- Sohu is a Chinese internet company with business units in portal, online gaming, online video, and search. It owns majority stakes in Changyou (online gaming) and Sogou (search). - The presentation argues that Sohu is severely undervalued based on a sum-of-the-parts valuation of its business units compared to relevant competitors. Valuations of individual units suggest a total value over $2.96 billion compared to Sohu's market cap of just $1.79 billion. - Near-term triggers for reducing the valuation gap include potential IPOs of Changyou, Sogou, and Sohu TV, as well as the possibility of Soh

1. SOHU
Shiwei Zhang
April 7, 2013

2. Proposal: Long SOHU (Nasdaq: SOHU)
Severely undervalued Chinese Internet Player
2

3. Chairman & CEO
Charles Zhang
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4. Business Units
4

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%
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6. Thesis: Severely undervalued
Methodology:
Sum of the Parts
Comparables Valuation
Comparables better suited for tech & internet company than DCF
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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. 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. 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. 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. Sum of the Parts Valuation
? + $1.16 B + $1 B + $0.8 B ≥
$2.96 B > $1.79 B
Sohu is severely undervalued.
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12. 5 Year Stock Chart
Market cap: $1.79 B
Average Volume: 423 K
Current price: $47.04
P/E ratio: 20.3
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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%
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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
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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
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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
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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
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18. 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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19. Thank you.
Shiwei Zhang
Shiwei.Zhang47@gmail.com
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20. Appendix
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21. China Internet
• 538 million internet users
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22. 2012Q4 China Online Gaming Market Share
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23. 2012 Q4 Market Share in Revenue
Youku
22%
Tudou
12%
Sohu
12%
Tencent
5%
iQiyi
7%
CR4: 51%
CR8: 85%
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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%
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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%
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26. Revenue Sources
As of Dec. 2012
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27. Future – Mobile, Content
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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
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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
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30. Sogou Typing & Search
Weather
TV show
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31. Data Source
iResearch
CNNIC – China Internet Network Information Center
comScore
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32. Thanks!
Shiwei Zhang
Shiwei.Zhang47@gmail.com
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