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Trojan Investing Newsletter - Volume 2 Issue 1

Trojan Investing Newsletter - Volume 2 Issue 1

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Published by Alex

The Trojan Investing Newsletter is written and edited by students at the University of Southern California. Article subjects range from stock tips, economic outlooks, industry profiles, and much much more.

The Trojan Investing Newsletter is written and edited by students at the University of Southern California. Article subjects range from stock tips, economic outlooks, industry profiles, and much much more.

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09/17/2013

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 Trojan Investing Newsletter
October 6, 2008 Issue 1 - Volume 2
Inside Tis Issue 
Investment Analysis
NCTY - Gaming China.......................... p.1
Learning Center
Understanding the Zero-Sum Game........ p.2 A Case in Optionality.............................. p.4
Contributors:
 Joshua Inouye, Alexander Muhr, Matthew Riley 
Co-Editor-In-Chiefs:
 Alexander Muhr  Jordan Ohama 
Market Performance Snapshot 
2-Sep30-SepReturnDow Jones11,51610,850-5.78%S&P 5001,2771,164-8.85%NASDAQ2,3492,082-11.39%Russell 2000738679-7.99%
10-Year T-Bill
3.746%3.837%2.43%
Disclaimer: Views expressed in this newsletter are not those of the University of Southern Cali- fornia or any of IN’s affi liated groups, but the author’s own. Recommendations are made by students, not financial professionals. Readers should not rely on information from the following articles or the recommendations therein for trading or investing. Te purpose of this newsletter is to facilitate discussion and broaden students’ awareness of current market issues.Tis newsletter may contain references or links to websites that are created and maintained by other organizations. IN does not necessarily endorse the views expressed on these websites, nor does it guarantee the accuracy or completeness of any information presented therein.
 Welcome Back to TIN!
We would like to thank our contributors and those who have invested their time and effort to make the TrojanInvesting Newsletter all that it can be. If you are interestedin contributing or editing, please contact us at
trojan.investing.newsletter@gmail.com
. For those of you who are new to the TIN, read on to
nd out how youcan bene
t from joining our readership.Through issues distributed at the beginning of each month, the Trojan Investing Newsletter hopes tobring ideas together that stimulate new ways of thinking to bene
t you as an investor. Through critically analyzing economic and sector/industry trends as well as individualsecurities, we hope to provide you with new insight intohow to view the world as a place to invest. We are af 
liated with the Trojan Investing Society,the premier
nance and investing club at USC. The weekly  TIS meetings are a great place to come to express youropinions on the articles written; and where the contributorsof those articles will have a chance to answer any questionsyou have. Being allowed access to a variety of investing ideas through this forum provides our issues depth andbreadth that we would otherwise be unable to afford ourreadership. We sincerely hope that you
nd our newsletterto be interesting, informative and most of all, enjoyable.“This is a market of disparate opinions and therefore in-creasing opportunities for those who get it right. We hopeto be one.”-Bill Gross-Trojan Investing Newsletter Staff 
 
