Prospectus Summary
The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs, discussed under “Risk Factors”, before deciding whether to buy our ADSs.
Overview
We are China’s leading online game company in terms of the size and diversity of our game portfolio. Our online game revenues and game player base are also among the largest in China. Through our extensive experience in the online game industry in China, we have created a scalable approach to develop, source and operate online games, as well as license our games to third parties. We use multiple channels to assemble a large and diversified game portfolio of various genres. We operate a nationwide, secure network to host hundreds of thousands of game players playing simultaneously, and monitor and adjust the game environment to optimize our game players’ experience.
Our online game business includes the business of developing, operating and licensing our massively multi-player online role-playing games, or MMORPGs, and advanced casual games, which are collectively referred to in this prospectus as our online games. Advanced casual games, which is a sub-category of casual games, are generally less time consuming than MMORPGs but possess certain elements of MMORPGs including a story line, elaborate graphics, availability of virtual items and frequent interactions among game players. We develop and source a broad array of game content through multiple channels, including in-house development, licensing, investment and acquisition, co-development, and co-operation. Through these channels, we have built a large, diversified game portfolio and a robust game pipeline. As of August 31, 2009, we operated 18 MMORPGs and 11 advanced casual games and had 16 MMORPGs and eight advanced casual games in our announced pipeline.
Our game player base, which consisted of over 9.73 million active paying accounts for the three-month period ended June 30, 2009, is one of the largest in China. Active paying accounts refers to the number of game player accounts that spend virtual currency at least once during a given period and includes accounts of game players who spend virtual currency in beta testing of our online games. We seek to strengthen our game players’ loyalty by, among other things, closely monitoring our players’ preferences and introducing updates, expansion packs and other game improvements in a timely manner. An expansion pack is an addition to an existing game that usually includes additional game play areas, weapons, objects or an extended story line to a previously released game. We believe the size of our game player base is a key factor in attracting and retaining new game players and additional game content.
We are a leader in the development and innovation of China’s online game industry. In 2003, we launched The World of Legend, or Woool, which we developed in-house and was one of China’s first domestically developed MMORPGs. We were among the first in China to adopt the item-based revenue model for advanced casual games and were the first to adopt this revenue model for MMORPGs on a large scale, which has since become the prevailing revenue model in China. In 2006, we established 18 Capital, which is one of the first investment initiatives in China focused exclusively on investing in independent online game development and operating studios.
Our online game business has been widely recognized in China with our online games receiving numerous industry and user awards in China. For example, our online games that have won awards include:
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1We use two different revenue models for all games that we operate: item-based and time-based. Compared with the time-based model, under which game players pay for game-playing time, the item-based model allows game players to play the basic features of the game for free. Game players may then choose to purchase virtual items that enhance their playing experience, such as weapons, clothing, accessories and pets. Most of our virtual items are priced between less than US$0.01 and US$1.47. However, unit prices of certain virtual items can be as high as approximately US$129. We have adopted the item-based model for substantially all of our MMORPGs and all of our advanced casual games.
Our online game business was founded by Shanda Interactive Entertainment Limited, or Shanda Interactive, in 2001 and was operated by Shanda Interactive until Shanda Interactive’s reorganization effective July 1, 2008, which we refer to as the reorganization in this prospectus. Pursuant to the reorganization, Shanda Interactive transferred substantially all of its assets and liabilities related to the online game business to us. We have benefited from and intend to continue leveraging our relationship with Shanda Interactive which, through Shanda Online and its variable interest entities, or VIEs, operates an integrated service platform on which diverse multi-media content is offered, including online games, literature and music. By offering our online games through this platform, we can access Shanda Interactive’s large user base and broaden our marketing reach. In addition, we have successfully established a separate brand identity, “Shanda Games”, building on Shanda Interactive’s established brand name as one of China’s leading interactive entertainment media companies. We believe our powerful brand in China helps us to further strengthen our leading industry position.
