Days Hao Capital maintain Qihoo 360 buy rating

Summary: Check the latest quotes Beijing time, August 27 Morning News, the U.S. investment company Days Hao Capital (T.H) released a study today, the Qihoo 360 (Nyse:qihu) stock rating remained unchanged, while its target price from 139 U.S. dollars to 1 View the latest quotes

Beijing time August 27 Morning News, the U.S. investment company Days Hao Capital (T.H) released a study today, the 360 (Nyse:qihu) 's stock rating remained unchanged, while its target price from 139 U.S. dollars to 113 U.S. dollars.

The following is a summary of the contents of the report:

Search business and other revenue sources have upside potential; maintain "buy" rating and cut target price

Qihoo 360 showed strong performance in the second quarter, with revenue and earnings per share significantly exceeding expectations. But at the same time, Qihoo 360 has revealed some operational problems, notably its mobile search and other development plans that have failed to make much headway. However, from the perspective of the future, these problems may gradually disappear.

We expect that the future benefits of Qihoo 360 include: 1 The rapid commercialization of PC search business, 2 the use of PC games for Qihoo 360 users to commercialize; 3 to commercialize the Enterprise PC and Internet security business. We believe that the valuation of Qihoo 360 still has significant upside potential. Taking these factors into consideration, we reiterated the "buy" rating for Qihoo 360, but also lowered its target price from $139 to $113.

-Search share will grow; increase revenue forecasts for fiscal year 2014 and 2015:

According to our statistics, the share of Qihoo 360 in the search market has increased rapidly, representing a share of 30.5%, up from 24.8% in the first quarter of fiscal year 2014 as at August 22, 2014. We believe that the commercialization of its search business may begin to take off, supported by increased market share. Although Baidu (Nasdaq:bidu) still occupy market leadership position, is the first choice of enterprise search, but Qihoo 360 is obviously become the second choice.

Compared with Baidu, Qihoo 360 's search business has a higher return on investment, which is attractive to corporate customers. Qihoo 360 past policies have made it difficult to commercialize Baidu's high market share, such as health care and pharmaceuticals, education and business services, but we think Qihoo 360 has taken the right steps and will be able to achieve a significant share growth in these areas in the future.

As a result, we expect Qihoo 360 search revenue to reach 270 million US dollars and 536 million dollars respectively in the 2014 and 2015 fiscal year, compared with the previous estimates of 265 million dollars and 418 million dollars respectively.

New revenue sources such as PC gaming and corporate security have upside potential:

1 PC games: Mobile games are growing at more than 100%, while PC games are still growing at a steady pace of 15% to 20%. Of the major PC game providers in China, most of the market share has been embezzled by Tencent (0700.HK) for controlling a large number of users. However, if Qihoo 360 can deliver its user traffic (128 million people per day, page views 749 million times, and Tencent is at a similar level) to the game provider, we believe that the content of these providers will be commercially available, Qihoo 360 and game providers can benefit from this collaboration.

Qihoo 360 has teamed up with Nine City (nasdaq:ncty) to form a joint venture to run its upcoming new game, Fair Fall.

2 Enterprise Safety: According to the Chinese government, corporate security has become a major problem, which provides a new business opportunity for Qihoo 360. For now, there are no leading providers in the Chinese market, both in corporate PCs and in the area of Internet security. Many small and medium-sized enterprises have installed the safety products of Qihoo 360 because of their no copyright requirements and are free to use. Looking ahead, we think it will become a new source of revenue for Qihoo 360.

We have not established a predictive model for Qihoo 360 's PC game and business security.

-Adjustment of performance expectations:

We estimate that in the third quarter of fiscal year 2014, Qihoo 360 revenue and earnings per share (not in accordance with U.S. General Accounting standards) were 362.8 million U.S. dollars and 0.61 U.S. dollars, compared with the previous forecast of 364.5 million U.S. dollars and 0.67 U.S. dollars respectively. We expect the $360 revenue and earnings per share (not in accordance with US GAAP) to be $1.3283 billion and $2.39 trillion respectively for the 2014 fiscal year, compared with the previous estimates of 1.3236 billion dollars and 2.43 dollars respectively.

We also expect $360 in revenue and earnings per share (not according to US GAAP) to be $1.8885 billion and $3.76 for the 2015 fiscal year, compared with the previous estimates of $1.886 billion and 3.47 dollars respectively.

In terms of profitability, we expect Qihoo 360 's operating margin in the third and fourth quarters to rise to 24% and 28.5% respectively, compared with 21.9% in the second quarter. We also expect 360 operating margins (not in accordance with US general accounting standards) for the 2014 fiscal year to rise to 30.4% per cent for fiscal year 2015.

-strong performance in the second quarter:

Qihoo 360 's second-quarter revenue was $317.9 million trillion, exceeding the average Wall Street analyst's expected $309.4 million trillion and our expected $304.6 million trillion. Not according to US GAAP, Qihoo 360 earned 0.50 dollars a share in the second quarter, exceeding the average Wall Street analyst's expected $0.46 trillion and our expected $0.48 trillion.

-third-quarter performance forecasts exceeded expectations:

Qihoo 360 expects its third-quarter revenue to be 360 million U.S. dollars to 365 million U.S. dollars, up 92% to 94% Year-on-year, up from 13% to 15% per cent, above Wall Street analysts ' average forecast of $357.4 million trillion.

Valuation：

We maintained the "buy" rating of Qihoo 360 unchanged and lowered its target price from USD 139 to $113 based on the peg (market share rate). We assume that the average rate of earnings per share in Qihoo 360 in 2014 and 2015 is likely to reach about 70%; Based on this, we use a 30 times-fold P/e ratio (which means a 0.43 times-fold increase), multiplied by 3.76 dollars in expected earnings per share (not in accordance with US GAAP) Thus the target price of 113 dollars was obtained.

-Target price risk:

1 The flow from the PC to move the speed may be far faster than expected, this led to Qihoo 360 's inability to benefit from its PC search market share, 2 of the search engine's commercialization process failing to accelerate, and 3 from fierce competition from large companies such as Tencent and Baidu, and 4 of the risks posed by a severe slowdown in macroeconomic growth. (Tangfeng)