(Repeating item that initially moved on Friday)
By Phil Wahba
NEW YORK, March 27 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
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
"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.
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
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
(Reporting by Phil Wahba; editing by John Wallace)