Tuesday, February 2, 2010

Tuesday, February 2, 2010 Global Tech Day [Morgan Stanley]

Sohu.com – 4Q09: Fueling Growth with Two Strong Engines (SOHU, $50, O/A) Jenny Wu / Richard Ji / Philip Wan / Lisa Yuan

 Earnings in line – Sales of US$135.8mn dipped 1% QoQ, in line with guidance. Non-GAAP fully diluted EPS was US$0.92, in line with our estimate.

What we liked – 1) Online gaming sales grew 3% sequentially, in line with the high-end of guidance, with PCU and ARPU expanding 9% and 3% QoQ, respectively. 2) Paid search revenue surged 28% QoQ and 80% YoY, accounting for 6% of total advertising sales, up from 3% a year

 What concerned us – 1) Sohu guided for advertising sales to decline 14-18% QoQ, due to the late timing of Chinese New Year in 2010. 2) Sales from mobile value-added services fell 7% QoQ, ~10% below guidance, as China Mobile suspended its WAP billing services to clean up mobile content.

 Fueling growth with two strong engines – Our DCF-based fair value of $76.2 per share implies ~50% upside. On our calculations, Sohu's current stock price implies that, excluding the value for its online gaming business, its ad business is priced at a P/E of only 4-5x on our 2010 forecasts, or ~70% discount to Sina's. In our view, Sohu has built a strong position in both online ad and online gaming. Notably, 1) Sohu.com is ranked among top five online portals by traffic in China. 2) Sohu secured ~20% sales market share in online brand ad in China in 2009, second only to Sina. 3) We forecast Sohu's online ad sales may climb +20% in 2010, benefiting from ad recovery in China. 4) ChangYou, Sohu's online gaming subsidiary, ranked No. 5 in online gaming sales in 2009, vs. a niche player in 2006. It is on track to release its first 3D game, ZHYX, in 2Q10 and its highly anticipated 2.5D game, DMD, in 3Q10, which should become new growth drivers, in our view.


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