Sept. 25 (Bloomberg) -- Shanda Games Ltd., a unit of China’s biggest online games provider, tumbled in its first day of trading in New York as investors said the company overpriced shares in the largest U.S. initial stock sale this year.

Shanda Games, which was spun off by Shanda Interactive Entertainment Ltd. in a $1.04 billion deal, dropped 14 percent to $10.75 in Nasdaq Stock Market trading. Shanda Interactive slid 12 percent to $50, the most since October 2008.

The IPO was “priced too high,” said Stephen Parr, who oversees $30 million at Memphis-based Parr Financial Group LLC including Chinese stocks. He said he didn’t buy the shares.

Shanda Games and Shanda Interactive sold 83.5 million American depositary receipts at $12.50 apiece, the upper end of the range of $10.50 and $12.50 cited in the prospectus. Goldman Sachs Group Inc. and JPMorgan Chase & Co. managed the IPO.

Shanda Interactive is selling shares in the U.S. as equity markets in China slump. The Shanghai Composite has fallen 18 percent since this year’s peak on Aug. 4 on speculation a plunge in new lending will damp domestic spending and stifle economic growth. Metallurgical Corporation of China Ltd. debuted yesterday with the weakest first-day performance for a newly listed company in Hong Kong this year. The state-owned construction company shares fell 12 percent.

Shanda Interactive’s decision to spin off its game unit comes after Sohu.com Inc.’s successful IPO of Changyou.com Ltd in April. Changyou, an online game developer and operator, has more than doubled since it started trading on the Nasdaq. It raised $60 million in its IPO.

‘Priced at Market’

“We are pleased with this successful IPO,” Diana Li, chief executive officer of Shanda Games said in a phone interview. She declined to comment on the plunge in the stock price.

Citigroup Inc. recommended selling shares of Shanda Interactive, saying valuations are “inflated.”

“Shanda Interactive plus Shanda Games is now valued at $7.5 billion from $3.7 billion before, without any change to underlying revenue and earnings potential,” Citigroup analysts Alicia Yap and Jason Brueschke wrote in a report. “We find it hard to justify.”

Shanda Interactive shares have gained 55 percent this year, compared with a 33 percent advance for the Nasdaq. The company retains 71 percent of Shanda Game’s stock and 96 percent of voting control.

“People believe Shanda Games has been priced at market,” said Tian Hou, a New York-based analyst with Pali Capital Inc. “What’s the room to go up if it’s already priced at market?”

Web Growth

The Shanghai-based company is tapping into investor interest in game companies as Internet growth surges in China. China’s total Web-gaming market grew 77 percent to $2.7 billion last year, the company said, citing research firm IDC. The Chinese economy will grow 9.5 percent next year after expanding 8.3 percent in 2009, according to a Bloomberg survey of analysts conducted the week ended Aug. 28.

“We have a very long vision for the company,” Li said. China’s online game market is expected to grow 18 percent annually, she said. Shanda Games operates 31 games and has 24 more in the pipeline, according to Li.

Shanda Games increased first-half profit 75 percent as it attracted more players with games such as MIR 2 and Aion in the world’s biggest online market. The company will speed up new product development and offer more titles from outside developers as competition from Chinese rivals including NetEase.com Inc. and Changyou.com intensifies.

“We are seeing more and more game developers in China starting out, and this will benefit publishers like Shanda,” said Eric Wen, an analyst at Mainfirst Securities. Rivals such as NetEase and Changyou rely more on self-developed games, said Wen, who rates shares of parent Shanda Interactive “buy.”

Profit Rises

First-half profit rose to 671.2 million yuan ($98.3 million) from 382.8 million yuan a year earlier, according to Shanda Games’ IPO prospectus. Sales climbed 43 percent to 2.03 billion yuan.

Shanda Interactive, which derived 96 percent of its 2008 revenue from games, said it will focus on developing other Web businesses. In June, the company bought control of Hurray! Holding Co., a Chinese Internet-music provider.

The parent’s other Web businesses include an online- literature unit that accounts for more than 80 percent of the market in China, Jin Yoon, an analyst at Nomura Holdings Inc., wrote in a May 26 report.

The unit’s shares trade on the Nasdaq Stock Market under the ticker “GAME.”

To contact the reporters on this story: Tim Mullaney in New York at tmullaney1@bloomberg.net; Tian Huang in New York at thuang57@bloomberg.net.

Last Updated: September 25, 2009 16:22 EDT