Shanda survives market turmoil (just)

Online gaming company keeps Chinese IPO market alive by re-pricing deal.

Shanda Interactive Media went ahead with a scaled down IPO after New York's close on Wednesday May 12, pricing a 13.9 million ADS deal at $11 per unit (pre shoe). With Goldman Sachs as lead manager, the company had originally intended to issue 17.5 million ADS units (pre shoe) on a range of $13 to $15. However, Monday's mini-meltdown sounded the final death knell to ambitions that had already been battered by the performance of comparable stocks, which had fallen 25% to 28% during the course of roadshows.

Observers say a deal would still just about been possible at the very bottom of the original price range even after Monday's collapse. But, it would have traded disastrously, potentially closing the tottering China IPO market. So instead, the lead decided to postpone pricing on Tuesday, re-file the deal on Wednesday and re-build a book that went on to close about two-and-a-quarter times covered.

The most price sensitive investors were said to be US tech accounts that had been waiting until the last minute to place orders. At the end of last week, the book is said to have already been covered by core accounts (mainly Asian), but US demand failed to materialise even after markets bounced slightly on Tuesday.

As one observer comments, "US investors have been completely spooked by the reduction in global risk appetite. They saw what happened to world equity markets on Monday and decided they just didn't want any more risk. To them, Shanda is a company, which operates in a volatile sector, a volatile country and a volatile region."

Shanda's timing could hardly have been worse, but the fact the deal got done shows the equity market is still open for those issuers willing to take a realistic view of what can be achieved. In the end, just over 100 investors participated in the deal, with a split of about 80% institutional and 20% retail. The revised pricing was enough to tempt a number of US accounts back, resulting in a geographical split that saw 55% placed into the US, 20% into Europe and 20% Asia.

Alongside Goldman, co-leads were Bear Stearns, CLSA/CIBC, HSBC and Piper Jaffray. Syndicate consensus estimates price the deal at about 15 times 2004 earnings, versus an original range between 19 and 22 times.

At this level, many think the deal is very attractive on a medium-term basis. Initially, it had been expected to price at a slight premium to Korean operators such as NCSoft and Webzen and at a 20% to 25% discount to Chinese comparables such as Sina Corp and Netease.

It has now priced at a discount to both. At the beginning of roadshows, Netease and Sina were trading on respective PE multiples of 29 and 30 times 2004 earnings. They are now trading at 22 and 22.5 times (editor's note: all valuations and pricing details relate to May 14 when this article was first published).

By contrast, Korea's NCSoft was trading at 22.6 times 2004 earnings at the beginning of roadshows and ended them only marginally lower at 21 times. The differential between the main Chinese and Korean broadband games providers has, therefore, been closed. The outlyer is Webzen, which has been on a downward track all year and has now slipped 35% year-to-date to close yesterday at Won80,500: a PE ratio of about eight times 2004 earnings.

Over the course of Tuesday and Wednesday, Sina and Netease clawed back some of their losses, rising about 5% over the course of the two days following postive earnings results from Linktone, which rose 35% on Tuesday. Yet both have seen stock prices halve from their peak. Netease hit $72 per share last September and is now trading around the $39 level, while Sina hit $49.50 in January and is now around the $28 level.

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