JP Morgan - Qihoo 360 26 Aug 2014

8/9/2019 JP Morgan - Qihoo 360 26 Aug 2014

1/12www.jpmorganmarkets.c

Asia Pacific Equity Research26 August 2014

Qihoo 360 Technology Co. LtdOverweightQIHU, QIHU US

Reaching the intersection: ads going north whilegaming going south; cutting PT to US$145

Price: $93.87

Price Target: $145.00Previous: $170.00

China

Internet

Alex YaoAC

(852) 2800 8535

[email protected]

Bloomberg JPMA YAO

Yong Wang

(852) 2800-8579

[email protected]

J.P. Morgan Securities (Asia Pacific) Limite

YTD 1m 3m 12mAbs 14.4% -5.3% 5.4% 19.1%Rel 5.3% -7.7% -3.5% -5.5%

Bloomberg QIHU US, Reuters QIHU(Year-end Dec, $ mn) FY13 FY14E FY15E FY16E FY13 FY14E FY15E FY16E

Net Sales 671 1,357 2,050 2,802 ROE(%) 37.2% 37.7% 42.1 39.3% 52-Week range 124.42-73.0

Operating Profit (EBIT) 102 251 536 795 ROIC(%) - - - - Shares Outstg 132MEBITDA 273 430 759 1,055 Cash 1,015.8 1,224.5 1,666.1 2,321.6 Market Cap(US) US$12,391M

Pre Tax Profit 123 278 539 798 Equity 754.1 1,079.6 1,625.1 2,390.8 Free float

Reported Net profit 99 228 442 662 Qtr GAAP EPS ($) 1Q 2Q 3Q 4Q Avg daily vol. 2.7MM shareReported EPS ($) 0.76 1.66 3.22 4.83 EPS (13) 0.04 0.26 0.34 0.13 Avg daily val ($) 250.24M

P/E (x) 123.3 56.4 29.1 19.4 EPS (14) E 0.37 0.30 0.36 0.68 Dividend YieldAdj. EPS * 1.74 2.48 4.10 5.71 EPS (15) E 0.54 0.68 0.87 1.26 Index (NASD) 4538.5

Adj. P/E (X) 54.1 37.9 22.9 16.5 1M 3M 12M Price Target 145.0

EV/EBITDA (x) 45.5 28.4 15.5 10.5 Abs. Perf.(%) (5.3%) 5.4% 28.4 Price Target End Date 30-Jun-1

P/B (x) 36.6 17.2 9.7 6.1 Rel. Perf.(%) (7.3%) (3.0%) 4.3 Price Date 25 Aug 1

Y/E BPS ($) 2.56 5.46 9.68 15.33

Source: Company, J. P. Morgan estimates, Bloomberg. * Note: Excluding share-based compensation expense.

See page 9 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware thathe firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only single factor in making their investment decision.

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Price Performance

QIHU share price ($)

CCMP (rebased)

We believe margin pressure is likely to continue into 2H while a recoverymight start in 2015 as returns on investment kick in. Gaming-drivenearnings growth momentum is likely to slow down in 2015, while we seeample room for advertising revenue to ramp up in the next few years. Westill like the risk/reward profile of the stock from a PEG perspective(currently trading at 0.7x PEG, vs our target PEG multiple at 1.0x).Maintain OW, lower PT to US$145.

2Q profit beat on accounting gain; core operation in line. 2Q non-GAAP EPS of US$0.50 was 13%/9% above our/consensus est., largelydue to the US$8.4m gain on disposal. Stripping out the gain, the bottomline would have been in line with our estimate. Revenue was 2%/3%above our/consensus estimates, with non-GAAP OPM of 21.9% largelyin line.

Margin pressure to remain in 2H; expect a recovery in 2015. We seecontinued margin pressure into 2H on aggressive marketing activities,which we believe should taper off in 2015. Hence, we expect returnsfrom investment to drive margin expansion and accelerate earningsgrowth in 2015, which will likely stabilize in 2016.

