China Online Games
A Defensive Play; No Impact From China Tariff Increases
 Online games is a defensive play — In our view, online games revenues and
earnings are less sensitive to overall economic growth and thus the sector
serves as a good defensive play in light of global economic concerns. That said,
we believe China online games companies should benefit as an alternative play
when investors shy away from industries that could be hurt by the recent
energy/fuel tariff increases in China.
 One of the cheapest leisure activities — Gaming is one of the most popular and
compelling (some say addictive) forms of entertainment for young people in
China. Price points are extremely low. Gamers in China pay only Rmb0.40/hour
to play NetEase's games and Rmb0.45/hour to play The9's World of Warcraft
and an average of Rmb20-50 per month on item-based games. Such low price
points mean less sensitivity to changing economic conditions, such as inflation
fears and cautious consumer sentiment, in our view.
 Demographics — The majority of the online gamers are aged between 16 and
30, with 16.3% between 16 and 18 years. In our view, most students will still
continue their daily routine regardless of any slowdown in the Chinese
economy, including playing online games after school.
 2Q results should have minimal risks — Since most of the China Online games
companies have reported 1Q08 results and provided 2Q guidance after the
earthquake and the 3-day mourning period, most management teams provided
a good indication of the percentage of gamers from Sichuan province. For
companies that gave guidance, their conservative 2Q guidance has reflected
the earthquake impact and 3-day server shut-down. As a result, we believe
current share prices have priced-in the earthquake impact. After the servers
re-opened, all online games have seen user levels rebound to pre-shutdown
levels. We believe 2Q results for most online games companies are tracking
well and have minimal risks and correlation to current economic conditions.
 Near-term catalysts — Near-term positive news flow from the sector will
include: 1) continued user trends and performance of NTES' Tianxia2; 2)
closed beta test of Pocketpet Journey West (June 26) by Perfect World; and 3)
release of new expansion of ZT Online (end-June) by Giant.