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Shanda's Cloudary Refiles NYSE IPO

SEC, 8/24/11

Cloudary Corporation, a wholly owned online literature subsidiary of Chinese online media provider and game operator Shanda Interactive (Nasdaq: SNDA), has filed its IPO prospectus to list American Depositary Shares (ADSs) on the New York Stock Exchange under the symbol "READ."

Cloudary currently offers free as well as paid premium content. Cloudary generates revenues primarily by charging users for viewing paid content on its websites and for using its community tools and through revenue-sharing arrangements with other distribution channel providers, including e-readers and mobile operators. Cloudary licenses certain content rights to online game companies and television and film studios and also sells advertisements on its websites. Cloudary generates revenues from its offline publishing business by selling books through chain and online bookstores and wholesalers.

Net revenues increased to RMB 311.4 mln (USD 48.2 mln) in the first half of 2011, up 111.3% YoY from RMB 147.4 mln in the first half of 2010. Net loss decreased to RMB 14.2 mln (USD 2.2 mln) in the first half of 2011 from RMB 22.2 mln in the first half of 2010.

Cloudary's online literature library, consisting of literary works generated by its online community, had over 5.4 mln titles as of June 30, 2011. In the first half of 2011, an average of 58 mln Chinese characters were uploaded daily to this library. In addition, Cloudary offered over 84,600 audio book chapters and more than 1,010 electronic magazines on its platform as of June 30, 2011. Further, as of June 30, 2011, more than 270 third-party content providers, including publishers and authors, had agreed to make more than 41,370 copyrighted books available on the platform. The library is also complemented by Cloudary's offline publishing business, which in 2010 published two of the top three bestselling literature books in China, according to publishing industry market research firm Openbook.

In H1 2011, net revenues from Cloudary's online business, which includes revenue from online paid users, wireless services, online advertising, copyright licensing, and other online services, rose 129.7% YoY to RMB 184.71 mln.

Revenue from online paid users rose 103.4% YoY to RMB 79.53 mln. Cloudary had an aggregate of 86.2 mln registered users as of June 30, 2011, among which only 1.6% spent money in the second quarter of 2011, or 1.4 mln active paying users, up 92.1% YoY. Cloudary charges approximately RMB 0.02-0.05 per 1,000 Chinese characters for its premium content. Average net revenue per active paying user rose 3.2% YoY in H1 2011 to RMB 32.7. Average net revenue per active paying user in the fourth quarter of 2008, 2009 and 2010 was RMB 27.3, RMB 30.5 and RMB 34.8, respectively.

Revenue from Cloudary's wireless service rose 237% YoY to RMB 73.7 mln, primarily as a result of the increase in the number of titles made available to China Mobile (NYSE: CHL; 0941.HK) and rapid growth of total fees paid by mobile users to access Cloudary's literary content through China Mobile's wireless network. The number of titles made available to China Mobile's users increased to 26,773 titles in the first half of 2011 from 15,263 titles in the first half of 2010. Average net revenue per title rose from RMB 1,433 in H1 2010 to RMB 2,408 in H1 2011. In 2010 and the six months ended June 30, 2011, Cloudary derived approximately 15.0% and 22.7%, respectively, of net revenues from revenue-sharing arrangements with China Mobile with respect to Cloudary's wireless services. The agreements with China Mobile typically have a term of one or two years.

Revenue from Cloudary's online advertising business grew 65.7% YoY to RMB 15.25 mln. The number of advertisers that used online advertising services decreased to 113 in the first half of 2011 from 135 in the first half of 2010, primarily because Cloudary's advertising agencies focused their selling efforts on advertising clients that can contribute more revenues and did not renew the contracts with the advertisers who contributed lower revenues in 2010. In the first half of 2010 and 2011, the average net revenue per advertiser was RMB 68,154 and RMB 134,917, respectively.

Revenue from copyright licensing increased 27.1% YoY to RMB 10.73 mln. Revenue from other online business grew 205.2% YoY to RMB 5.5 mln. There were 122 and 328 copyright licensing titles that contributed to Cloudary's revenues from copyright licensing in the first half of 2010 and 2011, respectively. The average price per copyright licensing title was RMB 69,213 and RMB 32,712 in the first half of 2010 and 2011, respectively. The decrease in the average price per copyright licensing title from the first half of 2010 to the first half of 2011 was primarily because Cloudary licensed more titles to offline book publishers, for which it usually charges lower licensing fees compared to the fees it charges for the development of games, television series or movies.

Revenue from Cloudary's offline business rose 89.2% YoY to RMB 126.73 mln. The number of books Cloudary sold and collected payment for increased to 12.0 mln in the first half of 2011 from 6.2 mln in the first half of 2010.

Copyright licensing cost relating to its online business has historically accounted for the largest portion of Cloudary's cost of revenues. In 2008, 2009, 2010 and the six months ended June 30, 2011, copyright licensing cost relating to its online business constituted approximately 75.9%, 54.9%, 37.4% and 48.9%, respectively, of its total cost of revenues.

To view Cloudary's full amended IPO filing, please click here.

Editor's Note: For more information on this topic, please see "Cloudary Files for NYSE IPO," MD 5/25/11 issue, and "Cloudary Postpones US IPO," MD 7/21/11 issue.

Keywords: READ mobile literature Shanda China Mobile Internet IPO NYSE loss revenue wireless online advertising online literature online media copyright SNDA CHL registered users 0941.HK Cloudary H1 2011 profit

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