Mixed growth outlook across different segments in 2015. We see apotential slowdown of IVAS revenue in 2015, given: 1) webgamemarket slowdown; and 2) challenges from Tencent on mobile gamemarket share. Nonetheless, we see multiple drivers for ads revenue,

which we believe will serve as the main top line driver in 2015. Maintain OW and cut PT to US$145 from US$170 on lower earnings

growth assumption due to a weaker gaming outlook. Our Jun-15 PT isbased on 2015E non-GAAP FD EPADS of US$4.10, a FY15-17EEPADS CAGR of 35% and a PEG of 1.0x.


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Alex Yao(852) 2800 [email protected]

Key catalysts or the stock price: Upside risks to our view: Downside risks to our view:

Mobile games distribution

Search monetization

Faster- han-expected mobile gaming market growth

Improved advertising demand

Search algorithm is behind market leader

National distribution channel is behind market leader Competition from Tencent in mobile gaming Higher-than-expected marketing spend

Key financial metrics FY13 FY14E FY15E FY16E Valuation and price target basis

Revenues (USDm) 671 1,357 2,050 2,802 We maintain Overweight on Qihoo and cut PT to US$145 from US$170.Our Jun-15 PT is based on 2015E non-GAAP FD EPADS of US$4.10, aFY15-17E EPADS CAGR of 35% and a PEG of 1.0x. Our PT implies a2015E P/E of 35x and a 2016E P/E of 25x.

Revenue growth (%) 104.0% 102.2% 51.1% 36.7%

EBITDA (USDm) 146 319 638 935EBITDA margin (%) 21.8% 23.5% 31.1% 33.4%

Tax rate (%) 19.1% 18.0% 17.9% 16.9%

Net profit (USDm) 226 340 563 783

EPS (USD) 1.74 2.48 4.10 5.71

EPS growth (%) 118.1% 42.6% 65.7% 39.1% Non-GAAP operating margin trendDPS (USD) 0.00 0.00 0.00 0.00

BVPS (USD) 2.56 5.46 9.68 15.33

Operating cash flow (USDm) 210 494 749 1020Free cash flow (USDm) 84 194 439 653

Interest cover (X) -56.6 -180.9 -271.4 -377.4Net margin (%) 33.7% 25.0% 27.4% 27.9%

Sales/assets (X) 0.6 0.7 0.8 0.8

Debt/equity (%) 0.0% 0.0% 0.0% 0.0%Net debt/equity (%) -134.7% -113.4% -102.5% -97.1%

ROE (%) 37.2% 37.7% 42.1% 39.3%

Key model assumptions FY13 FY14E FY15E FY16E

Quarterly paying users (million) 0.5 1.0 1.2 1.3Game ARPU (USD) 438 522 580 641

Source: Company and J.P. Morgan estimates. Source: Bloomberg, Company and J.P. Morgan estimates.

Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates

Sensitivity to FY14E FY15E FY14E FY15E EPS (USD) FY14E FY15E

5% chg in online ad revenue 4% 4% 3% 3% JPMe old 2.66 4.06

5% chg in internet service revenue 1% 1% 1% 1% JPMe new 2.48 4.10% chg -7% 1%

Consensus 2.52 3.98

Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan estimates.

Peer group valuation comparison

Ticker Rating Price PT Mkt Cap EV P/E P/S PEG CAGR

USDm USDm FY14E FY15E FY14E FY15E FY15E 15-17E

Qihoo QIHU US OW USD 101.8 USD 145 12,013 11,895 41.0 x 24.8 x 10.3 x 6.8 x 0.7 x 35.3%

Baidu BIDU US OW USD 214.2 USD 258 76,254 72,606 35.2 x 21.5 x 9.4 x 6.6 x 0.7 x 32.2%

Sina SINA US OW USD 46.5 USD 92 3,094 1,860 30.0 x 13.2 x 3.8 x 3.1 x 0.4 x 30.6%Sohu SOHU US N USD 61.3 USD 65 2,346 1,967 N/A -73.8 x 1.4 x 1.2 x N/A N/ATencent 700 HK N HKD 130.7 HKD 144 156,810 154,349 38.2 x 26.9 x 11.9 x 9.8 x 1.1 x 24.7%

Phoenix New Media FENG US OW USD 10.7 USD 14 820 596 14.2 x 11.1 x 2.7 x 1.9 x 0.5 x 20.8%

SouFun SFUN US N USD 11.9 USD 10 4,746 4,400 17.6 x 13.1 x 7.5 x 6.0 x 0.8 x 16.3%

YY YY US OW USD 87.5 USD 118 4,922 4,557 34.1 x 22.3 x 10.1 x 6.8 x 0.7 x 30.5%

Source: Company and J.P. Morgan estimates. Prices as of 25 Aug, 2014

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Near-term margin pressure followed by margin recovery in2015

Near-term margin pressure due to more investment in the rest of 2014

We see continued margin pressure in the second half of 2014 due to increasing

marketing activities in order to drive search and mobile monetization. More specially,

the spending will be around:

Promoting mobile products (e.g. mobile browser and mobile search app) through

pre-installations.

Building brand awareness of Qihoos mobile search service.

Hosting the 2014 China Internet Security Conference in Beijing.

But expect margins to recover in 2015

We believe the large-scale investments will begin to scale down in 2-3 quarters,leading to margin recovery in 2015.

According to management, such massive spend is unlikely to continue into 2015, as

The demand for pre-installation will gradually scale down as smartphone

penetration increases.

Qihoo has already established its market position and is approaching its

investment goals.

Figure 1: Non-GAAP margin trend of Qihoo

Source: J.P. Morgan estimates, Company data.

A mixed 2015 growth outlook

Top line growth in 1H14 has been driven by solid IVAS revenue (+154% YoY) and,to a lesser extent, online ads revenue (+102% YoY). We expect the trend to sustain

into 2H14, to support a JPMe 102% YoY growth of revenue in 2014. However,

heading into 2015, we see mixed growth outlook for different business segments and

expect ads to serve as the bigger revenue driver.

Web game: Potential impact from structural slowdown of the market

The webgame market has experienced a faster-than-expected slowdown in 2014.

This, in our view, is attributable to:

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Rise of mobile games, which capture increasing time spent from users. Total

number of webgamers has declined for the second consecutive quarter, reaching

258m in 2Q14 vs. 287m in 1Q14 and 303m in 4Q13 (Figure 2). Developers tend to co-operate with large platforms that have better publishing

efficiency. However, these large platforms have increasingly begun to operate

webgames on an exclusive basis, and this has squeezed the growth of smaller-

sized channels.

We expect the webgame market in China to grow at an 18% CAGR from 2014 to

2017 (Figure 3), compared to over 60% YoY growth in 2013, with large platforms

taking market share.

Figure 2: Number of webgamers s arted to decline

Source: GPC, CNG

Figure 3: China webgame market

Source: iResearch, J.P. Morgan estimates

Stripping out the revenue contribution from acquisition (JPMe USD18m in 2Q14),

we estimate Qihoo's webgame business grew c31% organically in 2Q. Into 2015,while we believe Qihoo could continue to outperform the market, we estimate a 25%

YoY growth for Qihoo webgame revenue, vs 22% YoY our estimate for the market.

Mobile game: Sees more challenges from Tencent

Qihoo's mobile game revenue and mobile ads revenue (largely from mobile game

developers) grew 18% QoQ/9% QoQ in 2Q14, or collectively 15% QoQ,

underperforming Tencent's 67% QoQ, despite a smaller revenue base. We believe

that:

Tencent has captured a majority portion of incremental growth of the mobile

game market due to its better content control capability;

Due to lack of control on content, Qihoos mobile game business is subject toseasonality or the game launch cycles of developers.

Hence, we expect Qihoos mobile game related revenue to grow 277% YoY in 2014,

off a low base in 2013, and slow to 35% YoY in 2015.

Advertising: Likely to become the main driver

We believe advertising revenue is likely to outperform expectations into 2015 as we

see multiple growth drivers, including:

Further PC search monetization. Search revenue grew 50% QoQ to reach

USD62m in 2Q, vs our estimate of USD53m, with total traffic share already

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reaching 30%. We expect continued traffic share gain and optimization of search

monetization system to provide potential revenue upside.

Non-game mobile ads, incl. mobile search, still not monetized as of 2Q14.Management noted that mobile search currently accounts for low-to-mid teens of

total search traffic, targeting 25% by end-2014.

Continued development of PC and mobile affiliate ads network business.

Improvement of PC start-up page monetization efficiency, especially post the

integration of MediaV.

We expect total ads revenue to grow 68% YoY in 2015, vs 51% YoY of our total

revenue growth estimates.

2Q results review

Qihoo reported 2Q non-GAAP EPS of US$0.50, which beat our estimate (US$0.44)by 13% and Bloomberg consensus (US$0.46) by 9%. The earnings surprise was

largely due to income below the line, especially a US$8.4m gain on sales of

investments.

Total revenue reached US$317m, 2% higher than our estimate US$311m and 3%

higher than consensus US$310m. Online advertising and IVAS revenue reached

US$171m and US$146m, respectively, 2%/2% higher than our estimate US$168m

and US$143m.

Cost of revenues was US$66.6m in 2Q14, 10% higher than our estimate US$60.5m.

Non-GAAP operating expenses (US$183m) were slightly lower than our estimate

US$184m.

Non-GAAP operating profit was US$70m, 5% higher than our estimate US$66.5m.

Gross margin (79%) missed our estimate by 2ppt due to higher-than-expected cost of

revenues. Non-GAAP operating margin (22%) beat our estimate slightly by 1ppt.

Table 1: Quarterly earnings review

USDm 2Q14(A) 2Q14(F) Reportedvs. JPMe

Consensus Reportedvs.

Consensus

Revenue 317.9 311.1 2% 309.5 3%Gross profit 251.3 250.6 0% 251.5 0%GM % 79% 81% 81%Operating profit (GAAP) 43.9 46.6 -6% 39.1Operating profit (Non-GAAP) 69.7 66.5 5% 60.2 16%Operating margin (Non-GAAP) 22% 21% 19%

PBT 51.7 51.5 0% 46.7 11%Net profit (Non-GAAP) 69.4 60.7 14% 60.1 15%Non-GAAP EPS (US$) 0.50 0.44 13% 0.46 9%

Source: J.P. Morgan estimates, Bloomberg, Company data.

Forecast revisions

We raise 2014/2015 revenue forecasts by 1%/2% on strong advertising outlook

driven by search monetization. This is partially offset by a cut in game revenue due

to 1) an industry-wise slowdown in the webgame market, and 2) increasing difficulty

in gaining further market share in mobile gaming due to competition from Tencent.


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We cut non-GAAP operating profit forecast in 3Q14 and 2014 by 29% and 10%,

respectively, on an expected increase in marketing activities (e.g. The Internet

Security Conference). We expect non-GAAP operating margin to rebound by 5ppt to31% in 2015 as marketing activities normalizes.

As such, we revise down non-GAAP EPS forecast in 2014 by 7% and tweak up 2015

forecast by 1ppt.

Table 2: Changes of forecasts

Previous orecast Current forecast Change in %USDm 3Q14 2014 2015 3Q14 2014 2015 3Q14 2014 2015Net revenue 362.9 1,343.9 2,004.0 361.0 1,356.9 2,050.1 -1% 1 2%Gross profit 298.9 1,098.8 1,654.8 288.0 1,084.9 1,654.6 -4% -1% 0% GM 82 82% 83% 80% 80 81%Operating profit (Non-GAAP) 120.4 386.1 632.1 85.3 348.4 639.0 -29 -10% 1% Operating margin (Non-GAAP) 33 29% 32% 24% 26 31%Net profit (Non-GAAP) 106.5 364.1 555.3 77.5 339.6 562.7 -27 -7% 1%Non-GAAP EPS (USD) $0.78 $2.66 $4.06 $0.56 $2.48 $4.10 -28 -7% 1%

Source: J.P. Morgan estimates.

Valuation

We maintain Overweight on Qihoo and cut PT to US$145 from US$170 on a lower

earnings growth assumption due to a weaker gaming outlook. We meanwhile roll

forward PT end date from December 2014 to June 2015.

Our Jun-15 PT is based on 2015E non-GAAP FD EPADS of US$4.10, a FY15-17E

EPADS CAGR of 35% and a PEG of 1.0x. We leverage PEG as our primary

valuation methodology, as it is able to balance growth prospects against P/E multiple.

Our PT implies a 2015E P/E of 35x and a 2016E P/E of 25x.

As an additional check, we conduct DCF valuation that yields a price of US$149.

Key assumptions in our DCF valuation include 1) a long-term risk-free rate of 4%, 2)

an equity risk premium of 7% in the China market, 3) a beta of 1.1, 4) a discount rate

of 12%, and 5) a terminal growth rate of 3%.


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Investment Thesis, Valuation and Risks

Qihoo 360 Technology Co. Ltd (Overweight; Price Target: $145.00)

Investment Thesis

2Q results were broadly in line on both top and bottom line. We believe margin

pressure is likely to remain in 2H while a recovery may start in 2015 as return on

investment kicks in. Gaming-driven earnings growth momentum is likely to

slowdown in 2015, while we see ample room for advertising revenue to grow into

next few years, in our view. We still like the risk/reward profile of the stock on PEG

basis (currently trading at 0.7x PEG, vs 1.0x our PT implies). Maintain OW.

Valuation

We maintain Overweight on Qihoo and cut PT to US$145 from US$170. Our Jun-15

PT is based on 2015E non-GAAP FD EPADS of US$4.10, a FY15-17E EPADS

CAGR of 35% and a PEG of 1.0x. We leverage PEG as our primary valuation

methodology, as it is able to balance growth prospects against P/E multiple.

Our PT implies a 2015E P/E of 35x and a 2016E P/E of 25x.

As an additional check, we conduct DCF valuation that yields a price of US$149.

Key assumptions in our DCF valuation include 1) a long-term risk-free rate of 4%, 2)

an equity risk premium of 7% in the China market, 3) a beta of 1.1, 4) a discount rate

of 12%, and 5) a terminal growth rate of 3%.

Risks to Rating and Price Target

Downside risks to our view include:

Search algorithm is behind the market leader.

National distribution channel is behind the market leader.

Lagged search monetization.

Competition from Tencent on mobile gaming

Higher-than-expected marketing expenses


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Qihoo 360 Technology Co. Ltd: Summary of FinancialsIncome Statement Ratio Analysis$ in millions, year end Dec FY12 FY13 FY14E FY15E FY16E $ in millions, year end Dec FY12 FY13 FY14E FY15E FY16E

Revenues 329 671 1,357 2,050 2,802 Gross margin 90.0% 86.9% 80.0% 80.7 81.5%Cost of goods sold (33) (88) (272) (395) (520) EBITDA margin 35.2% 40.7% 31.7% 37.0 37.7%

Gross Profit 296 583 1,085 1,655 2,283 Operating margin 30.1% 34.1% 26.7% 32.0 32.7%R&D expenses (45) (89) (298) (395) (538) Net margin 29.6% 33.7% 25.0% 27.4 27.9%

SG&A expenses (153) (271) (439) (620) (846) R&D/sales 13.6% 13.3% 21.9% 19.3 19.2%

Operating profit (EBIT) 49 102 251 536 795 SG&A/Sales 46.6% 40.4% 32.3% 30.3 30.2%EBITDA 116 273 430 759 1,055

Interest income 7 10 20 20 20 Sales growth 96.0% 104.0% 102.2% 51.1 36.7%Interest expense 0 (6) (18) (17) (17) Operating profit growth 169.9% 109.4% 146.8% 113.5 48.3%

Investment income (Exp.) 7 5 2 3 3 Net profit growth 199.6% 112.4% 129.8% 93.8 49.8%

Non-operating Income (expense) 7 16 25 0 0 EPS (reported) growth 191.0% 99.3% 118.4% 93.8 49.8%

Earnings before tax 63 123 278 539 798Tax (11) (23) (50) (96) (135) Interest coverage (x) NM NM NM NM NM

Net income (reported) 47 99 228 442 662Net income (adjusted) 97 226 340 563 783 Net debt to total capital (399.8%) 388.1% 845.1% 4065.3 (3357.9%)

Net debt to equity (80.0%) (134.7%) (113.4%) (102.5%) (97.1%)

EPS (reported) 0.38 0.76 1.66 3.22 4.83

EPS (adjusted) 0.80 1.74 2.48 4.10 5.71 Asset turnover 0.6 0.6 0.7 0.8 0.8BVPS 1.88 2.56 5.46 9.68 15.33 Working capital turns (x) 1.2 1.1 1.4 1.7 1.7

DPS - - - - - ROE 22.9% 37.2% 37.7% 42.1 39.3%Shares outstanding 118 120 123 123 123 ROIC - - - - -

Balance sheet Cash flow statement

$ in millions, year end Dec FY12 FY13 FY14E FY15E FY16E $ in millions, year end Dec FY12 FY13 FY14E FY15E FY16E

Cash and cash equivalents 383 1,016 1,224 1,666 2,322 Net income 47 99 228 442 662Accounts receivable 24 55 79 119 163 Depr. & amortization 17 44 68 103 140

Inventories 0 0 0 0 0 Change in working capital 4 (47) 114 101 114Others 29 87 175 252 330 Other 49 113 84 103 103

Current assets 435 1,158 1,478 2,038 2,815 Cash flow from operations 117 210 494 749 1,020LT investments 28 84 84 84 84 Capex (74) (121) (299) (308) (364)

Net fixed assets 126 164 395 600 824 Disposal/(purchase) - - - - -

Others 10 41 41 41 41 Cash flow from investing (84) (197) (299) (308) (364)

Total Assets 690 1,569 2,120 2,884 3,886 Free cash flow 37 84 194 439 653Liabilities Equity raised/(repaid) 0 0 0 0 0

ST Loans - - - - - Debt raised/(repaid) - - - - -Payables 7 25 50 72 95 Other 2 613 0 0 0

Others 197 184 384 581 794 Dividends paid - - - - -

Total current liabilities 204 209 434 653 889 Cash flow from financing 2 613 0 0 0Long- erm debt 0 0 0 0 0 Net change in cash 36 633 209 442 655

Other liabilities 8 606 606 606 606 Beginning cash 345 381 1,013 1,222 1,664Total Liabilities 211 815 1,040 1,259 1,495 Ending cash 381 1,013 1,222 1,664 2,319

Shareholder's equity 478 754 1,080 1,625 2,391

Source: Company reports and J.P. Morgan estimates.


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Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple researchanalysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document

individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the viewsexpressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part ofany of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or viewsexpressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as perKOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence orintervention.

Important Disclosures

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgancovered companies by visiting https://jpmm.com/research/disclosures ,calling 1-800-477-0406, or [email protected] with your request. J.P. Morgans Strategy, Technical, and Quantitative Research teams mayscreen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or [email protected] .

