Prospectus Summary
PROSPECTUS SUMMARY This summary highlights key aspects of the information contained elsewhere in this prospectus. Because it is a summary, it does not contain all of the information that you should consider before making an investment decision. You should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and the accompanying notes to those statements. The statistics relating to the China’s online game market and economy included in this prospectus are derived from various government and institute research publications. We have not independently verified such information and you should not unduly rely upon it.Overview
We are one of China’s leading online game developers and operators in terms of revenues, and our online game ZT Online was the most popular online game in China in 2006, according to a report published by International Data Corporation, or IDC, a leading market research firm. We focus on massively multiplayer online, or MMO, games that are played through networked game servers in which tens of thousands of players are able to simultaneously connect and interact.
Our first internally developed MMO game, ZT Online, was commercially launched in January 2006. ZT Online’s compound quarterly growth rate was 39.6% and 45.3%, respectively, in terms of peak concurrent users and average concurrent users from the quarter ended March 31, 2006 through the quarter ended September 30, 2007. ZT Online had 120,037 quarterly peak concurrent users and 51,202 quarterly average concurrent users for the quarter ended March 31, 2006 and had 888,146 quarterly peak concurrent users and 481,054 quarterly average concurrent users for the quarter ended September 30, 2007.
We believe that our success is largely attributable to our ability to internally develop, operate and market a high quality MMO game tailored to China’s core game player audience, which we define as players between the ages of 18 and 40. We have a team of over 140 experienced game developers, which includes dedicated product development and enhancement teams for each of our MMO games. We plan to commercially launch our second MMO game, ZT Online PTP, a pay-to-play game based on the ZT Online free-to-play game, and our third MMO game, Giant Online, in the fourth quarter of 2007. We believe that we will be able to leverage our national distribution and operational platform to market these games to players throughout China. We acquired the intellectual property rights to our third free-to-play MMO game, King of Kings III, from Taiwan Lager Network Technology Co., Ltd., or Lager Network, a developer in Taiwan, in the third quarter of 2007, and currently intend to commercially launch the game in China in 2008. See “Business—Our Games—Future Game—King of Kings III.”
We believe that the high playability, interactivity and community-oriented nature of our games, together with their large active player bases, have resulted in a strong growth in the number of our paying players and our average revenues per user, or ARPU. As a result, ZT Online’s quarterly active paying players and ARPU achieved compound quarterly growth rates of 71.1% and 15.9%, respectively, from the quarter ended March 31, 2006 through the quarter ended June 30, 2007. ZT Online had 143,110 and 2,096,870 quarterly active paying players in the quarters ended March 31, 2006 and June 30, 2007, respectively. ZT Online had ARPU of RMB84 and RMB190 in the quarters ended March 31, 2006 and March 31, 2007, respectively. In the quarter ended June 30, 2007, ZT Online’s ARPU decreased to RMB176.
We have built nationwide distribution and marketing networks to sell and market our prepaid game cards and game points. As of August 31, 2007, our distribution network consisted of over 200 distributors and reached over 116,500 retail outlets, including Internet cafés, software stores, supermarkets, bookstores, newspaper stands and convenience stores located throughout China. We also sell game points through our official game website. As of August 31, 2007, our marketing network consisted of over 250 liaison offices located throughout China.
Since our commercial launch of ZT Online in January 2006, we have experienced significant growth in our net revenues and net income. For the year ended December 31, 2006 and the six months ended June 30, 2007, our net revenues were RMB408.5 million (US$53.7 million) and RMB687.4 million (US$90.3 million), respectively. Our net income for the same periods was RMB244.6 million (US$32.1 million) and RMB512.3 million (US$67.3 million), respectively. As of June 30, 2007, deferred revenues and advances from distributors totaled RMB219.8 million (US$28.9 million) and RMB63.4 million (US$8.3 million), respectively. Deferred revenues and advances from distributors represent amounts that we have received for sales of our prepaid game cards and game points that have not yet been recognized as net revenues. Although substantially all of our revenues have been generated in China, starting in January 2007 we have also derived revenues from the license of ZT Online to Lager Network for operation in Hong Kong, Macau and Taiwan.
Industry Background
Online games are one of the most popular forms of interactive entertainment. According to IDC, the online game industry in China has experienced significant growth in recent years, generating revenues of approximately US$815 million in 2006, which are expected to grow to US$3.0 billion in 2011, representing a compound annual growth rate of 30.2%.
