Operating Expenses For PWRD May Rise; Put Pressure On Margins

Citibank mentions, “As of the end of 1Q10, PW had a total cash balance of US$275m. We believe the transactions are likely to be closed in 3Q10. Since PW will own majority stakes in these two investments, we expect PW to start consolidating the financials either end 3Q10 or early 4Q10. While we believe the near-term revenue contributions will be minimal, we do expect more recurring revenues to be reported on ‘film and television revs’ lines in the future.” “We are neutral on this strategic investment. On one hand, we believe it provides PW additional opportunities to penetrate deeper into the TV production and distribution business, thus allowing PW to gain some synergies with its online game content. On the other hand, it suggests that PW is slowly diversifying away from its core gaming development business, even as we believe they are one of the stronger developers in China. We also are cautious about the possibility of operating expenses likely creeping up, hence continuing to put pressure on margins longer term. In addition, revenues growth could be even more volatile depending on the release and traction (hit-or-miss) of TV series and movies,” the analysts add.