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 54.2% and 28.6%, respectively, from the quarter ended March 31, 2006 through the quarter ended June 30, 2007. ZT Online had 143,110 and 1,247,791 quarterly active paying players in the quarters ended March 31, 2006 and June 30, 2007, respectively. In the three months ended September 30, 2007, ZT Online had 1,317,673 quarterly active paying players. ZT Online had ARPU of RMB84 and RMB320 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 RMB295.

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:

 

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status as a leader in the online game market in China;

 

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strong product and technology development and enhancement capabilities for the Chinese market;

 

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expertise and innovation in MMO games;

 

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extensive nationwide distribution and marketing support networks; and

 

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experienced management team.

Notwithstanding our competitive strengths, we expect to face certain risks and uncertainties, including:

 

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our ability to develop, purchase or license additional online games that are attractive to our players;

 

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our dependence on one online game, which accounted for all of our historical net revenues;

 

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our ability to respond to competition;

 

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our need to implement and maintain effective internal control over financial reporting;

 

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our limited operating history and unproven long-term potential of our online game business model; and

 

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uncertainties with respect to the PRC legal and regulatory environments.

 

Our objective is to become the largest online game developer and operator in Asia. Our business strategies include the following:

 

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expand and enhance our product offerings;

 

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enhance interactive community features to attract new players and increase player loyalty;

 

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expand our player base in China and internationally;

 

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strengthen our technology and operational platforms;

 

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continue to attract and retain quality development talent; and

 

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pursue opportunities for acquisitions, strategic joint ventures and other attractive investments.

Corporate Structure

We commenced operations in 2004 through Shanghai Zhengtu Network Technology Co., Ltd., a limited liability company organized under PRC laws. On October 16, 2007 this entity changed its name to Shanghai Giant Network Technology Co., Ltd., or Giant Network.

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 Giant 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 Giant Network. The beneficial shareholders of Giant Network currently include Yuzhu Shi, who beneficially owns or controls 75% of Giant 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 Giant Network pursuant to which our wholly owned subsidiary, Zhengtu Information, provides technical support and consulting services to Giant Network. In addition, we have entered into agreements with Giant Network and its shareholders, providing us with the ability to effectively control this entity. Accordingly, we have consolidated the historical results of Giant 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⁾

 

(1)	For risks relating to our current corporate structure, see “Risk Factors—Risks Related to the Regulation of Our Business.”

 

(2)

Agreements that provide us with effective control over Shanghai Giant Network Technology Co., Ltd., or Giant Network, include irrevocable powers of attorney, share pledge agreements, purchase options and cooperation agreements. See “Our Corporate Structure—Contractual Arrangements with the Consolidated Affiliated Entity and Its Shareholders—Agreements that Provide Us Substantial Ability to Control and an Option to Acquire Giant Network.”

 

(3)

The economic benefits and losses of Giant Network accrue to Shanghai Zhengtu Information Technology Co., Ltd. pursuant to an exclusive technical consulting and services agreement, and an online game software sales and licensing agreement. See “Our Corporate Structure—Contractual Arrangements with the Consolidated Affiliated Entity and Its Shareholders—Exclusive Technical Consulting and Services Agreement and Online Game Software Sales and Licensing Agreement that Transfers Economic Benefits from the Affiliated Entity to Us.”

 

(4)

Shanghai Lanlin Bio-Technology Co., Ltd., or Shanghai Lanlin, is wholly beneficially owned by Yuzhu Shi, our current chief executive officer and chairman, through (i) his 95% interest in Giant Investment Co., Ltd. (which holds a 90% interest in Shanghai Lanlin), (ii) a written statement by Jinhua Niu (who holds a 5% interest in Giant Investment Co., Ltd.) disclaiming all ownership rights in Giant Investment Co., Ltd. in favor of Yuzhu Shi and (iii) a proxy shareholding agreement with Kai Chen (who holds a 10% interest in Shanghai Lanlin) which gives Yuzhu Shi all beneficial ownership rights of Kai Chen’s shares in Shanghai Lanlin.

