Changyou.com Limited (CYOU) shares may be well above their initial public offering price, but the stock continues to trade a compelling valuation given its growth.

Changyou.com Limited [[CYOU]], a China-based online game developer and operator, is up nearly 90 percent from its initial public offering. However, shares continue to trade at just 7.14x with explosive historical growth rates and strong projection for the 2009. As a result, investors may want to take a second look at this young company as a strong play on China.

During the first quarter, Changyou.com reported net income of $33.5 million on total revenues of $61.6 million. This represented a 15% increase quarter-over-quarter and a 120% increase year-over-year, suggesting that this stock may be substantially undervalued at these levels. Meanwhile, active paying accounts also increased to 2.27 million – up 50% year-over-year.

“I’m pleased to have delivered another quarter of record results as we report for the first time as a standalone public company,” said Mr. Tao Wang, Changyou’s chief executive officer. “Online games, which provide low-cost entertainment, continue to be a very popular leisure time activity in China, even in an economic downturn, making the industry a strong defensive play.

“Our peak concurrent users and active paying accounts reached record highs during the quarter, demonstrating the efficacy of our strategy of focusing on the user experience. We continued to leverage synergies with our parent company Sohu.com Inc. (Sohu) and our expanded offline marketing efforts to reach gamers in new cities and increase our penetration in existing cities.

“With our strong execution capabilities, I’m confident that we can successfully extend the lifespan of our existing games and release new titles that capture the imagination and mindshare of China’s growing population of online gamers.”

In the end, Changyou.com trades with a conservative historical P/E to growth ratio of around 0.1 and a future ratio of 0.5. These numbers suggest that the stock is greatly undervalued at these levels given its potential growth rates, and may therefore represent a compelling opportunity for investors interested in adding a Chinese element to their portfolio.

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