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Stock is 40% off its highs, down twenty bucks to $30. Last quarter, Q2, was first time company disappointed. Not much of a surprise actually as the company planned to shut down for several days while they upgraded their servers, and they warned their numbers might be weaker for Q2. And they were.

Last quarter's transcript reads pretty well, I think:

Company has exclusive rights to run the biggest game in the world, World of Warcraft, in China, the biggest market in the world. 3.5 million Chinese play the game. The expansion pack for the game, The Burning Crusade, was released in China for Q3. It's a sequel, and as in the movies, the sequels often do better than the originals. On the weekend of the release of the Burning Crusade, 800,000 Chinese played the game simultaneously, a record.

Almost all of the company's revenues have derived from World of Warcraft. For Q3 they will have revenues for W.o.W., plus the Burning Crusade expansion pack, plus another game from Korea called Soul of the Ultimate Nation. Company reports tomorrow and I expect them to soundly beat their comps.

Blizzard Entertainment, the creators of W.o.W., have another expansion pack in the works called Wrath of the Lich King, which should be released sometime in 2008.

A film version of World of Warcraft is in the works, called Warcraft, by the producers of 300. It's a tentpole release with a $100 million budget, set for a 2009 release. This movie should bring in even more players in the future who have never played the game before.

The9 is the Chinese company of choice for foreign game-makers who want access to the Chinese market. The9 has obtained the China rights to several games, including:

Guildwars, the first game created by ArenaNet, a company that was formed by former uppity ups at Blizzard who were responsible for the early version of World of Warcraft.

Hellgate: London. Science fiction game created by Bill Roper, another former uppity up with Blizzard who left to form his own company. The9 plans to release first half of 2008.

Granado Espada. Korean fantasy game that won many awards in Korea, should do very well in Asian market and China. the9 is doing beta testing this quarter.

Huxley Another Korean game, this is a sci-fi shooter game set in the future. The9 will beta test it in 2007.

FIFA Soccer. Created by EA sports, currently one of the biggest games in Korea. The9 plans to release it in China in 2007 or 2008, certainly in time for the Olympics.

I think with these games in addition to the massive W.o.W. franchise, the9 will be the leading game company in China in the next couple of years, surpassing both Shanda and Netease. I think the writing on the wall was when E.A. bought a 15% share of our company.

Our stock is cheap. P.E. 19 (trailing) and 14 (forward). 27% profit margins. Our revenue growth has been huge, from $4 million to $125 million in 2 years. Projected growth is way too conservative, in my opinion. The entire sector is cheap, on fears (overblown) that the Chinese government will shut down internet cafes. There is some political risk, but that's true with all Chinese stocks in my opinion. So the low multiple along with the huge growth, and the massive pipeline, makes this a long term buy. I'm expecting a positive earnings report tomorrow so hopefully there will be a jump. Anyway, I'm in.

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