SOHU

Shiwei Zhang
April 7, 2013
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
...
Thesis: Severely undervalued

Methodology:
Sum of the Parts
Comparables Valuation
Comparables better suited for tech & int...
Business Unit Valuation

Sohu.com

Yahoo

• Founded 1996

• Founded 1994

• 178 MM monthly unique
visitors, ranked #16 glo...
Business Unit Valuation

Sohu TV

Youku Tudou (think
Hulu)

• 2012Q4 Revenue 70% YoY
growth

• 2012Q4 Revenue 30% YoY
grow...
Business Unit Valuation

Sogou

Baidu (think Google)

• 2013Q1 Customer 10% YoY
growth

• 2013Q1 Search volume -10%
YoY de...
Business Unit Valuation
Changyou (Nasdaq:
CYOU)

Sohu affiliation

• 2012Q4 Revenue 26% YoY
Growth to $623 MM

• Changyou ...
Sum of the Parts Valuation

? + $1.16 B + $1 B + $0.8 B ≥

$2.96 B > $1.79 B
Sohu is severely undervalued.

11
5 Year Stock Chart

Market cap: $1.79 B

Average Volume: 423 K

Current price: $47.04

P/E ratio: 20.3

12
Financials
As of Dec. 2012
Income Statement

Balance Sheet

Key Ratios

• Revenue: $1,079 MM
• 22.4% YoY Growth
• Gross Pr...
Trading below breakup value
• Theories:
• Operational: Disynergies among different business units
• Transactional: Fees go...
Investment Rationales

The Positives

The Negatives

IPO of Changyou subdiary 7
Road (on track)

Sohu TV dragging the whol...
China Internet Users

Online Video Users to Reach 450 Million by 2012

Millions
600

100%
90%

500

80%

Internet Users
70...
Market size
• 4.1 billion hours watched in August--comScore

• Youtube monthly average 4 billion hours (70% intl).
• Hulu ...
Exit

When any one or more of the subsidiaries go public, or
after holding for 2 years, or the company goes private.

18
Thank you.
Shiwei Zhang
Shiwei.Zhang47@gmail.com

19
Appendix

20
China Internet
• 538 million internet users

21
2012Q4 China Online Gaming Market Share

22
2012 Q4 Market Share in Revenue

Youku
22%

Tudou
12%

Sohu
12%
Tencent
5%

iQiyi
7%

CR4: 51%
CR8: 85%
23
2012 Q4 Market Share in DAU

iFeng
6%
PPTV
6%

CNTV
7%

Youku
20%

LeTV
7%

Tudou
11%

Xunlei
10%

iQiyi
13%

Tencent
9%
S...
2012 Q4 Market Share in time spent

CNTV
4%

iFeng
3%

PPTV
5%

Youku
25%

Tencent
5%

Xunlei
6%

LeTV
10%

Tudou
12%

Soh...
Revenue Sources
As of Dec. 2012

26
Future – Mobile, Content

27
Mobile
• China Mobile Internet Users (2012 1H) 388 million

• In 2012 1H mobile internet users surpassed PC internet
users...
3G User Growth
China 3G user to reach 300 million by the end of 2012
China 3G user to reach 300 million by 2012
1,200

