Changyou.com IPO to raise up to $120 million

A roadshow will begin today for a Nasdaq listing of Changyou.com, a Chinese online game developer and operator that is controlled by Sohu.com, one of China's largest Internet portals. The company expects to raise between $105 million and $120 million from what looks set to become the first Asian IPO in the US this year.

The offering consists of 7.5 million American depositary shares (ADS), representing 15 million ordinary shares. Half of the ADS are backed by primary shares, while the other half are secondary shares being sold by the parent company. The shares are offered at a price ranging from $14 to $16 per ADS.

There is a 15% greenshoe, consisting of 1.125 million secondary ADS, which could bring the total size of the deal up to $138 million. The ADS represent 14.2% of the company pre-shoe and 16.3% post-shoe.

Changyou.com is an online game developer with one of the most popular games in China: Tian Long Ba Bu (TLBB), which accounts for 93.6% of the company's revenues. In 2007, TLBB was ranked as the country's third most popular online game by International Data Corporation, and the second most popular domestically developed game. This month, the number of TLBB's peak concurrent users is more than 800,000.

The games are free to play. The company makes its money as players pay money in the real world for virtual items, most of which cost between $0.01 and $2.20, although prices can be as high as $180.

In 2008, Changyou.com generated revenues of $201.8 million, up from $42.1 million the year before. The massive jump is due to the short life of the company - TLBB was launched in May 2007 and the company was incorporated in August that same year. "We are not likely to sustain similar growth rates in revenue or net income in future periods due to a number of factors," says the company in its stock exchange filing. The difficulty of achieving similar growth from a larger revenue base is one reason cited by the company, another is the cost of developing new games.

Sohu.com will remain the controlling shareholder after the IPO, with an indirect holding of 70.7% and 81.5% of the voting power.

The price range values the company at six to seven times its 2009 earnings. This puts it at a significant discount to the companies that investors are comparing it to, such as Shanda Interactive Entertainment, which is currently trading at about 12 times its 2009 earnings.

Gaming companies are seen as something of a defensive stock, compared to shares in internet portals. The reason is that the portals are heavily dependent on revenue from advertising, which typically dries up during an economic slowdown. Gaming companies have regular customers continually feeding money into the game, as long as they keep playing.

The pricing and the trading debut are expected to take place in the week of March 30. Credit Suisse and Merrill Lynch are joint bookrunners for the deal.