These Chinese Gaming Companies May Go Private

Feb.27.14 | About: Perfect World (PWRD)

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of the foolishness…" - Charles Dickens

Almost a decade ago, the Chinese were happy for their gaming companies to be listed on Nasdaq and NYSE. It was a triumphant moment for the early entrepreneurs who devoted their lives to the world of cyber entertainment. Now they are busy trying to get their companies off the U.S stock market.

After the 2008 financial crisis, everything has changed. Giant Interactive (NYSE:GA) and Shanda Games (NASDAQ:GAME) both announced offers from shareholders to be taken private at the beginning of 2014. There are rumors that Perfect World (NASDAQ:PWRD) and Changyou.com (NASDAQ:CYOU) are also considering their options to be taken private by major shareholders. So why is this happening? Do we have a chance to hop on the train of privatization?

Reasons:

  1. Both CYOU and PWRD are cheap.
  2. Both CYOU and PWRD have relatively stable operations.
  3. Both CYOU and PWRD have rich pipelines for mobile gaming market.
  4. Both CYOU and PWRD have subsidiaries that are not appreciated by the market.

Changyou.com

First, Let's look at the valuation. CYOU was priced about $28 a share on Feb 24, 2014. Forward 2014 and 2015 EPS are projected to be $1.72 and $3.86 respectively. CYOU adjusted its earnings down dramatically due to huge investment in the mobile department. The newly licensed mobile game Max Axe was recommended by iTunes.

CYOU has $410 million in debt and $550 million cash or cash equivalent.

CYOU has a few stable games in operation that can last for at least a couple of years. Despite of decline ACU in TLBB and other old products, the overall operation is stable. Its web games are also doing well by generating cash continuously.

CYOU's main shareholder is Sohu.com (NASDAQ:SOHU), which owns about 67.7% of CYOU. CYOU is a very valuable asset for SOHU, since SOHU itself does not produce any significant income from its own operations.

CYOU has 17173.COM, a major portal site for gamers in China. The site gets its income mainly from online advertisement business. CYOU also has shares in Seventh Avenue, a web-game company that may have an IPO.

To SOHU, its EPS is expected to be negative for the year 2014, while its gaming spin-off generates most of its income with a discount price listed on the market.

CYOU's current market cap is about $1.5 billion. SOHU's current market cap is $2.87 billion. SOHU owns 67.7% of CYOU.

Perfect World

Perfect World, on the other hand, also had a tough ride. PWRD traded around $20 a share on Feb 24, 2014. Forward 2014 and 2015 EPS are projected as $1.51 and $1.91 respectively.

PWRD has about 30% income from oversea operations. This is unique among Chinese gaming companies. The company heavily invested in its mobile game pipelines. I have mentioned this in my last article, and I believe the company will pick up its growth into 2015.

PWRD suffered years from lack of high profile games. The stock price was sent down to $8 a share until it finally launched games like Swordsman Online and Dota 2 in 2013.

PWRD acquired C&C Media to improve its operations in Japan. PWRD also acquired Runic Games from the U.S to have exciting titles like Torch Light and Torch Light 2. However, due to the nature of independent games or PC games, most of the income from Runic in 2012-2013 isn't repeatable.

PWRD recently sold its BIDU)/9009448.html" rel="nofollow">literature site to Baidu (BIDU) for 191.5 million in RMB. (Selling an asset unnecessarily is a sign of privatization to me.)

PWRD also sold its media department to Chairman of the Board, Chi Yu Feng, a few years ago. Mr.Chi is still the largest single shareholder of the company.

The spin-off media department has grown well in Mr.Chi's hands. It is one of the best media production and distribution media companies in China.

Conclusions

As you can see, both CYOU and PWRD will provide benefits to their major owners if they go private at their current levels. The market isn't very nice to Chinese gaming companies, due to their unstable growth rates and nonstop changing consumer behaviors. From the facts I have listed above, I myself would pick PWRD as my first priority. The reason is that Mr.Chi would be able to form a much larger firm if PWRD goes private. The sale of the literature segment is a very clear sign that the major owners don't want the company to carry any unnecessary assets even they are somewhat valuable.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PWRD, CYOU over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.