30%...
Sogou Typing & Search

Weather

TV show

30
Data Source
iResearch

CNNIC – China Internet Network Information Center
comScore

31
Thanks!
Shiwei Zhang
Shiwei.Zhang47@gmail.com

32
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Long Sohu

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Long Sohu

  1. 1. SOHU Shiwei Zhang April 7, 2013
  2. 2. Proposal: Long SOHU (Nasdaq: SOHU) Severely undervalued Chinese Internet Player 2
  3. 3. Chairman & CEO Charles Zhang 3
  4. 4. Business Units 4
  5. 5. 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
  6. 6. Thesis: Severely undervalued Methodology: Sum of the Parts Comparables Valuation Comparables better suited for tech & internet company than DCF 6
  7. 7. Business Unit Valuation Sohu.com Yahoo • Founded 1996 • Founded 1994 • 178 MM monthly unique visitors, ranked #16 globally by ComScore • 470 MM monthly unique visitors, ranked #4 globally by ComScore • 2012Q4 25% YoY traffic growth • Revenue $5 B • Profit $4 B • Revenue ? • Valuation: • Profit ? • Valuation ? • P/E: 7.11 • Mkt cap $25.66 B
  8. 8. Business Unit Valuation Sohu TV Youku Tudou (think Hulu) • 2012Q4 Revenue 70% YoY growth • 2012Q4 Revenue 30% YoY growth • 2012Q4 Market Share: • 2012Q4 Market Share: • Revenue : 12%, #3 • Revenue: 34%, #1 • DAU: 11% #4 • DAU: 31%, #1 • Average Time Spent: 10%, #4 • Content differentiation: Focus on documentary and TV shows • Valuation for Sohu: $2.66 B * 0.3 = $0.80 B • Average Time Spent: 37%, #1 •Valuation: • Mkt cap: $2.66 B
  9. 9. Business Unit Valuation Sogou Baidu (think Google) • 2013Q1 Customer 10% YoY growth • 2013Q1 Search volume -10% YoY decrease • 2013Q1 Search volume 1% YoY growth • 2012Q4 Revenue 41% growth YoY to $1 B • 2012Q4 Revenue 78% growth YoY to $41 MM • 2012Q4 70.81% mkt share • 2012Q4 7.6% mkt share • Valuation: • Goal: Spin-off & IPO • Valuation for Sohu: $29.2 B* 4% = $1.16 B • P/E: 17.3 • Mkt cap: $29.2 B
  10. 10. Business Unit Valuation Changyou (Nasdaq: CYOU) Sohu affiliation • 2012Q4 Revenue 26% YoY Growth to $623 MM • Changyou spun-off from Sohu in 2009 and went IPO • 2012Q4 Profit 15% YoY Growth to $282 MM • 66.7% equity owned by Sohu • 2012Q4 Registered accounts 41% YoY Growth to 248 MM • 80% voting power owned by Sohu • 2012Q4 Average revenue per active paying account 60% YoY growth to $58.8 • Valuation for Sohu: $1.5 B * 66.7% = $1 B • Valuation: • P/E 5.35 • Mkt Cap: $1.5 B
  11. 11. Sum of the Parts Valuation ? + $1.16 B + $1 B + $0.8 B ≥ $2.96 B > $1.79 B Sohu is severely undervalued. 11
  12. 12. 5 Year Stock Chart Market cap: $1.79 B Average Volume: 423 K Current price: $47.04 P/E ratio: 20.3 12
  13. 13. Financials As of Dec. 2012 Income Statement Balance Sheet Key Ratios • Revenue: $1,079 MM • 22.4% YoY Growth • Gross Profit: $705 MM • 65% Margin • EBITDA: $359MM • 33% Margin • Net Profit: $88 MM • 8.2% • $2,076 MM Total Asset • $1,232 MM Total Current Asset • $541 MM cash • $991 MM Total Liabilities • $552 MM Total Current Liabilities • • • • • EV/EBITDA: 3.4x EV/Sales: 1.1x P/E: 20.3 Current ratio: 2.23 5 Year Revenue CAGR: 41% 13
  14. 14. 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 14
  15. 15. Investment Rationales The Positives The Negatives IPO of Changyou subdiary 7 Road (on track) Sohu TV dragging the whole group IPO of Sogou (on track) IPO of Sohu TV Privitization of Sohu 15
  16. 16. China Internet Users Online Video Users to Reach 450 Million by 2012 Millions 600 100% 90% 500 80% Internet Users 70% 400 60% 300 50% Online Video Users Penetration 40% 200 30% 20% 100 10% 0 0% 2006 2007 2008 2009 2010 2011 2012 16
  17. 17. Market size • 4.1 billion hours watched in August--comScore • Youtube monthly average 4 billion hours (70% intl). • Hulu 2011 revenue -- $420 million Online Video Market Size (in million $) 416 $450 358 $400 $350 303 $300 278 231 $250 $200 155 $150 $100 289 159 156 106 70 $50 $0 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 17
  18. 18. Exit When any one or more of the subsidiaries go public, or after holding for 2 years, or the company goes private. 18
  19. 19. Thank you. Shiwei Zhang Shiwei.Zhang47@gmail.com 19
  20. 20. Appendix 20
  21. 21. China Internet • 538 million internet users 21
  22. 22. 2012Q4 China Online Gaming Market Share 22
  23. 23. 2012 Q4 Market Share in Revenue Youku 22% Tudou 12% Sohu 12% Tencent 5% iQiyi 7% CR4: 51% CR8: 85% 23
  24. 24. 2012 Q4 Market Share in DAU iFeng 6% PPTV 6% CNTV 7% Youku 20% LeTV 7% Tudou 11% Xunlei 10% iQiyi 13% Tencent 9% Sohu 11% CR4: 64% CR8: 94% 24
  25. 25. 2012 Q4 Market Share in time spent CNTV 4% iFeng 3% PPTV 5% Youku 25% Tencent 5% Xunlei 6% LeTV 10% Tudou 12% Sohu 10% iQiyi 20% CR4: 77% CR8: 97% 25
  26. 26. Revenue Sources As of Dec. 2012 26
  27. 27. Future – Mobile, Content 27
  28. 28. 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
  29. 29. 3G User Growth China 3G user to reach 300 million by the end of 2012 China 3G user to reach 300 million by 2012 1,200 30% 1,112 986 1,000 859 800 747 20% Mobile phone user 600 3G user 3G penetration rate 400 301 200 10% 128 47 12 0 0% 1 2 3 4 29
  30. 30. Sogou Typing & Search Weather TV show 30
  31. 31. Data Source iResearch CNNIC – China Internet Network Information Center comScore 31
  32. 32. Thanks! Shiwei Zhang Shiwei.Zhang47@gmail.com 32

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