long sohu
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Shiwei Zhang
April 7, 2013
SOHU
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Proposal: Long SOHU (Nasdaq: SOHU)
Severely undervalued Chinese Internet Player
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Chairman & CEO
Charles Zhang
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Business Units
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Business Units
• Portal: Sohu.com
• #1 portal site in China: news, multi-media
• Changyou (Nasdaq: CYOU) : Online Gaming
• Top 3 leading online gaming service provider in China
• 67% owned by Sohu
• Sohu TV
• Top 3 leading online video site
• Sogou: Typing, Browser, Search
• Largest Chinese typing software – 80%
• Third largest browser – 8.9%
• Third largest search engine – 7.6%
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Thesis: Severely undervalued
Comparables better suited for tech & internet company than DCF
Methodology:
Sum of the Parts
Comparables Valuation
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Business Unit Valuation
Sohu.com
• Founded 1996
• 178 MM monthly unique visitors, ranked #16 globally by ComScore
• 2012Q4 25% YoY traffic growth
• Revenue ?
• Profit ?
• Valuation ?
Yahoo
• Founded 1994
• 470 MM monthly unique visitors, ranked #4 globally by ComScore
• Revenue $5 B
• Profit $4 B
• Valuation:
• P/E: 7.11
• Mkt cap $25.66 B
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Business Unit Valuation
Sohu TV
• 2012Q4 Revenue 70% YoY growth
• 2012Q4 Market Share:
• Revenue : 12%, #3
• DAU: 11% #4
• Average Time Spent: 10%, #4
• Content differentiation: Focus on documentary and TV shows
• Valuation for Sohu: $2.66 B * 0.3 = $0.80 B
Youku Tudou (think Hulu)
• 2012Q4 Revenue 30% YoY growth
• 2012Q4 Market Share:
• Revenue: 34%, #1
• DAU: 31%, #1
• Average Time Spent: 37%, #1
•Valuation:
• Mkt cap: $2.66 B
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Business Unit Valuation
Sogou
• 2013Q1 Customer 10% YoY growth
• 2013Q1 Search volume 1% YoY growth
• 2012Q4 Revenue 78% growth YoY to $41 MM
• 2012Q4 7.6% mkt share
• Goal: Spin-off & IPO
• Valuation for Sohu: $29.2 B* 4% = $1.16 B
Baidu (think Google)
• 2013Q1 Search volume -10% YoY decrease
• 2012Q4 Revenue 41% growth YoY to $1 B
• 2012Q4 70.81% mkt share
• Valuation:
• P/E: 17.3
• Mkt cap: $29.2 B
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Business Unit Valuation
Changyou (Nasdaq: CYOU)
• 2012Q4 Revenue 26% YoY Growth to $623 MM
• 2012Q4 Profit 15% YoY Growth to $282 MM
• 2012Q4 Registered accounts 41% YoY Growth to 248 MM
• 2012Q4 Average revenue per active paying account 60% YoY growth to $58.8
• Valuation:
• P/E 5.35
• Mkt Cap: $1.5 B
Sohu affiliation
• Changyou spun-off from Sohu in 2009 and went IPO
• 66.7% equity owned by Sohu
• 80% voting power owned by Sohu
• Valuation for Sohu: $1.5 B * 66.7% = $1 B
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Sum of the Parts Valuation
Sohu is severely undervalued.
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? + $1.16 B + $1 B + $0.8 B ≥
$2.96 B > $1.79 B
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5 Year Stock Chart
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Market cap: $1.79 B Average Volume: 423 K Current price: $47.04 P/E ratio: 20.3
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Financials
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Income Statement
• Revenue: $1,079 MM
• 22.4% YoY Growth
• Gross Profit: $705 MM
• 65% Margin
• EBITDA: $359MM
• 33% Margin
• Net Profit: $88 MM
• 8.2%
Balance Sheet
• $2,076 MM Total Asset
• $1,232 MM Total Current Asset
• $541 MM cash
• $991 MM Total Liabilities
• $552 MM Total Current Liabilities
Key Ratios
• EV/EBITDA: 3.4x
• EV/Sales: 1.1x
• P/E: 20.3
• Current ratio: 2.23
• 5 Year Revenue CAGR: 41%
As of Dec. 2012
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Trading below breakup value
• Theories:
• Operational: Disynergies among different business units
• Transactional: Fees going to I-Banks
• Financial: Uncle Sam
• Industry specific:
• Adversely impacted by other Chinese frauds
• Sohu Specific:
• Misperceptions from US investors
• A combination of vastly different businesses
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Investment Rationales
The Positives
IPO of Changyou subdiary 7 Road (on track)
IPO of Sogou (on track)
IPO of Sohu TV
Privitization of Sohu
The Negatives
Sohu TV dragging the whole group
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China Internet Users
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
100
200
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2006 2007 2008 2009 2010 2011 2012
Millions
Online Video Users to Reach 450 Million by 2012
Internet Users
Online Video
Users
Penetration
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Market size
• 4.1 billion hours watched in August--comScore
• Youtube monthly average 4 billion hours (70% intl).
• Hulu 2011 revenue -- $420 million
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70 106
155 159 156
231
303 289 278
358
416
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3
Online Video Market Size (in million $)
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Exit
When any one or more of the subsidiaries go public, or after holding for 2 years, or the company goes private.
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Appendix
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China Internet
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• 538 million internet users
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2012Q4 China Online Gaming Market Share
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2012 Q4 Market Share in Revenue
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Youku
22%
Tudou
12%
Sohu 12%
iQiyi 7%
Tencent 5%
CR4: 51% CR8: 85%
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Youku 20%
Tudou 11%
iQiyi 13%
Sohu 11%
Tencent 9%
Xunlei 10%
LeTV 7%
CNTV 7%
PPTV 6%
iFeng 6%
2012 Q4 Market Share in DAU
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CR4: 64% CR8: 94%
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Youku 25%
Tudou 12%
iQiyi 20%
Sohu 10%
LeTV 10%
Xunlei 6%
Tencent 5%
PPTV 5%
CNTV 4%
iFeng 3%
2012 Q4 Market Share in time spent
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CR4: 77% CR8: 97%
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Revenue Sources
As of Dec. 2012
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Future – Mobile, Content
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Mobile
• China Mobile Internet Users (2012 1H) 388 million
• In 2012 1H mobile internet users surpassed PC internet users (380 million)
• 27.7% (107 million) of mobile internet users watch videos online
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3G User Growth
China 3G user to reach 300 million by the end of 2012
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747
859
986
1,112
12 47
128
301
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China 3G user to reach 300 million by 2012
Mobile phone user
3G user
3G penetration rate
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Sogou Typing & Search
Weather TV show
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Data Source
iResearch
CNNIC – China Internet Network Information Center
comScore
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