We believe that the Chinese online game industry presents substantial market opportunities for companies, such as ours, who operate MMO games under a free-to-play model. According to IDC, in 2006, the top five game vendors in China as measured by revenues all produce MMO games, and MMO games generated approximately US$662 million revenues in total, representing 81.2% of China’s total online game revenues. Additionally, MMO games are expected to achieve revenues of US$2.0 billion by 2011, representing a compound annual growth rate of 24.2% from 2006.
Our Strengths, Challenges and Strategies
We believe our strengths consist of our:
Notwithstanding our competitive strengths, we expect to face certain risks and uncertainties, including:
Our objective is to become the largest online game developer and operator in Asia. Our business strategies include the following:
Corporate Structure
We commenced operations in 2004 through Shanghai Zhengtu Network Technology Co., Ltd., or Zhengtu Network, a limited liability company organized under PRC laws.
In order to implement an offshore holding company structure to comply with Chinese laws imposing restrictions on foreign ownership in the online game industry in China, on July 26, 2006, Yuzhu Shi, our current chief executive officer and chairman, and his daughter, Jing Shi, together with 18 other individual shareholders (most of whom are direct or beneficial shareholders of Zhengtu Network) established our current Cayman Islands holding company, Giant Network Technology Limited, or Giant, and its wholly owned subsidiary, Eddia International Group Limited, or Eddia, in the British Virgin Islands. Eddia established Shanghai Zhengtu Information Technology Co., Ltd., or Zhengtu Information, a wholly owned subsidiary in China on September 6, 2006. As a result, we own 100% of the equity of Zhengtu Information through Eddia. On June 11, 2007, Giant changed its name from Giant Network Technology Limited to Giant Interactive Group Inc.
Following the establishment of our offshore holding structure, all of our online game business continues to be operated through Zhengtu Network. The beneficial shareholders of Zhengtu Network currently include Yuzhu Shi, who beneficially owns or controls 75% of Zhengtu Network’s equity interests through his beneficial ownership of Shanghai Lanlin Bio-Technology Co., Ltd. and an additional 18 PRC individuals who beneficially own the remaining approximately 25%. We have entered into contractual arrangements with Zhengtu Network pursuant to which our wholly owned subsidiary, Zhengtu Information, provides technical support and consulting services to Zhengtu Network. In addition, we have entered into agreements with Zhengtu Network and its shareholders, providing us with the ability to effectively control this entity. Accordingly, we have consolidated the historical results of Zhengtu Network in our financial statements as a variable interest entity pursuant to U.S. GAAP. See “Our Corporate Structure.”
The following diagram illustrates our current corporate structure and the place of formation and affiliation of each of our subsidiaries and our affiliated entity as of the date of this prospectus:(1)
Corporate Information
Our principal executive offices are located at 2/F No.29 Building, 396 Guilin Road, Shanghai, 200233, People’s Republic of China. Our telephone number at this address is +86 21 6451-5001 and our fax number is +86 21 6451-8006.
Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website address is www.ztgame.com.cn. The information contained on our website is not part of this prospectus. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, 13th Floor, New York, New York 10011.
Conventions That Apply to This Prospectus
Unless otherwise indicated, references in this prospectus to:
Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment option to purchase additional ADSs.
This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. Unless otherwise stated, all translations from Renminbi to U.S. dollars in this prospectus have been made at the rate of RMB7.6120 to US$1.00, which was the noon buying rate as of June 29, 2007 in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. We make no representation that the Renminbi or dollar amounts referred to in this prospectus could have been or could be converted into dollars or Renminbi, as the case may be, at any particular rate or at all. On October 11, 2007, the noon buying rate was RMB7.5080 to US$1.00.
The Offering
Summary Consolidated Financial and Operating Data
The following summary consolidated statement of operations data for the period from November 18, 2004 (date of inception) to December 31, 2004, and the years ended December 31, 2005 and 2006 and the summary consolidated balance sheet data as of December 31, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements included elsewhere in this prospectus, which have been audited by Ernst & Young Hua Ming, an independent registered public accounting firm. Our summary consolidated statement of operations data for each of the six month periods ended June 30, 2006 and 2007 and summary consolidated balance sheet data as of June 30, 2007 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial information on the same basis as our audited consolidated financial statements. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. Results for the six months ended June 30, 2007 are not necessarily indicative of results that may be expected for the full year. You should read the summary consolidated financial data in conjunction with those financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our audited consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our historical results do not necessarily indicate our expected results for any future periods.