 

(5)

Kai Chen holds 0.75% on his own behalf, 1% on behalf of Min Tang, our vice president of media and administration, 0.625% on behalf of Yonghua Lu, our vice president of sales and marketing, 0.375% on behalf of Yong Chu, 0.75% on behalf of Yongjun Fei, 0.25% on behalf of Zhaoyou Huang, 0.375% on behalf of Wenqing Wang, 0.25% on behalf of Jin Xu, 1% on behalf of Yan Zeng and 0.375% on behalf of Lianlong Zhang.

 

(6)

Shareholders of Giant Network who are also shareholders of Giant Interactive Group Inc. include Kai Chen (who holds shares for the benefit of Yong Chu, Yongjun Fei, Zhaoyou Huang, Yonghua Lu, Min Tang, Wenqing Wang, Jin Xu and Lianlong Zhang), Chen Cheng, Yuliang Feng, Haixiao Lin, Wei Liu, Fabing Qu, Yonggui Wang, Tao Yue and Lu Zhang.

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, 13^th Floor, New York, New York 10011.

Conventions That Apply to This Prospectus

Unless otherwise indicated, references in this prospectus to:

 

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“$,” “US$,” “USD” and “U.S. dollars” are to the legal currency of the United States;

 

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“ADRs” are to the American depositary receipts, which, if issued, evidence our ADSs;

 

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“ADSs” are to our American depositary shares, each of which represents one ordinary share;

 

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“China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau;

 

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monthly “average concurrent users,” or “ACU,” of any of our games is determined as follows: we first determine the number of users logged on to the game at five-minute intervals, and average that data over the course of a day to derive the daily average. The daily average data are then averaged over the monthly period to derive the monthly average concurrent users;

 

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“ordinary shares” are to our ordinary shares, par value US$0.0000002 per share;

 

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“PCs” are to personal computers;

 

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quarterly “active paying players,” or “APP,” is the aggregate number of accounts for our games that have been charged at least once during the quarterly period;

 

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quarterly “average concurrent users,” or “ACU,” of any of our games is the average of monthly average concurrent users of such game during the quarterly period;

 

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quarterly “average revenues per user,” or “ARPU,” is our online game net revenues during the quarterly period divided by the quarterly active paying players of these games during the quarterly period; our definition of ARPU may not be comparable to similarly titled measures presented by other online game companies;

 

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quarterly “peak concurrent users,” or “PCU,” of any of our games is the peak concurrent users of such game during the quarterly period;

 

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“RMB” and “Renminbi” are to the legal currency of China;

 

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a “shard” is, with respect to an online game, one of multiple independent copies of the game world. In a “sharded” game, such as ZT Online, players may only interact with other players in one shard at one time;

 

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“U.S. GAAP” is to generally accepted accounting principles in the United States; and

 

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“we,” “us,” “our company” and “our” are to Giant Interactive Group Inc., its predecessor entities, its subsidiaries and its affiliated entity.

Unless otherwise indicated, (a) information in this prospectus assumes that the underwriters do not exercise their over-allotment option to purchase additional ADSs, and (b) references in this prospectus to this offering are to our offering of ADSs pursuant to this prospectus and the investment by Standard Chartered Private Equity Limited, or Standard Chartered, in US$25.0 million of our ordinary shares at a price per share equal to the per ADS initial public offering price set forth on the cover page of the final prospectus. See “Underwriting—Standard Chartered Investment.”

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 16, 2007, the noon buying rate was RMB7.5116 to US$1.00.

 

The Offering

 

Price per ADS:		We currently estimate that the initial public offering price will be between $12.00 and $14.00 per ADS.
ADSs offered:
By us		52,467,723 ADSs
By the selling shareholder		4,729,700 ADSs
The ADSs		Each ADS represents one ordinary share, par value US$0.0000002 per share.
		The ADSs will be evidenced by ADRs.
		•           The depositary will hold the ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement.
		•           If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses.
		•           You may exchange your ADSs for ordinary shares through the depositary. The depositary will charge you fees for any exchange.
		•           We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after the amendment, you agree to be bound by the deposit agreement as amended.
		To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.
Standard Chartered Investment		In conjunction with, and subject to, the completion of the offering of our ADSs, Standard Chartered has agreed to purchase US$25.0 million of our ordinary shares at a price per share equal to the initial public offering price of our ADSs, or 1,923,077 ordinary shares assuming an initial public offering price of US$13.00 per ADS, the mid-point of the estimated range of the initial public offering price. This investment is being made pursuant to an offer exempt from registration with the U.S. Securities and Exchange Commission pursuant to Regulation S of the Securities Act of 1933, as amended.
ADSs outstanding immediately after the offering		57,197,423 ADSs.

