RPT-IPO VIEW-Video-game IPO to test US market for Chinese deals

Sun Mar 29, 2009 10:42am EDT

(Repeating item that initially moved on Friday)

By Phil Wahba

NEW YORK, March 27 (Reuters) - Chinese on-line game developer Changyou.com Ltd's (CYOU.O) initial public offering this week will test a market still tentative about new issues, in particular once-hot Chinese stocks.

Investors who once ravenously sought out Chinese IPOs now largely eschew those deals. The dollar volume of Chinese IPOs on U.S. exchanges fell 85 percent last year to $1.5 billion, according to Thomson Reuters data.

The last two Chinese IPOs, China Mass Media International Advertising CMM.P and China Distance Education Holdings (DL.P), were small deals that took place eight months ago and did not perform well, pricing at the bottom of their ranges. The shares still trade below their IPO prices.

But analysts argue that Changyou is not an ordinary Chinese company; for one thing, it is an offshoot of Sohu.com (SOHU.O), a large, profitable Chinese Internet portal already listed on Nasdaq, making Changyou less of an unknown.

"Changyou is the crown jewel of Sohu.com and has helped that stock perform well," said Paul Bard, a research director at Connecticut-based Renaissance Capital, an investment manager that specializes in IPO stocks.

Changyou's revenue has grown very quickly, rising nearly fivefold in 2008 to $194.6 million, according to its regulatory filing.

But 93.6 percent of those revenues come from one hit video game, Tian Long Ba Bu, based on a popular Chinese martial arts novel whose title loosely translates to "Novel of Eight Demigods."

"There is a lot of risk with any company in an industry viewed by many as being hit-driven," Bard said of both Chinese and U.S. video game makers. "Few companies have track records of producing hits consistently -- and in order to sustain growth, they have to develop new hits."

Changyou's near absence from the U.S. market may unnerve some U.S. investors, one analyst said.

"No one really knows how the money flows with Chinese gaming companies," Michael Pachter, a video games analyst with Wedbush Morgan Securities said, referring to the challenge of tracking revenues in an emerging market.

"Unless you are on the ground in China, and speak Chinese, these stocks are hard to cover," he said.

Stocks with limited analyst coverage are a tough sell to investors, Pachter added.

IN GOOD COMPANY

Analysts said Changyou could get a lift from the performance of its main competitors, Chinese gamemakers Giant Interactive Group (GA.N), Shanda Interactive Entertainment SNDA.O and NetEase.com (NTES.O), all listed on U.S. exchanges.

All have done well, with shares up between 6 percent and 22 percent on U.S. exchanges in 2009. (China's main stock index, the Shanghai Composite Index .SSEC, is up 30 percent this year.)

What's more, Changyou's IPO price estimate suggests a lower earnings multiple than that of its rivals.

Bard said he estimates Changyou's IPO is "priced to sell," with a price-earnings multiple of about seven, based on projections for Changyou's 2009 earnings. Multiples for Changyou's rivals range between 11.53 and 12.92.

RETURN OF CHINESE IPOS IN U.S.?

But even if Changyou's IPO is successful, it is unlikely to unleash an immediate flood of Chinese deals in the United States; there is only one other sizable Chinese IPO in the pipeline, a $75 million deal, not yet scheduled for pricing, by a media company.

Longer term, foreign capital markets have become sophisticated enough to attract their own IPOs, one banker said, meaning the Nasdaq and the New York Stock Exchange will have to compete with local exchanges for those IPOs.

To be sure, the U.S. exchanges remain a desirable destination for Chinese IPOs while Chinese regulators, who have virtually stopped approving IPOs, figure out new rules regulating the pricing of deals. There have only been three IPOs on the Shanghai exchange since January 2008.

"I don't think the U.S. market is viewed any longer as the only alternative," said Tom Fox, head of global capital markets for the Americas at Swiss bank UBS AG (UBSN.VX) (UBS.N).

"Five years ago, significant companies had to look to the U.S. to get the valuations they thought they deserved, and the liquidity," Fox said. "We don't think that's necessarily the case anymore." (Reporting by Phil Wahba; editing by John Wallace)

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