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Chinese Online Gamer Readies $800M IPO


Shanda Games is currently pre-marketing an initial public offering of American depositary receipts (ADRs) that is expected to raise approximately $800 million, according to a source familiar with the situation. The deal, which is expected to be completed before the end of September, comes six months after Changyou.com, another Chinese gaming company, listed in the U.S.

Shanda Games develops, operates and licenses online games that are played in China. It has two types of games: massively multi-player online role-playing games (MMORPG), which are intensely time-consuming games that are often set in fantasy worlds; and advanced casual games, which contain the storyline and graphics of a MMORPG without the massive time commitment.

The company's current portfolio of games is made up of 18 MMORPGs and 11 advanced casual games. It also has another 24 games in the pipeline. The World of Legend and Mir II are the company's most enduring titles and there is also the recently released Aion.

Shanda Games is a spin-off of Shanghai-based and Nasdaq-listed Shanda Interactive Entertainment, one of China's most recognisable online brands. Shanda Games was incorporated in mid-2008 as a holding company for the parent's online gaming business. The argument for having a separate entity dedicated to games is that it helps the company "to focus on developing, sourcing and operating high-quality online games", according to a stock exchange filing. Shanda Interactive will remain the controlling shareholder of Shanda Games after the IPO.

In 2008, Shanda Games' net revenues were up 45% to Rmb3.3 billion ($494.3 million), and during the first six months of 2009, they improved another 43% on the same period in 2008, to Rmb2.2 billion.

With 49.4 million online gamers, China has the largest gaming population in Asia. In 2008, China's gaming sector created revenues of $2.7 billion, according to International Data Corporation (IDC), a 76.6% increase on the year before. IDC expects sector revenues to grow to $5.8 billion by 2013, resulting in a compound annual growth rate of 16.7% for the period between 2008 an 2013.

Investors view gaming stocks as a defensive play compared to internet portals such as Sina Corporation. The reason is that portals are heavily dependent on advertising revenue, which tends to dry up when the economy slows down, while gaming companies have a steady revenue stream from loyal gamers. The downside, however, is that game operators need to keep developing popular games and a flop can seriously affect a company's future.

Shanda Interactive is already hurting from an old portfolio of games, according to a recent report by Credit Suisse. Although the Swiss bank acknowledges that Shanda is China's top MMORPG operator, it notes that the future is looking less bright. "Due to the expected decline of Mir II and [The World of Legend], the disappointing performance of Aion and the absence of an attractive game pipeline, we expect Shanda's MMORPG market share will decline," the report said.

Despite this, Shanda Interactive will be hoping that the U.S. listing of Shanda Games will match the success of Changyou.com earlier this year. The Sohu.com-controlled games company in April raised $120 million in the first Nasdaq IPO of 2009 and, since then, its share price has more than doubled from an IPO price of $16 to Monday's closing price of $39.05.

Shanda Games will be brought to market by Goldman Sachs and J.P. Morgan. The roadshow is expected to launch on Monday (September 14), with the pricing and trading debut in the week starting September 21.

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