Changyou closes up 25 percent in strongest debut in year

NEW YORK/SAN FRANCISCO (Reuters) - Online video games maker CYOU.O closed up 25 percent in its trading debut on Thursday, making it the most successful stock launch in nearly a year.

It was only the third initial public offering in the United States since August 2008, and the largest Chinese IPO on a U.S. exchange since December 2007, according to Thomson Reuters data.

"If this IPO had come in November, when the markets were low, it would have flopped," said Francis Gaskins, president of research firm IPO Desktop. "It was obviously lifted by the rising markets." The Nasdaq index .IXIC ended 3.3 percent higher.

The initial public offering of Changyou, spun off from Chinese Internet portal Inc SOHU.O, rose as much as 50 percent during its first day of trading before easing to end at $20.02, up $4.02, or 25 percent on Nasdaq.

The American Depositary Receipts started trading on Nasdaq at $22.02, a 38 percent premium over its pricing of $16 Wednesday evening.

Changyou sold 7.5 million ADRs, raising $120 million after pricing at the top of its estimate range.

Changyou Chairman Charles Zhang said the strong debut was due to the deal’s pricing as well as the track record of Sohu, which has been listed on Nasdaq for nine years.

“The pricing was based on the environment, and our price-earnings multiple was low compared to others,” Zhang told Reuters.


The valuation multiple of the Changyou IPO offer price of $16 was about seven, compared with a range of 11 to 13 for rivals such as Giant Interactive Group Inc GA.N, Shanda Interactive Entertainment Ltd SNDA.O and Inc NTES.O. Also, the IPO's float of 7.5 million ADRs was small.

“It did well because Sohu’s shareholder base is familiar with Changyou as a division of Sohu,” Zhang added.

The only other stock market debut this year was also a spinoff, an $828 million IPO by pediatrics nutrition maker Mead Johnson Nutrition Co MJN.N, a carve-out of drugmaker Bristol Myers Squibb.BMY.N. Its shares jumped 12 percent on their first day of trading.

“Mead Johnson had tremendous financials and brand awareness, as do Changyou and (upcoming IPO) Rosetta Stone, meaning that a company meeting those criteria should feel safe attempting an IPO,” said Scott Sweet, senior managing director with research firm IPO Boutique.

Set to price their IPOs in two weeks are Rosetta Stone Inc RST.N, a language learning company and Bridgepoint Education Inc BPI.N, an education services provider, as that market starts to show signs of thawing, Sweet said.

After the IPO, Soho has a stake of about 70 percent in Changyou, a level Zhang said it plans to maintain, making a follow-on offering not likely soon. Zhang is also chairman of Sohu.

The IPO attracted orders for 15 times the number of shares on offer, a source told Reuters Wednesday.


Changyou is best known for its online, role-playing martial-arts game, “Tian Long Ba Bu,” which accounts for about 94 percent of total revenues, and was launched in May 2007.

Analysts said the dependence on one blockbuster is a red flag, but Zhang said the company has three new games in the pipeline, with at least one title expected by the end of the year.

Zhang estimated about 300 million Internet users in China, and expects that to grow to 600 million in five years, bringing millions more online gamers.

“If you talk about video games in China, it’s online games,” Zhang said. “On a global basis, I think the online game will be the future.”

Zhang said Changyou was in the early stages of marketing its games outside China.

One video games analyst cautioned against thinking the Chinese market is limitless.

“It’s the classic situation. Everybody believes China is going to grow in perpetuity,” said Wedbush Morgan analyst Michael Pachter.

“My question is what are the barriers to entry? It’s a very healthy market, but there is a lot of competition.”

The last IPO to jump as quickly as Changyou was Intrepid Potash Inc IPI.N in April 2008. It ended its first day up 58 percent, and is now down 37 percent from its offer price.