Long Sohu

Shiwei Zhang

April 7, 2013

SOHU

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


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


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


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

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

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

http://finance.yahoo.com/q?s=sohu&ql=1

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

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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2006 2007 2008 2009 2010 2011 2012

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Online Video Users to Reach 450 Million by 2012

Internet Users

Online Video

Users

Penetration

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

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303 289 278

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2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3

Online Video Market Size (in million $)

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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Shiwei Zhang

[email protected]

Thank you.

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Appendix

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China Internet

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• 538 million internet users

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%

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%

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%

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

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1,112

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China 3G user to reach 300 million by 2012

Mobile phone user

3G user

3G penetration rate

Sogou Typing & Search

Weather TV show

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Data Source

iResearch

CNNIC – China Internet Network Information Center

comScore

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Business Model

Youtube—UGC

Hulu—copyrighted content

Self-produced Content

Netflix

Copyright distribution

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China Online Video Industry Key Players

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Key Players

Youku Tudou

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Youku (NYSE:YOKU, Mkt cap: $2 B) is the largest online video streaming company in China. “Youtube” of China.

Business model: UGC+Hulu+Self-produce+Netflix

Focus: Comprehensive

Tudou, along with Youku, is one of the oldest players in China online streaming industry.

Business model: UGC+Hulu+Self-produce+Netflix

Focus: UGC

Key Players

iQiyi (Baidu)

Baidu (Nasdaq: BIDU, Mkt cap $33.7 B) second largest public internet company in China. “Google of China”

Joint Venture between Baidu and Provident Equity Partners.

Business Model: Hulu

Focus: Hot movies and shows

Sohu Video (Sohu)

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Sohu (Nasdaq: Sohu, Mkt cap $1.5 B). Once a giant as a news portal site like Yahoo.

Business Model: Hulu

Focus: Movies, US shows, Documentary

Key Players

Tencent Video (Tencent)

Tencent (HKG:0700, Mkt cap $60 B) the largest public internet company in China.

LeTV

LeTV(SZ:300104, $1 B) focuses on copyright distribution. The only profitable site among all.

1/3 profit from ads, 2/3 from copyright distribution

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Horizontal Integration: Youku acquires Tudou

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Vertical Integration: Baidu purchase iQiyi

Nov. 2, 2012 -- Provident equity fund exited iQiyi

What this means:

• Baidu fully owns and controls iQiyi

• iQiyi has huge capital backup

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Vertical Integration: Tencent invests in video production

$70 million investment in Huayi Brothers, largest media production in China

Established a $80 million investment fund that specializes in video content investment

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LeTV – Box strategy

Challenge:

Privilege position as an online distribution agency reduced.

Solution:

Expanding into TV.

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Shiwei Zhang

[email protected]

Thanks!

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