Global Economics

Chinese Gaming Company Completes Year's First Nasdaq IPO


Changyou.com, a subsidiary of Sohu.com, is successfully spun-off in a $120 million listing

Chinese online game operator and developer Changyou.com yesterday became the first company to list on Nasdaq in 2009 and the first Chinese company to list in the U.S. since early August last year. The company, which is a spin-off from Chinese Internet portal operator Sohu.com, set the price at the top of the indicative range, allowing it to raise $120 million.

Sources say the deal could have been priced above the initial range of $14 to $16, as is allowed in U.S. listings, but the involved parties decided to stick with $16 to ensure stable secondary market trading. The tactics appear to have worked as the share price was up about 30% at $20.76 with less than one hour left of yesterday's session. U.S. market watchers attributed the strong debut partly to the high subscription rate.

The deal consisted of 7.5 million American depositary shares (ADS), each representing two ordinary shares. Half of the ADS were backed by primary shares, while the other half were secondary shares sold by the parent company. There is a 15% greenshoe, which, if used, could bring the total deal size to $138 million. The ADS represents 14.2% of the company pre-shoe and 16.3% post-shoe.

The order book was 15 times covered. Sources say it attracted predominantly U.S. demand -- around 70% of the total -- while most of the remainder came from Asia. Long-only, momentum and sector specialist funds all participated. A number of existing shareholders of Sohu.com also bought a direct stake in the subsidiary.

Demand was so strong that bookrunners chose to close the books a day earlier than planned, on Tuesday, New York time. The Thursday debut remained unchanged, however.

The separate listing of Changyou.com marks the spin-off of one of Sohu.com's major business units. In the current recessionary environment, Sohu.com, which is dependent on advertising, is likely to see lower revenues. Online gaming operators are seen as a counter-cyclical stock since the revenue comes from gamers that continue to play their favorite games regardless of the economic environment.

Sohu.com will keep strong control over Changyou.com, however, as it will remain the controlling shareholder with 70.7% of the economic interest and 81.5% of the voting power.

The IPO price values the company at seven times its 2009 earnings, according to bookrunner estimates, putting Changyou.com at a discount to other U.S.-listed Chinese game companies. Both Shanda Interactive Entertainment and Netease.com, two of the largest Chinese online game operators, are trading at about 13.5 times their estimated 2009 earnings. And U.S.-listed companies in this industry have performed well recently with Shanda up 17% in March and Netease up 23%.

Changyou.com is the operator of Tian Long Ba Bu, China's third most popular online game, according to International Data Corporation. The game is free to play and the company makes its money as the players pay for online items for their characters in the game. This one game alone currently contributes just over 93% of the company's revenue.

Credit Suisse and Bank of America-Merrill Lynch were the joint bookrunners.

© Haymarket Media Limited. All rights reserved.


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