Sohu unit ready to play the IPO game

Undaunted by the current poor appetite among investors for Chinese information technology companies, mainland web game developer 7Road.com flagged a plan this week to list American depository receipts (ADRs) in the United States.

7Road.com is a subsidiary of the mainland's online game developer and operator Changyou.com, which in turn is a subsidiary of news portal Sohu.com - both of which are listed on the Nasdaq market in the US.

Changyou said on the Sohu website on Monday that 7Road planned to submit a draft registration statement for a possible initial public offering of American depositary shares. Neither the timing of the IPO nor the number or dollar amounts of the proposed ADRs had yet been determined.

It said the purpose of the listing would be to create a public market for its shares and to attract and retain talented employees by providing them with equity incentives. 'The IPO may commence as early as market conditions permit,' it said.

ADRs are negotiable certificates issued by a US bank representing a specified number of shares in a foreign stock that is traded on any of the US markets, or on dealer-managed over-the-counter markets.

Investor confidence in Chinese information technology companies was dented after a series of online reports were published last year accusing mainland firms of falsifying of financial statements or poor internal management.

'This is not an ideal time to be listing,' said Sun Mengzi, an analyst for Analysys International.

'The overall economic situation is lacklustre, and the reaction of investors towards China's internet firms has been weak.' But she said 7Road had some strong selling points and investors might be persuaded to open their wallets.

'Investors are careful, but they have not stopped investing,' she said.

Sun said 7Road had developed a strong reputation in research and development. 'And their products sell well. These are hard facts.'

Liu Xingliang, chairman of Beijing-based internet data analysis firm Hongmai Software, said the key issue was not investors' perceived lack of trust in mainland firms, but the bearish macro-economic situation. 'It is risky to list at the moment and I think they should wait a bit,' he said.

7Road's best-selling product is DDTank, a web game that was launched in 2010, and which has remained one of the top 10 most popular web games on the mainland. Earlier this year it launched another game, Wartune, also known as Shen Qu, set in a magical, medieval era. Parent Changyou.com's main focus is on running Tian Long Ba Bu, one of the most popular multi-player online games on the mainland.

Sun called the online gaming business a 'cash cow' for parent Sohu. Revenues earned by all the online games on the mainland in the first half of this year reached 22.6 billion yuan (HK$27.7 billion), according to Analysys, and as the fourth-largest player in the industry, Changyou has a market share of 8 per cent, after online game giants including Tencent, Netease and Shanda.

Changyou was spun out of parent Sohu as a separate company in December 2007 and completed a listing on Nasdaq in April 2009.

After the announcement of the planned IPO of its subsidiary on Monday, Changyou shares surged 18.7 per cent to US$23 per share on Tuesday. Sohu shares rose 17.8 per cent to US$40.86.