Prospectus Summary
PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs.Our Company
We are a leading online game developer and operator in China as measured by the popularity of our games in China in 2006, according to a report published by International Data Corporation, or IDC, a leading market research firm. We primarily develop three-dimensional, or 3D, online games based on our proprietary Angelica 3D game engine and game development platform. Our strong technology and creative game design capabilities, combined with our extensive local knowledge and experience, enable us to frequently and rapidly introduce popular games designed to cater to changing customer preferences and market trends in China. In 2006, we launched our first three self-developed 3D massively multiplayer online role playing games, or MMORPGs, namely, Perfect World, Legend of Martial Arts and Perfect World II. In the first quarter of 2007, these games recorded approximately 237,000 average concurrent users in China. We launched a new self-developed 3D MMORPG, Zhu Xian, in late May 2007.
Our core technology capabilities consist of our proprietary 3D game engine, game development platform and real-time anti-cheating expertise, all developed and built by our experienced development team. In particular, our game engine enables us to create superior 3D graphics with impressive visual effects and provides the technical foundation for realizing innovative features in the game environment. Our game development platform is built on modularized functions which allow us to shorten the development cycle of our 3D MMORPGs to approximately six months for our most recent games and to update our games frequently with new features.
We have achieved an impressive game development track record. Our Perfect World and Legend of Martial Arts games were the two most popular domestically developed 3D online games in China in 2006 according to IDC. Perfect World was a winner of the “Best 3D Online Games” award, and Legend of Martial Arts was a winner of the “Best Self-Developed Online Games” award, in 2006 at the China Digital Entertainment Exposition and Conference, or ChinaJoy, a leading Chinese online game industry convention. Legend of Martial Arts was awarded as the “Most Favorite Brand Game among College Students” from the Education Management Information Center of the Ministry of Education in 2006. We expect to launch two additional 3D MMORPGs and one casual game, which is a game that can be played to a conclusion within a short period of time, in 2007 and early 2008. We plan to develop more online games, with a variety of themes, cultural characteristics and features that appeal to different segments of the online game player community.
We use a time-based revenue model for our first game, Perfect World, under which we charge players based on the time they spend playing the game. We use an item-based revenue model for Legend of Martial Arts, Perfect World II and Zhu Xian, under which players can play the games for free, but they are charged for purchases of in-game items, such as performance-enhancing items, clothing, accessories and pets. In 2006 and the first quarter of 2007, 46.9% and 86.5%, respectively, of our online game operation revenues were generated through this item-based model. We will continue to explore new and innovative business models to maximize our revenues and profit. We distribute our physical and virtual prepaid game cards to players in China through a variety of channels, consisting primarily of a network of 27 third-party distributors of our physical cards and one national distributor of our virtual cards. We also sell online points through our proprietary E-sales system and our own website. Although most of our revenues are generated in China, we have licensed our games, Perfect World II and Legend of Martial Arts, to leading game operators in 11 and seven countries and regions, respectively, including Japan and Taiwan, and we plan to license our games to more countries and regions. We have grown significantly since our inception, and generated revenues of RMB99.4 million (US$12.9 million) and RMB87.2 million (US$11.3 million) in 2006 and the first quarter of 2007, respectively. We incurred net losses from our inception in 2004 through the end of 2006. Our net loss of RMB27.9 million (US$3.6 million) in 2006 included one-time share-based compensation charges in the amount of RMB37.8 million (US$4.9 million) incurred in the year. We achieved net income of RMB40.0 million (US$5.2 million) in the first quarter of 2007.
Industry Background
Online games are electronic games played over the Internet. They can be played individually or in large groups of players simultaneously in the same game who interact in a game world. China is a key online game market in the Asia-Pacific region and has substantial growth potential. According to IDC, China’s online game revenues reached US$816 million in 2006, representing a 73.5% increase over 2005. IDC predicts that China’s online game revenues will reach US$3.0 billion by 2011, representing a compound annual growth rate, or CAGR, of 30.2% from 2006 to 2011.
Many factors have supported and we believe are likely to continue to drive the growth in the online game market in China, including the following:
Many players in China view online games as an attractive form of entertainment and desire to have more personalized, customizable and interactive game experiences. In addition, there has been a noticeable trend towards development and operation of 3D online games in China, as 3D games provide a more realistic representation of real-life objects and can depict more complex activities. Domestically developed online games have shown strong competitive advantages in China. According to IDC, in 2006, revenues generated from domestically developed online games reached RMB4.2 billion (US$0.5 billion), accounting for 64.8% of the total online game revenues in China.
Our Strengths
We believe that the following competitive strengths contribute to our success and differentiate us from our competitors:
Our Strategies
Our goal is to become one of the leading online game companies in the world. Our primary growth strategies include:
Our Challenges
The successful execution of our strategies is subject to certain risks and uncertainties, including those relating to:
Please see “Risk Factors” and other information included in this prospectus for a detailed discussion of these risks and uncertainties.
Corporate History and Structure
We commenced operations through Beijing Perfect World Network Technology Co., Ltd., or PW Network, a limited liability company established in China in 2004. To enable us to raise equity capital from international investors, our holding company, Perfect World Co., Ltd., or Perfect World, was incorporated under the laws of the Cayman Islands in June 2006. In August 2006, we formed Beijing Perfect World Software Co., Ltd., or PW Software, our wholly-owned subsidiary in China. In September 2006, PW Software entered into contractual agreements with PW Network and its shareholders, pursuant to which PW Network transferred certain fixed assets and certain personnel to PW Software and PW Software provides technical support and research and development services to PW Network. Through these contractual arrangements, we have the ability to effectively control PW Network’s daily operations and financial affairs, appoint senior executives and decide on all matters subject to shareholders’ approval. As a result of these contractual arrangements, we are considered to be the primary beneficiary of PW Network and PW Network is a variable interest entity, or VIE, of our company under generally accepted accounting principles in the United States, or U.S. GAAP. Accordingly, we consolidate PW Network’s results of operations, assets and liabilities in our financial statements. PW Network is considered as our predecessor company. Since both we and PW Network are under common control, our consolidated financial statements reflect this reorganization as a transaction between entities under common control and have been prepared as if the reorganized corporate structure had been in existence throughout all the periods presented. See “Corporate History and Structure” for a description of the contractual arrangements among PW Software, PW Network and its equity owners. If PW Network and/or its equity owners breach the contractual arrangements with us, we may not be able to continue to effectively control PW Network’s operations and remain to be its primary beneficiary. For example, PW Network may distribute dividends to its equity owners who may decide not to remit these dividends to us in accordance with the existing contractual arrangements. In such case, we would have to rely on legal remedies under PRC law, which may not always be effective, particularly in light of uncertainties in the PRC legal system. See “Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”
The following diagram illustrates our corporate structure.
Corporate Information
Our principal executive offices are located at 8th floor, Huakong Building, No. 1 Shangdi East Road, Haidian District, Beijing 100085, People’s Republic of China. Our telephone number at this address is (8610) 5885-8555. Our registered office in the Cayman Islands is located at the offices of M&C Corporate Services Limited, P.O. Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands, British West Indies. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our principal website is http://www.wanmei.com. The information contained on this website and our other websites is not a part of this prospectus.
Conventions Which Apply to this Prospectus
Unless we indicate otherwise, all information in this prospectus reflects the following:
Except where the context otherwise requires and for purposes of this prospectus only: