Giant Interactive Group Inc. (GA) is cashing in on the expanding Chinese online gaming industry. The company has surprised on estimates 3 out of the last 4 quarters by an average of 10.24%. GA has a PEG ratio of just 0.59.

Company Description

Giant Interactive is a Chinese online gaming company. Its first game, ZT Online, was voted the most popular online game in China in 2006 according to the International Data Corporation. The company has three additional online games in the pipeline, including King of Kings III, Empire of Sports and ZT Online II.

Giant Interactive has 280 distributors and reaches over 116,500 retail outlets including Internet cafes, software stores, supermarkets and bookstores throughout China.

GA Beat Wall Street Estimates by 63.64%

On Mar 4, Giant Interactive Group reported fourth-quarter 2008 earnings that surprised on analysts’ estimates by 63.64%, or 7 cents a share. Earnings per ADS were 18 cents. Analysts expected 11 cents.

Fourth quarter revenue fell 18% to $51.7 million as revenue from online games fell year over year. The decrease was primarily due to the disruption caused by the revised monetization structure in ZT Online made in the third quarter of 2008. Quarter over quarter, revenue rose 33.2%.

For 2008, revenue rose 4.4% to $233.3 million compared to full year 2007.

“Our fourth quarter results showed a marked improvement on a sequential basis, signifying that our strategic decision to adjust the monetization model within ZT Online in the third quarter is generating positive momentum,” said Yuzhu Shi, Chairman and Chief Executive Officer.

“This new monetization structure aims to extend the game life cycle and promote long-term growth,” he said.

Dividend Announced

On Mar 4, the company announced it would pay a cash dividend of 18 cents per share on April 10 to shareholders of record on Mar 27, 2009. The total cash payment will be approximately $40.8 million.

Consensus Estimates Rise

Given the surprise in the fourth quarter, covering analysts have been adjusting their earnings for the first quarter and 2009. First quarter consensus estimates are up 1 penny to 13 cents in the last month.

Full year 2009 consensus estimates rose 5 cents to 59 cents in the last 30 days with 5 out of 9 covering analysts raising during that period.

Analysts expect 5-year earnings growth of 20.17%.

Value Fundamentals

Giant Interactive Group is a Zacks #1 Rank (strong buy) stock. It’s trading with a forward P/E of 10.38. The company’s price-to-book is 2.12. GA has a 1-year return on equity (ROE) of 20.69%.

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