Nothing But Net 2009 Internet Investment Guide 31. Leading . Morgan Internet industry analyst Imran Khan provides a comprehensive look at key Internet industry characteristics, drivers, and trends in his seminal industry outlook, Nothing But Net. Geared toward Internet investing novices and experienced professionals, this book provides a detailed look at data points and trends that should be considered when investing in the Internet space. With almost 8 years of technology banking and investing experience, Khan provides a detailed analysis of multiple Internet sectors including online advertising, e-commerce, online travel, and social networking. This book is a must have for. | Morgan Imran Khan 1-212 622-6693 Global Equity Research 05 January 2009 Our Estimates and Outlook for 2009 We forecast net revenue of US in 2009 up 27 Y Y and GAAP diluted EPS of US up 11 Y Y or adjusted EPS ex-share-based expense of US up 11 Y Y. We forecast MMORPG revenue of US in 2009 84 of total revenue up 29 Y Y and casual game revenue of US 12 of total revenue up 20 Y Y. We forecast gross margin at for 2009 slightly lower than for 2008 adjusted operating margin ex-share-based expense of for 2009 slightly lower than for 2008 and adjusted net margin of for 2009 down from for 2008 on higher effective tax rate of 24 in 2009 due to Actoz - with higher tax rate in Korea - and Aurora combination . Our Estimates and Outlook for 2010 For 2010 we forecast net revenue of US up 13 Y Y and GAAP diluted EPS of US up 13 Y Y or adjusted EPS of US up 13 Y Y. We forecast MMORPG revenue of US in 2010 84 of total revenue up 12 Y Y and casual game revenue of US 13 of total revenue up 16 Y Y. On margins we forecast gross margin at stable Y Y adjusted operating margin of stable Y Y and adjusted net margin of also stable Y Y . Price Target Valuation and Rating Analysis We maintain our Overweight rating on Shanda which remains our top pick in the online game sector in China. Our price target is US 35 June-09 which implies 2008E and 2009E GAAP EPS or 2008E and 2009E adjusted EPS. Our price target is below our DCF valuation of US 55 13 WACC 0 terminal growth due to the lower sector multiples. Historically the game sector has traded at a forward P E of 10x-20x. We believe Shanda can trade towards the mid-end of this range due to upside potential to our estimates from successes in upcoming new games and in-game advertising. On the other hand with general stock market weakness the stock is not likely to trade at the historical