Our net revenues increased 45% from RMB2,322.8 million in 2007 to RMB3,376.8 million (US$494.3 million) in 2008, of which 65.7% was derived from online games licensed from third parties, and 43% from RMB1,540.0 million in the six months ended June 30, 2008 to RMB2,198.5 million (US$321.9 million) in the six months ended June 30, 2009, of which 69.8% was derived from online games licensed from third parties. Our net income attributable to our company increased 58% from RMB591.9 million in 2007 to RMB935.5 million (US$136.9 million) in 2008, and 75% from RMB382.7 million in the six months ended June 30, 2008 to RMB671.2 million (US$98.3 million) in the six months ended June 30, 2009.
Industry Background
According to the International Data Corporation, or IDC, the number of China’s online game players reached 49.4 million in 2008, which we believe was the largest online game population in Asia, generating revenues of US$2.7 billion, representing a 76.6% increase over 2007. According to IDC, China’s online game revenues are expected to grow to US$5.8 billion by 2013, representing a compound annual growth rate, or CAGR, of 16.7% from 2008 to 2013. The number of paying online game players is expected to grow from 30.4 million in 2008 to 59.5 million in 2013, representing a CAGR of 14.3%.
Many factors have supported and we believe are likely to continue to drive the growth in the online game industry in China, including the following:
Trends in China’s online game industry include the following:
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1Our Strengths
We believe that the following competitive strengths contribute to our success and differentiate us from our competitors:
Our Strategies
We aim to become a leading global online game company. Our business strategies primarily include:
Our Challenges
The successful execution of our strategies is subject to certain risks and uncertainties, including those relating to:
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1Our History and Corporate Structure
Our online game business was founded by Shanda Interactive, our parent, in 2001 and was operated by Shanda Interactive through various subsidiaries and VIEs until the reorganization effective July 1, 2008. In November 2001, Shanda Interactive launched its first online game, Legend of Mir II, or Mir II, which it had licensed from Actoz Soft Co., Ltd., or Actoz. In October 2003, Shanda Interactive launched Woool. In May 2004, Shanda Interactive completed an initial public offering of ADSs. Shanda Interactive’s ADSs are traded on the NASDAQ Global Select Market under the symbol “SNDA”.
As part of the reorganization, we were incorporated in the Cayman Islands on June 12, 2008 as a wholly-owned subsidiary of Shanda Interactive to be the holding company for the online game business. Pursuant to a Master Separation Agreement, Shanda Interactive transferred substantially all of its assets and liabilities related to its online game business to us. Concurrently, we transferred to Shanda Interactive certain assets and liabilities not related to the online game business. See “Our Relationship with Shanda Interactive” for a description of the Master Separation Agreement and other agreements relating to the reorganization. As a result of the reorganization and in order to comply with PRC laws restricting foreign ownership in the online game business in China, we conduct our online game business through Shanghai Shulong Technology Development Co., Ltd., or Shanghai Shulong, which we control through a series of contractual arrangements, including VIE agreements, between our wholly-owned subsidiary, Shengqu Information Technology (Shanghai) Co., Ltd., or Shengqu, and both Shanghai Shulong and its shareholders. The VIE agreements are a series of contractual arrangements between us, on the one hand, and our PRC operating companies and their shareholders, on the other hand, including contracts relating to the provision of services, software licenses and equipment, and certain shareholder rights and corporate governance matters. As a result of these contractual arrangements, we are considered the primary beneficiary of Shanghai Shulong and its subsidiaries and accordingly, consolidate the results of operations of Shanghai Shulong and its subsidiaries in our financial statements. See “Our History and Corporate Structure” for a detailed discussion of these contractual arrangements.
