Code JDMBA: My Opinion of Webzen

Wednesday, July 06, 2005

My Opinion of Webzen

Webzen (WZEN) is currently one of my favorite holdings in the Asian online gaming sector. While I believe others may be much better positioned in the key Chinese market and have executed much better than WZEN over the last few years (such as NTES another one of my key holdings), I think that WZEN is trading at far to low a valuation to resist.

Applying a standard SWOT analysis to WZEN:


Strengths
Huge cash position as compared to market cap. Ample opportunity to buy back shares, takeover attractive targets, license top quality games and invest heavily in R&D. Their games pipeline for the next few years is very impressive

Weaknesses
Their primary game MU is responsible for virtually all of their current revenues. MU is also an older game showing very visible signs of aging. Revenue and EPS growth has leveled off and will likely stay flat or decline until new games are commercially launched.

Opportunities
WZEN has the opportunity over the next few to market its large game pipeline (SUN, Parfait Station, WIKI, Huxley, and APB) to an existing MU customer base, the growing Asian gaming market and into new markets such as North America. I feel particularly strong about the opportunity for SUN worldwide and Huxley and APB in the North American Market. With its large cash position I also think WZEN is in a position to take advantage of the rapidly growing mobile gaming market over the next few years.

Threats
Among the biggest threats are competitors taking customers away from MU at a faster than expected rate, increased hacking and pirate servers, and upcoming games being overshadowed by superior games offered by the competition.

In addition there is a very real threat that China (soon to be the world’s largest online gaming market) will pass new regulations controlling the industry. Rumor has it that the new regulations will require:
  1. Technical requirements that will prevent playing games for extremely long hours every day (perhaps by setting a time limit after which a game character becomes “tired” or less effective in killing enemies and earning virtual weapons and currency)
  2. Support of Chinese game companies over foreign competitors
  3. New rules regulating the use of game violence

These rules of course are still not finalized. Here are some recent articles/blog posts on the Chinese gaming regulation topic:
http://www.chinatechnews.com/index.php?action=show&type=news&id=2757
http://tinyurl.com/8mlz5
english.iresearch.com.cn/online_game/detail_news.asp?id=5907

In my mind the closest competitor to WZEN is GRVY another Korean online gaming company. Essentially GRVY is doing much better than WZEN at the moment since its key game Ragnarok Online (RO) is still being ramped up in many markets. GRVY has an impressive global footprint and lots of cash (but not as much as WZEN) but does not have a games pipeline quite as strong as WZEN at the moment. For the record I also think GRVY is a great value right now.

For a great overview of GRVY visit this excellent blog:
http://coolheadinvestor.blogspot.com/2005/06/grvy-strong-buy-target-20_111964637317653709.html

Disclosure: I am long WZEN

4 Comments:

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