IPO Focus: No easy win for
Changyou.com
Concern about ability to maintain growth will weigh on shares
By
The Wall Street
Journal Asia
(c) 2009 Dow Jones & Company, Inc. To see the edition in which this
article appeared, click here http://awsj.com.hk/factiva-ns
Online videogame company Changyou.com Ltd.
has a lot of positive attributes working in its favor for a successful IPO this
week, but there is no certainty it will repeat Mead Johnson Nutrition Co.'s
strong performance last month.
While Changyou.com has shown rapid revenue and earnings growth in the
two years that it has been offering its 2-D martial-arts saga, Tian Long Ba Bu,
to Chinese gamers, there is concern about its ability to continue at its
current pace, particularly since about 94% of its revenue in 2008 was derived
from that one online game.
"This is not a slam dunk, as far as I'm concerned," said Sal
Morreale, who tracks initial public offerings for Cantor Fitzgerald LP.
Competition is keen among Chinese companies that develop large-scale online
role-playing games, where hundreds of thousands of people can log in
simultaneously to play from their personal computers.
In the past five years, about a half-dozen of these companies have launched
IPOs in the
Although Tian Long Ba Bu's audience appears to be growing -- it hit a peak
in March of more than 800,000 players accessing the game simultaneously, double
the level at its launch in May 2007 -- it could lose market share before the
company is able to line up another hit from the three games it has in its
pipeline, the first of which is due to begin beta testing some time this
quarter, says Francis Gaskins, president of research site IPODesktop.com.
Another concern is that revenue growth is slowing as the company matures.
Although revenue rose nearly fivefold last year from 2007 levels, those gains
ebbed with every sequential quarter in 2008. Net income, which increased 20
times over 2007's level, also slowed after the second quarter of 2008.
"Right now, they are a one-trick pony, and their growth is leveling
out. They want us to believe that they have a stable of horses that will help
them grow more -- and they might. But they might not," Mr. Gaskins said.
Short term, there is enough pent-up demand for the small offering -- just
7.5 million shares are scheduled to debut under the symbol CYOU on the Nasdaq
Stock Market on Thursday -- to drive the price higher in the first days of
trading, believes Scott Sweet, managing director of Tampa research firm IPOBoutique.com. But if it can't sustain
its gains after that, the stock could prove troublesome for longer-term
investors given its risk profile and intense competition.
"I do think that it will likely play well in the short term. But I
would be cautious if the stock broke through the offering price quickly,
considering the outstanding numbers it's reported. If they can't hold it steady
with those numbers, then the numbers and exponential growth do not
matter," Mr. Sweet said. "It's potentially a deal that has tangible
hazards."
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