Date Rating Share Price($)

Price Target($)

30-Aug-13 OW 77.93 94.00

07-Jan-14 OW 81.40 98.00

10-Mar-14 OW 118.31 165.00

29-May-14 OW 89.98 170.00

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entireperiod.J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform theaverage total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelvemonths, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return ofthe stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, ifapplicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policyreasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not arecommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return iscompared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appearin the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans researchwebsite, www.jpmorganmarkets.com.

Coverage Universe: Yao, Alex: Baidu.com (BIDU), Cheetah Mobile Inc (CMCM), Ctrip.com International, Ltd (CTRP), Dangdang(DANG), Forgame Holdings Ltd (0484.HK), Kingsoft Corporation Limited (3888.HK), Leju Holdings Limited (LEJU), NetEase (NTES),Phoenix New Media Ltd (FENG), Qihoo 360 Technology Co. Ltd (QIHU), Shanda Games (GAME), Sina Corp (SINA), Sohu.Com

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Qihoo 360 Technology Co. Ltd (QIHU, QIHU US) Price Chart

OW $170

OW $165

OW $94 OW $98

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Aug 30, 2013.
https://jpmm.com/research/disclosureshttps://jpmm.com/research/disclosuresmailto:[email protected]:[email protected]:[email protected]://jpmm.com/research/disclosuresmailto:[email protected]:[email protected]


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(SOHU), SouFun Holdings Ltd (SFUN), Sungy Mobile Limited (GOMO), Tencent (0700.HK), Vipshop (VIPS), Xunlei Limited (XNET),YY Inc (YY), Youku Tudou Inc. (YOKU), iSoftstone (ISS)

J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2014

Overweight

(buy)Neutral

(hold)Underweight

(sell)

J.P. Morgan Global Equity Research Coverage 45% 43% 11%IB clients* 55% 49% 34%

JPMS Equity Research Coverage 46% 47% 7%IB clients* 75% 66% 54%

*Percentage of investment banking clients in each rating category.

For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a holdrating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the tableabove.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for coveredcompanies, please see the most recent company-specific research report athttp://www.jpmorganmarkets.com, contact the primary analyst

or your J.P. Morgan representative, or [email protected] .

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation basedupon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-USaffiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS,and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, publicappearances, and trading securities held by a research analyst account.

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J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing

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All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content isredistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales

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Options related research: If the information contained herein regards options related research, such information is available only to persons who have

received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options,please contact your J.P. Morgan Representative or visit the OCC's website athttp://www.optionsclearing.com/publications/risks/riskstoc.pdf

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regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England & Wales No. 2711006. Registered Office 25Bank Street, London, E14 5JP. South Africa: J.P. Morgan Equities South Africa Proprietary Limited is a member of the Johannesburg SecuritiesExchange and is regulated by the Financial Services Board. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated

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regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (JPMAL) (ABN 52 002 888 011/AFS Licence No:238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is regulated byASIC and is a Market, Clearing and Settlement Participant of ASX Limited and CHI-X. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participantof the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited

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http://www.jpmorganmarkets.com/http://www.jpmorganmarkets.com/http://www.jpmorganmarkets.com/mailto:[email protected]:[email protected]:[email protected]://www.optionsclearing.com/publications/risks/riskstoc.pdfhttp://www.optionsclearing.com/publications/risks/riskstoc.pdfhttp://www.jpmipl.com/http://www.jpmipl.com/http://www.jpmipl.com/http://www.jpmorganmarkets.com/mailto:[email protected]://www.optionsclearing.com/publications/risks/riskstoc.pdfhttp://www.jpmipl.com/


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General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co.

or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative toJPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for thesecurities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change

without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of anyfinancial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are notintended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own

independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S.affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments orannouncements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P.

Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.


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"Other Disclosures" last revised June 21, 2014.

Copyright 2014 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold orredistributed without the written consent of J.P. Morgan. #$J&098$#*P

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