Shanda Entertainment (SNDA) Now A Turnaround Play?

I've been accumulating Shanda Entertainment (SNDA) last week or so on its remarkable strength in the face of a sharp market sell-off. On Thursday, the company reported earnings that were far lower than last year (down 90%?), but revenue seems to have stabalized quarter over quarter. The market responded to the report very positively, raising the price over 10% the next day.

SNDA has been a near-disaster during last year when its price plummeted from a high of $45 to a low of $12s recently (see my analysis several months ago: Shanda: A Nice Case Study). I think that its business has somewhat stabalized and its free-to-play business model may actually be a workable one, meaning the company can survive even without a hit game. Its failure in venturing into IPTV business and scaling down its EZ Center (hardware) business may actually be positive for its stock price: the company will now stop throwing more money into something that may never work out and, instead, focus on what it does best: providing online game and entertainment contents to the ever-growing population of Chinese teenagers.

More importantly, I think it is now a value play. Its 19.6% position in SINA and net cash accounts for over $8 of its $13 stock price, making the market value of its own business only $5! Sounds a value play for me. The market's strong interest in China stocks lately and the positive technicals don't hurt either. The price may explode when the short positions (40% of the float) are covered on any positive news.

In the meantime, the analysts on the street are still very negative on the company after the release of the quarterly report:

J.P. Morgan maintained its underweight rating on the stock but cut its 06 price target to $11 from $12."1Q06 revenue was better than expected due to stabilizing online games revenue," said Dick Wei. But the analyst added that he believes "visibility on Shanda businesses remains low," given aging game portfolio, uncertainties in its new game portfolio and lack of initial tractions of EZ Center.

Bear Stearns reiterated its underperform rating and said it remains on the sidelines on Shanda stock.

[5/18/06] Analysts at Brean Murray reiterate their "sell" rating on Shanda Interactive (SNDA.NAS). The target price has been reduced from $10 to $8.

[5/24/06] Shaun Rein of China Market Research Group: Shanda Interactive and Importance of Guangxi.

They are right about SNDA's "low visibility" and it is also true that any negative news or market condition can send its price down again. But at today's relatively low price I will see how the analysts' records stand in the coming months. Besides, I wish the analysts had informed us Shanda's problem before its stock crashed from its high of $45, instead of now when everybody knows what's happened!

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Updates ...

[8/6/06]: SNDA's price now stands at 15.5. I think it may keep going up until August 15, the date of earning release. The reason: short-covering. To play safe, I should sell just before the earning release.