also announced a cash dividend.

If it's to follow that up with another strong quarter where it beats on earnings expectations, they could make another big move up.

For the moment, it should also trade up on the optimism surrounding other Chinese gaming names.

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