 The9 Limited - Gaming China
By Matthew Riley 
Recommendation: Speculative Buy 
Snapshot
Company Name:The9 Limited Ticker Symbol:NCTY Closing Price (Oct. 2):$17.80Market Cap:$491 MillionP/E (ttm)10.59x
Source: www.
nance.yahoo.com
 The9 Limited is an online game operator in China. Its stock is traded on the Nasdaq as American Depository Shares(ADSs)—each representing one ordinary share. The
rmderives revenue from prepaid online game cards and virtualitem purchases for games it licenses from game developers. A substantial portion of The9’s revenues come from Bliz-zard’s
World of Warcraft 
, which has 12.6MM online accountsin mainland China, a signi
cant increase since its introduc-tion there in July 2005. The company operates a variety of other online games as well, but
World of Warcraft 
remains thedominant player in revenue composition. 
Impressive Recent Results
In its most recent quarter, Q2 ’08, The9 recorded $66.3MMin revenues, a 69% year-over-year
1
increase. While the
rm’sgross margin was 47% in Q2, or 5% higher than during thesame period a year prior, the company feels that this margin will increase with the release of games developed in-house. The
rm’s net income for the quarter of $16.9MM represents129% growth on a year-over-year basis. This 25.5% pro
tmargin, coupled with a trend of increasing margins, showsthat the
rm is effectively leveraging its business to maximizeoperating ef 
ciency. With regards to the
rm’s
World of War- craft 
segment, Q2 was a record quarter with the largest num-ber of concurrent users in the game’s history. The concur-rent users were measured at a high of 489,000, representing a3.8% quarter-over-quarter
2
increase. Growth in this segmentis attributed to acquiring new customers mainly through therecently released expansion pack 
Burning Crusade 
.
1
Year-over-year OR YoY
Compares the period to the corresponding quarter from theprevious year--ie Q2 2008 vs. Q2 20072
Quarter-over-quarter
Compares the current quarter to the one immediately beforei.e. Q2 2008 vs. Q1 2008
Increased Promotional Initiatives
 The9 stresses the acquisition of new users to achieve futuregrowth. Recently, the
rm added a ground promotion divi-sion to its operations, which focuses on obtaining users insmaller tier two and tier three cities. Personnel in this de-partment work as promoters in Internet cafes in hundredsof these smaller cities across China. The division has grownfrom 200 personnel in Q1 to over 300 at the end of Q2. The company hopes to grow this team to 500 by year end. As a greater number of users are attracted to The9’s gamesthrough these promoters, increased revenues would be ex-pected. Although this will potentially decrease pro
ts int heshort-run, The9 is building a form of marketing infrastruc-ture that could be used for future releases.
Future Prospects
 To help drive continued revenue and margin expansion, The9has begun proprietary game development operations. The
rm’s in-house Resesarch and Development department grew from 40 personnel in 2007 to 190 at the end of Q2 2008. This growth is expected to continue through the end of theyear, at which point The9 hopes there will be 250 personnel working on proprietary game development. The company showcased its most recent in-house developed game,
Warriors of Fate Online 
, at the 2008 ChinaJoy Expo and received upbeatuser feedback. It is also important to note that proprietary game development will also help dilute revenue contribution,lowering The9’s reliance on
World of Warcraf
.
 Valuation
 With no debt and $300MM in cash, cash equivalents andshort-term investments, the company is well-positioned forfuture acquisitions as well as the operational improvementsit intends to implement in the coming quarters. Addition-ally, the company’s Board of Directors recently approveda $50MM share buyback, a telling signal that the
rm be-lieves in its long-term performance. Signi
cant cash reservesmake measures such as these possible. An enterprise valueof $143MM yields an EV/Revenue multiple of 0.6x, signi
-cantly lower than the Gaming Activities industry average of 1.8x. The9 is undervalued compared to its competition andhas very compelling future prospects. I am therefore recom-mending NCTY as a BUY.
Source: Gamedaily.com
 
 A Case in Optionality 
By Alexander Muhr
In a market as volatile and unpredictable as it is these days,the dif 
culty of 
nding potential investment opportunities islimited at best. The best way to maximize your return, in my opinion, is by using a concept called
optionality 
. You can useactual options, but the idea is more about limited downsiderisk for a particular bet. For instance, earlier this year the yieldcurve was
at, and there might have been a great reason forthat, but due to economic woes, it was more likely to steepenthan invert itself again. The small probability of it invert-ing again would give you limited downside risk on your play that the yield curve would steepen again, in essence creating optionality.Recently there has been a great example to illustrate option-ality. A famous face during the past year or so has been Bill Ackman of Pershing Square Capital, a hedge fund. He cor-rectly predicted problems in the bond insurance companies(MBIA and Ambac, which he was short) and continues toexpress concern for the economy and the way the situation isbeing handled by the government. Some might believe thathe is a perma-bear, but if you looked more closely at his port-folio (which anyone can do quarterly by looking online at theSEC website for a 13-HF’s), he is more long stocks than he’sshort.On August 4th, Pershing Square
led a SC-13D (which ismandatory once any entity or individual gains a stake of 5%or more in a public company) in a company named LongsDrug Stores (NYSE:LDG) for 8.8% of shares outstanding. The
ling was for an action completed on July 23rd so wecan assume most of the stock was bought at a price below $46.50. This had piqued my interest because I subscribe to the RSSfeed of Pershing Square, but did not look into it more.Needless to say, on August 12th, CVS made a bid for thecompany at $71.50 per share in a tender offer. This is wherethings get really interesting. The tender offer agreement isunique for the fact that it’s open for a whole year – meaning that CVS can buy shares from shareholders at the offer pricefor one year. They need to reach a share count of 2/3 of theoutstanding shares in order to complete the buy-out. Whilethis is going on, the company would still be paying its normaldividend, which pays for owners to wait. August 14th LDG is already trading above the buy-outprice and closed at $71.55. When this happens the marketis indicating that a higher bid is likely to occur, because nor-mally shares trade slightly lower due to risk of the bid fall-ing through, and that’s where merger/buy-out arbitrage hap-pens.
Source: Flicker.comSource: Hdrse.com

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