 

Ordinary shares outstanding immediately after the offering		258,980,800 shares, excluding ordinary shares reserved for future issuance under our equity incentive plans. This includes 1,923,077 ordinary shares issued to Standard Chartered in connection with its investment in our ordinary shares, assuming a price per ADS of US$13.00, the mid-point of the estimated range of the initial public offering price.
Over-allotment option		The selling shareholder has granted to the underwriters an option, exercisable for 30 days from the date of the final prospectus, to purchase up to an aggregate of 8,579,613 additional ADSs from the selling shareholder at the initial public offering price set forth on the cover page of the final prospectus, less underwriting discounts and commissions, solely for the purpose of covering over-allotments.
Use of proceeds		We estimate that we will receive net proceeds of approximately US$657 million from this offering and the investment by Standard Chartered in our ordinary shares, assuming an initial public offering price of US$13.00 per ADS, the mid-point of the estimated range of the initial public offering price, after deducting estimated underwriter discounts, commissions and estimated offering expenses payable by us. We intend to use our net proceeds from this offering for the following purposes:
		The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives and obtain additional capital. We intend to use the net proceeds from this offering for general corporate purposes, including capital expenditures and funding possible future acquisitions.
		We will not receive any of the proceeds from the sales of the ADSs by the selling shareholder.
Reserved ADSs		At our request, the underwriters have reserved up to 8% of the ADSs being offered, at the initial public offering price, through a directed share program, for our vendors, employees, family members of employees or other third parties.
Risk factors		See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in the ADSs.
Listing		We have applied to have the ADSs listed on the New York Stock Exchange. The ordinary shares and the ADSs will not be listed on any other exchange or traded on any other automated quotation system.
Proposed New York Stock Exchange Symbol		“GA”
Depositary		Citibank, N.A.

 

Lock-up		We, the selling shareholder, Standard Chartered, our directors and executive officers and all of our existing shareholders, have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of up to 180 days (or, in the case of ordinary shares held by Yuzhu Shi, our current chairman and chief executive officer, through Union Sky Holding Group Limited, for two years after the date of this prospectus) after the date of this prospectus without the consent of the representatives of the underwriters. See “Underwriting.”

 

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.

 

		For the period from November 18, 2004 (date of inception) to December 31, 2004			For the years ended December 31,									For the six months ended June 30,
					2005			2006						2006			2007
		(RMB)			(RMB)			(RMB)			(US$)			(RMB)			(RMB)			(US$)
		(in thousands, except for per share data)
Summary Consolidated Statement of Operations Data
Net revenue:
Online game revenue		—			—			408,499			53,665			82,411			683,789			89,830
Overseas licensing revenue		—			—			—			—			—			3,658			481
Total net revenue		—			—			408,499			53,665			82,411			687,447			90,311
Cost of services		—			—			(45,195	)		(5,937	)		(8,800	)		(66,602	)		(8,750	)
Gross profit		—			—			363,304			47,728			73,611			620,845			81,561
Operating (expenses) income:
Research and product development expenses		(205	)		(4,830	)		(14,799	)		(1,944	)		(3,387	)		(6,637	)		(872	)
Sales and marketing expenses		—			(4,579	)		(80,460	)		(10,570	)		(22,163	)		(71,818	)		(9,435	)
General and administrative expenses		(588	)		(31,299	)		(26,098	)		(3,429	)		(4,631	)		(31,123	)		(4,089	)
Government financial incentives		—			—			1,621			213			17			—			—
Total operating expenses		(793	)		(40,708	)		(119,736	)		(15,730	)		(30,164	)		(109,578	)		(14,396	)