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Chinese MMO company raises $138 million in NASDAQ listing

By on March 31, 2009

UPDATE: Chris Nuttall of the FT reports that the Changyou IPO priced at the top of the range ($16), and that the shares had risen 25 per cent by the end of the first day’s trading. A good result for Changyou and Sohu.

It seems that American investors just can’t get enough of online games in China.

Two weeks ago, Chinese company Changyou (CYOU) filed a registration statement to go public on NASDAQ. Today, it looks as if it will close the book on a successful IPO a day ahead of schedule.

The company

Changyou operates two MMOs in China:

  • Tian Long Ba Bu (known as TLBB), which was the third-largest MMO in China in 2007 according to IDC.TLBB is “a martial arts game with 2.5D graphics” (whatever that means) based on the novel Novel of Eight Diamonds by Louis Cha and funded by microtransactions for in game items. In the three months to December 2008, 1.8 million unique users played the game, while the concurrent peak number of users, reached in March 2009, was over 800,000.
  • Blade Online, a licensed property, which had 159,000 unique users in the three months to December 2008.

The company is also developing three new games: Duke of Mount Deer based on another novel by Louis Cha, Immortal Faith and Legend of the Ancient World.

Changyou’s financial details are pretty good – no wonder they are seeking an IPO now:

  2006 2007 2008
  ($m) ($m) ($m)


8.5 42.1 201.8

Operating profit

0 5.2 115.4
Source: Changyou F-1 statement

The transaction

Changyou is currently 84.2% owned by (Ticker: SOHU), a Chinese Internet portal that is listed on NASDAQ. The remaining 15.8% is owned by management. As a Chinese company, Changyou is issuing American Depositary Receipts, the usual way of selling shares of a foreign company on NASDAQ. 7.5 million ADRs are on offer, with half the proceeds going to Sohu and half going as new investment to Changyou. Due to a complicated structure involving A and B shares with different voting rights, Sohu will end up owning 70.7% of Changyou, but having voting rights over 81.5% of the company.

The joint bookrunners (Credit Suisse and Merrill Lynch) have set a price range of $14-$16. At the mid-point of $15, the deal will raise $56.25 million for each of Sohu and Changyou, $64.7 million if the 15% over-allotment is exercised (which looks likely).


The FT says that the Changyou’s IPO is “priced to go”. At a value of $15 a share, that’s only 6-7 x the forecast of 2009 earnings, a discount of around 50% compared with parent Sohu and peers like Tencent, NetEase and Giant.

However, there are some big warning signs:

  • With parent Sohu keeping over 80% of the shares, this looks a lot like discredited tracking stocks, which existed during the boom to show the “true” value of a subsidiary. Investors found these confusing and also eventually realised that they were investing as minority shareholders in businesses which was still completely controlled by their parent companies. Very few tracking stocks still exist.
  • Sohu is selling. It is raising nearly $65 million from the sale. Since Sohu knows more about Changyou’s prospects than anyone, this is another warning flag.
  • The company only has one successful title, TLBB. It operates one other (Blade Online) and is investing in three new games. The company is currently very cash-generative from its existing single property, but this could change if it invests heavily in its new titles, and they disappoint (just as NCsoft found with Auto Assault and Tabula Rasa).

On the other hand, Changyou has shown stellar revenue growth, comes from a parent company whose management is highly respected, has created a major MMO based on a well-known licence and has secured the rights to further games from the same author and offers exposure to the still-growing Chinese gaming market.

Despite the warnings, this deal looks likely to show again how keen the financial markets are to invest in businesses with virtual worlds.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: