Sohu Tests IPO Market With Big Dividend 搜狐用巨额股息试水IPO市场
Internet portal Sohu (Nasdaq: SOHU) is testing one of the worst IPO markets in recent memory with plans for listing one of its online gaming units, serving up a massive dividend and mildly upbeat quarterly results to generate hype for what otherwise looks to me like a very so-so offering. This latest plan comes against a broader backdrop of a dismal IPO market that has seen just 1 major offering for a Chinese firm in the US this year, as international investors shun Chinese stocks after a steady stream of accounting scandals that began more than a year ago. Further limiting its chances for success, this latest offering plan comes in the relatively uninspired online game sector, which is already quite competitive and where overseas investors already have a number of other choices in the form of companies such as NetEase (Nasdaq: NTES) and Perfect World (Nasdaq: PRWD), as well as Sohu’s own separately listed gaming unit Changyou (Nasdaq: CYOU).
The latest listing plan would see Changyou spin off one of its own units, called 7Road.com, into a separately listed company in New York. (company announcement) In its official announcement, Changyou said it was preparing to make a confidential, non-public filing for the offering, the first step towards an eventual IPO whose size has yet to be determined. Such an announcement is highly unusual, as companies usually don’t discuss their IPO plans so close to a potential offering and instead usually prefer to let their public filings do the talking.
In this case, I suspect that Sohu and Changyou are making their unusual pre-announcement to see how the markets react before moving ahead with any actual filings. To generate some buzz around the plan, Changyou separately announced a massive dividend on the same day it unveiled its IPO plan for 7Road, and both Changyou and Sohu also announced quarterly results that were mildly upbeat though nothing to get too excited about. The slew of announcements seemed to have had the desired effect, with Nasdaq-listed shares for both Sohu and Changyou jumping nearly 20 percent in Monday trading in New York.
Let’s take a quick look at the individual pieces of news, and from them we can try to figure out what the future might hold for the 7Road offering if and when it moves forward. First let’s look at the dividend, which is clearly the biggest source of excitement as it will provide Changyou shareholders with an instant major return on their investment. Changyou said each of its US-listed American Depositary Shares (ADS) will receive a dividend of $3.80, amounting to a 20 percent return of the company’s share price before the announcement. (company announcement) Even after the big jump, the dividend still represents a 16 percent return on Changyou’s Monday closing price.
At the same time, Sohu announced second-quarter results that showed a tiny increase for its core advertising revenues amid a broader rapid slowdown in China’s ad market, which was widely expected. (results announcement) But that slowdown was offset by healthier gains for Changyou, which is controlled by Sohu and reported a 30 percent increase in second-quarter revenue. What’s more, Changyou forecast that both revenue and non-GAPP profit would continue growing at about 30 percent in the third quarter despite China’s broader economic slowdown. Changyou didn’t break out separate results for 7Road, but clearly it wants investors to believe the unit is growing just as quickly as the parent company, if not faster.
So the question becomes: What does all this information say about a potential listing by 7Road? Judging from the timing of the announcement, Changyou would like to make an IPO for 7Road by the end of this year, joining a list of others like Shanda’s Cloudary online literature unit that are waiting for sentiment to improve. Like Cloudary, I expect that 7Road is probably a profitable company — a fact that will appeal to investors in the current climate where many of the newest US-listed Chinese companies still lose money.
But unlike Cloudary, which would be the first listing in its category, 7Road would just be the latest in a relatively large group of already-listed online gaming companies, none of which have excited investors very much these days with the possible exception of NetEase. At the end of the day, I expect that many Changyou investors will wait for the company to pay out its big dividend and then quickly dump their shares. Similarly, any listing plan for 7Road will meet with tepid to weak demand, meaning the offering will likely have to be postponed until next year or aborted completely.
Bottom line: Despite efforts to generate hype for a planned IPO, Changyou’s 7Road online gaming unit will attract little or no interest from investors and will have to be delayed until next year.
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