In the second quarter of 2009, Shanda Interactive transferred to us its entire equity interest in Actoz for a cash consideration of US$70.2 million. For additional details on the basis of preparation of our consolidated financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — The Reorganization and the Basis of Preparation” and the financial statements included elsewhere in this prospectus.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1The following diagram illustrates our corporate structure and the corporate structure of Shanda Online, an entity controlled by Shanda Interactive, immediately prior to this offering.
callerid=999 iwidth=456 length=60 End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1Our Relationship with Shanda Interactive
Prior to the reorganization, our online game business was operated by Shanda Interactive, our parent, through its various subsidiaries and VIEs. In connection with the reorganization, which became effective on July 1, 2008, we have entered into agreements with Shanda Interactive with respect to various ongoing relationships between the two companies, including a Master Separation Agreement, a Non-Compete and Non-Solicitation Agreement, a Cooperation Agreement and a Sales Agency Agreement. These agreements include provisions relating to (i) the transfer of assets and liabilities related to the online game business from Shanda Interactive to us, (ii) cross-indemnification of liabilities arising from breaches of the Master Separation Agreement or any related intercompany agreement, (iii) limitations on Shanda Interactive from competing with us in the online game business for a five-year period commencing July 1, 2008 with certain exceptions and (iv) our engagement of certain VIEs of Shanda Online to provide certain services that are critical to our business, including online billing and payment, user authentication, customer service, anti-fatigue compliance, prepaid card marketing and distribution and data support services for a five-year period commencing July 1, 2008. For additional details of our contractual arrangements with VIEs of Shanda Online and the fees that we pay these VIEs, see “Our Relationship with Shanda Interactive”. A majority of our executive officers and employees are former employees of Shanda Interactive.
Upon the completion of this offering, Shanda Interactive will continue to be our controlling shareholder, with a shareholding of % of the combined total of our outstanding Class A and Class B ordinary shares, representing % of the voting rights of the combined total of our outstanding Class A and Class B ordinary shares due to the proportionately greater voting rights of the Class B ordinary shares it holds, which are entitled to 10 votes on matters subject to shareholders’ vote (as compared with one vote for Class A ordinary shares) or, assuming the underwriters exercise their over-allotment option to purchase additional ADSs in full, % of our combined total outstanding Class A and Class B ordinary shares, representing % of the combined total voting rights of our outstanding Class A and Class B ordinary shares. However, Shanda Interactive is not subject to any contractual obligation to maintain its share ownership other than the 180-day lock-up period as described in “Underwriting”.
We believe that our establishment as a standalone entity to focus on the online game business as part of the reorganization:
Our Corporate Information
Our principal executive offices are located at No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai, 201203, People’s Republic of China, and our telephone number is +86 (21) 5050-4740. Our website address is http://www.shandagames.com. The information on our website does not form a part of this prospectus. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
End box 1 END PAGE WIDTH PAGEBREAK BEGIN PAGE WIDTH Begin box 1Conventions That Apply to This Prospectus
Unless otherwise indicated, information in this prospectus assumes that the underwriters have not exercised their over-allotment option to purchase up to additional ADSs representing Class A ordinary shares from the selling shareholder and assumes that there has been no vesting of options to purchase Class A ordinary shares or restricted shares granted to our executive officers and employees.
Except where the context otherwise requires and for purpose of this prospectus only:
This prospectus contains translations of certain Renminbi, or RMB, amounts into U.S. dollars at the rate of RMB6.8302 to US$1.00, the noon buying rate in effect on June 30, 2009. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or can be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On August 28, 2009, the daily exchange rate reported by the Federal Reserve Board was RMB6.8300 to US$1.00.
References in this prospectus to the operations of our business, financial condition and results of operations with respect to the period from January 1, 2007 to June 30, 2008 are to Shanda Interactive’s online game business operations as conducted by Shanda Interactive’s subsidiaries and VIEs. References in this prospectus to the operations of our business, financial condition and results of operations with respect to the period from July 1, 2008 to June 30, 2009 are to Shanda Games, or our operations as a standalone company subsequent to the reorganization. Since July 1, 2007, the results of operations of Actoz have been consolidated into our results of operations.
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