CICC-Diversifying Portfolio with a Promising Outlook-120202

Please read carefully the important disclosures at the end of this report

Initial Coverage

February 2, 2012 Internet RESEARCH
ACCUMULATE
Changyou (http://wendang.chazidian.com)
Yu JIN
SFC CE Ref: ALU931
jinyu@http://wendang.chazidian.com
Martin BAO
rencheng.bao@http://wendang.chazidian.com



Diversifying Portfolio with a Promising Outlook
Financial highlights
Ear ni ngs Hi ghl i ght s
( US$ mn) 2009A 2010A 2011E 2012E 2013E
Net revenues 267.6 327.1 447.3 561.2 623.3
(+/ -) 33% 22% 37% 25% 11%
Gross profit 250.1 297.3 384.7 477.3 533.7
(+/ -) 34% 19% 29% 24% 12%
Operating profit 163.9 200.8 254.6 310.3 346.4
(+/ -) 42% 23% 27% 22% 12%
Net profit 144.7 175.0 220.2 267.3 295.1
(+/ -) 34% 21% 26% 21% 10%
Ful l y di l ut ed EPS ( US$) 2.71 3.28 4.13 5.01 5.53
P/ E (x) 9.5 7.8 6.2 5.1 4.7
P/ E ex. cash (x) 7.9 5.8 4.7 3.0 1.7
Non- GAAP Earni ngs
Net profit 158.1 183.5 225.5 272.1 305.8
(+/ -) 39% 16% 23% 21% 12%
Ful l y di l ut ed EPS ( US$) 2.96 3.44 4.23 5.10 5.73
P/ E (x) 8.7 7.5 6.1 5.0 4.5
P/ E ex. cash (x) 7.2 5.6 4.6 2.9 1.7
ROA 62% 44% 32% 26% 22%
ROE 89% 55% 42% 35% 28%
Share information
N-Share
Bloomberg code CYOU US Equity
Share price US$25.74
Target price US$28.60
Daily turnover volume 358,809
52 week high/ low US$52.00/ 20.71
Market cap (mn) 1,372.9
I ssued shares (mn) 53.3
Major shareholder (%) http://wendang.chazidian.com (GAME) Ltd. 67.1%
Recent price performance
% Last week 1m 3m YTD
[ http://wendang.chazidian.com] +8.56 +11.67 -2.57 +8.52
[ NASDAQ I ndex] +0.97 +8.01 +7.94 +6.23
[ HSCEI I ndex] +1.36 +13.71 +10.94 +10.39
52wk performance
0
40
80
120
160
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12
CYOU NASDAQ Index
Source: Bloomberg, company data, CICC Research
Investment highlights
Star game leads revenue growth. Tian Long Ba Bu (TLBB) remains
highly popular among online gamers and makes a steady revenue
contribution to Changyou’s top line in an increasingly competitive
market. We expect the series’ latest major upgrade TLBB 3, launched
in October 2011, to spur further incremental growth.
Divergent outlook on games beyond TLBB. CYOU scooped the
golden ticket to the booming web game market with the acquisition
of 7Road, the developer of DD Tank. We also see potential
opportunities for CYOU in the advanced casual game segment.
However, on the MMORPG side, we are more cautious on the
outlook for Duke of Mount Dear (DMD), given 3Q11’s less than
satisfactory performance and uncertainty over planned adjustments.
Synergies with 17173. CYOU completed the acquisition of 17173 at
the end of 2011. Potential synergies include: saving on marketing
expenses and possible user traffic conversion from 17173 to CYOU
on web games.
Financials
We expect 2011/12/13 net revenue of US$447.3mn/US$561.2mn and
US$623.3mn, +37%/+25%/+11% YoY. We estimate 2011/12/13
non-GAAP EPS of US$4.23/US$5.10/US$5.73. Our forecasts
include the estimated contributions from 17173.
Valuation and recommendation
Our target price of US$28.60, implying an upside of 11.1%, is based
on 5.6x our 2012e non-GAAP P/E, 33% below CYOU’s historical
forward P/E. We are confident in the strong outlook of TLBB and DD
Tan k, and see synergies from the 17173 acquisition. .
Risks
Key downside risks: 1) Unexpected loss of popularity with TLBB and
DD Tank; 2) market share loss due to increasing competition; and,
3) lower than expected performance of new games.