Go Private Offers Will Increase Rapidly Unless Investors In The West Wise Up

A little over a month ago, Charles Zhang, chairman of Changyou, a developer, and operator of online games in China surprised investors with an offer to take the company private by offering investors in the Changyou ADS that trade on our exchanges $42.10 in an all-cash offer.

That was a premium of a teeny 9% to the prior day's closing levels and a 50% premium to the average price of the shares in the previous 90 trading days. The ADS of Changyou closed up by around $2 per share the day the offer was revealed publicly (May 22, 2017).

Working through the financials, at $42.10 per share, Zhang was buying the company for roughly 11.7 times Wall Street estimated earnings of $3.60 per share for 2018 (EPS based on expectations at the time of the "go-private" offer). Incidentally, that is well below the 18 times or so that the S&P currently trades at.

Two weeks later (June 5, 2017), Changyou issued a press release stating that as a result of the launch of the company's TLBB (Dragon Oath) mobile game in mid-May, it was raising guidance for the June quarter to the following:

"Total revenue to be between US$140 million and US$150 million, compared with the previous guidance of US$110 million and US$120 million. Online game revenue to be between US$110 million to US$120 million, compared with the previous guidance of US$75 million and US$85 million. Non-GAAP[ net income attributable to Changyou.com Limited to be between US$60 million and US$65 million, or between US$1.12 and US$1.21 per fully-diluted ADS. This compares with our previous guidance of non-GAAP net income attributable to Chanyou.com Limited between US$25 million and US$30 million, or between US$0.46 and US$0.56 per fully-diluted ADS."

CEO Dewen Chen commented, "We are pleased with the performance so far of our Legacy TLBB mobile game. The game has been widely embraced by both new players and returning PC game players, and has consistently ranked among the top three grossing games in the Apple App Store since its launch. Our Legacy TLBB mobile game incorporated many classic features from our flagship PC version, including various social and community functions, which re-created the PC game experience on mobile and encouraged a return of former PC game players. In addition, we simplified some of the gameplay, which makes it easier for brand new players to operate within the game, and extends the user base to a younger generation."

Wall Street expectations prior to the above upwardly raised guidance for the June quarter were revenues of $129 million and earnings of $0.71 per share.

Quite the raise in expectations for the current quarter, no?

So, subsequent to the raised guidance, Zhang will walk away with the company at a mere 10 times or so a multiple of newly estimated earnings of $4.07 per share for 2018, unless Invesco (13.3% stake) decides to make some noise about how Charles Zhang's offer undervalues Changyou.

On the flip side, Zhang can always claim that investors never understood the Changyou story in the first place and were too caught up in the constant negative cawing from the financial press and the darksiders to correctly appreciate the actual value of the company. A similar go-private offer for Qihoo was successfully completed a year and a half ago.

I guess if shareholders can't see the value, and if Zhang does, shareholders have only themselves to blame, no?

If you have missed the Changyou investment opportunity, maybe a look at NetEase could be worth your while.

NetEase is also an online gaming company (probably the biggest in the PRC) and is also similarly severely undervalued like Changyou is.

NetEase is roughly 15 times bigger than Changyou is in terms of current Wall Street revenue expectations for 2018.

Just a small excerpt from NetEase Q1:17 quarterly earnings report:

"Net revenues were RMB13.6 billion (US$2.0 billion), an increase of 72.3% compared with the first quarter of 2016. Online game services net revenues were RMB10.7 billion (US$1.6 billion), an increase of 78.5% compared with the first quarter of 2016. Advertising services net revenues were RMB445.2 million (US$64.7 million), an increase of 13.2% compared with the first quarter of 2016.  E-mail, e-commerce, and others net revenues were RMB2.5 billion (US$357.4 million), an increase of 63.2% compared with the first quarter of 2016. Non-GAAP diluted earnings per ADS were US$4.75."

(Long ntes, long and short options)

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