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Shiwei Zhang
April 7, 2013
SOHU
Proposal: Long SOHU (Nasdaq: SOHU)
Severely undervalued Chinese Internet Player
2
Chairman & CEO
Charles Zhang
3
Business Units
4
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%
5
Thesis: Severely undervalued
Comparables better suited for tech & internet company than DCF
Methodology:
Sum of the Parts
Comparables Valuation
6
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
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
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
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
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
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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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
100
200
300
400
500
600
2006 2007 2008 2009 2010 2011 2012
Millions
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
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 $)
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
2012Q4 China Online Gaming Market Share
22
2012 Q4 Market Share in Revenue
23
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
24
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
25
CR4: 77% CR8: 97%
Revenue Sources
As of Dec. 2012
26
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
28
3G User Growth
China 3G user to reach 300 million by the end of 2012
29
747
859
986
1,112
12 47
128
301
0%
10%
20%
30%
0
200
400
600
800
1,000
1,200
1 2 3 4
China 3G user to reach 300 million by 2012
Mobile phone user
3G user
3G penetration rate
Sogou Typing & Search
Weather TV show
30
Data Source
iResearch
CNNIC – China Internet Network Information Center
comScore
31