The9 (Nasdaq: NCTY), the Chinese gaming company that operates World of Warcraft (WOW) in China, is set to report earnings on November 15. Since The9 relies on WOW for 99.9% of its revenues, an assessment of the WOW's usage trend is essential for estimating the company's revenues.

To track WOW utilization we have developed software to periodically acquire the user load levels for all individual Chinese WOW server groups. Each server group hosts a virtual mini-world and at the end of the third quarter The9 was operating 273 such WOW worlds. We analyzed the data using our internally developed methodology which allows us to obtain a time-evolving picture of the game usage and important metrics such as the daily average concurrent user (ACU) and the peak concurrent user (PCU) numbers. We constantly improve our models by taking advantage of the ACU and PCU numbers reported by The9 each quarter.

Ninetowns Digital is scheduled to release its 2nd quarter 2006 quarterly results after the close of market on August 17th. As stated by the NINE management, 2006 will be a transitional period, and as a result will not be giving forward guidance with the quarterly release.

We are expecting a decrease in Yr / Yr revenue and EPS of around 6M and .08 respectively.

More important will be the progress of newer products, I-Process and I-Monitor. Management stated that by mid 2006 they will start charging for I-Process as an upgrade to the free version already given to customers, and announced that approximately 2500 customers were using I-Process. Other areas of importance will be how the NINE's relationship with the PRC Inspections Administration is progressing, and whether anything is new regarding the possibility of an acquisition that could be accreditive to EPS in the future.

The Casual Analyst NCTY Q2-2006 Projections:
Net Revenues: $28.8 Million (9% increase q/q)
Net Income: $9.8 Million (includes $1.4 Million reimbursements for previously paid taxes) or $8.4 Million (without reimbursements).
EPS: $0.41 (includes reimbursements) or $0.35 (without reimbursements), 35% (15% respectively) q/q increase.
World of Warcraft ACU 308,000 (6% increase q/q). PCU 630,000 (4% increase q/q). ARPU RMB 0.357 (2% increase q/q)
2006 Earnings Estimates: $1.58
2007 Earnings Estimates: $2.40

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A popular rule of thumb is to consider a stock underpriced if its PEG falls much below 1, and overpriced if the PEG is much greater than 1.

PEG Analysis for China Internet Stocks