September 15, 2009 / 10:34 PM / in 8 years

Shanda Games looks to ride industry wave in IPO

NEW YORK/SAN FRANCISCO (Reuters) - Many people outside of China have never played the online video games operated by Shanda Games.

But Shanda Interactive Entertainment Ltd, the parent company of Shanda Games, is betting that fact won’t hurt investor demand when it begins selling off its stake in its online gaming unit in a Nasdaq-listed initial public offering set to price next week.

Shanda Games hopes to follow in the footsteps of Changyou.com Ltd, another Chinese online game outfit that was spun off from Chinese Internet portal Sohu.com Inc, which listed its shares on Nasdaq in April.

Changyou.com is the top performing U.S.-listed IPO this year, with its shares up 157 percent since its debut.

On Monday, Shanda Games set the price range for its $725 million IPO, estimating it will sell 63 million American depositary shares for $10.50 to $12.50.

But that range could prove to be conservative given Shanda Games’ growing sales and strong position in the industry, according to one analyst.

Using annualized data for the quarter ended in June 2009 and the midpoint price, Francis Gaskins, president of IPO Desktop, estimated that Shanda’s IPO is being priced at a price-to-earnings valuation of 13.8, compared to 15.3 for Changyou.com and 19.8 for NetEase.com Inc, its chief rivals.

Another leading rival, Giant Interactive, has a lower ratio of 12.5 because its revenues have not shown the same consistency in their growth, Gaskins said.

“Because it’s a big IPO, they want it to go up,” he noted. “They (Shanda Interactive) are only selling a 22 percent stake in the firm and they want to be able to sell more later.”

Shanda produces “Legend of Mir” -- a popular multi-player online role-playing game -- and also operates “Aion” in China, the world’s largest Internet market with more than 300 million users.

Sterne, Agee & Leach analyst James Lee said the strong financial performances of Chinese game companies are particularly attractive to U.S. investors hungry for growth.

Shanda Games’ revenue jumped 42.7 percent year-over-year to about $322 million in the six months ended June 30, and boasted a rich, 65 percent gross profit margin.

Revenue for Changyou.com grew 39 percent to $66.6 million during the second quarter with a 94 percent gross margin.

Shanda founder Chen Tianqiao has said in the past he would like to transform his company into a diversified media company, but some analysts say it is unclear why the company is spinning off its gaming unit, which contributes 95 percent of the overall company’s revenue.

After the Shanda Games IPO, Shanda Interactive will still own about 78 percent of its former unit’s shares and 97 percent of the voting rights.

Paul Bard, vice president of research at Greenwich, Connecticut-based Renaissance Capital, said Wall Street’s reception for Shanda Games’ offering may depend on how comfortable investors are with the structure and the rationale for doing the spinoff.

And while he said investor demand for online Chinese gaming companies is strong, he noted that many of the related Chinese Internet stocks have rallied since the Changyou.com IPO.

“When Changyou.com had its IPO, the group was at much lower multiples. Now that the stocks have run up a lot it probably will take away from some of that initial flare in the (Shanda Games) deal.”

Shanda Games has applied to list its American depositary shares on Nasdaq under the symbol “GAME.”

Goldman Sachs and J.P. Morgan are the lead underwriters.

Reporting by Alexei Oreskovic; Editing by Richard Chang

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