Deutsche Bank maintains Sohu's rating target of 56.4 US dollars

Beijing time November 4 Morning News, Deutsche Bank published a study today, the Sohu (Nasdaq:sohu) stock rating maintained in the "holding" (Hold) unchanged, while its target price from 58 U.S. dollars to 56.40 U.S. dollars, the reduction of 2.8%.

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

Fiscal year 2014 third-quarter results: Mobile game growth makes earnings exceed expectations; there is still uncertainty

-Strong mobile gaming business, more profit margins than expected;

The third quarter of the 2014 fiscal year, Sohu revenue of 430 million U.S. dollars (quarter-on-quarter growth of 7.6%, year-on-year growth of 16.9%), compared with Deutsche Bank analysts and Wall Street analysts expected to be lower than average 1% and 2%; Less than Deutsche Bank analyst expected net loss of $41 million and Wall Street analyst average expected net loss of $54 million , with a loss of $0.61 per share, below analysts ' forecasts by Deutsche Bank and the average loss of $0.8 and $0.83 trillion per share of Wall Street analysts, mainly because of the strong performance of mobile games.

Sohu expects fourth-quarter revenue to rise 15% to 20% year-on-year, less than we had expected year-on-year growth of 22%, mainly because of the poor prospects of brand advertising business. But we expect strong functionality from the Sogou business, which expects the business to grow 72% per cent year-on-year, plus a new mobile game (mainly "Tianlong eight 3D") that will offset this weakness to some extent. Profitability remains a lack of visibility (expectations are not provided by management) because of the impact of mobile game promotions.

Sohu's outlook is mixed, so we keep the stock rating unchanged.

-Sogou Business development is good:

Sogou business third-quarter revenue for 106 million U.S. dollars (up 86% year-on-year, compared with Deutsche Bank analysts average growth of 83%), but the profit margin fell (not according to the U.S. General accounting standards of the net profit margin of 6.6%, compared to the second quarter of 0.4%), Mainly because of mobile search applications and Sogou Input method application (the number of active monthly users up to 200 million people) have carried out a positive brand promotion activities.

We expect the Sogou business to continue its robust growth momentum, as the business will be supported by traffic as it integrates further with Tencent's (0700.HK) QQ browser and micro-mail.

Mobile revenue accounted for 15% of total search revenue in the third quarter. At the same time, Sogou recently acquired 56.com to supplement the Sogou video business from the user-generated content (UGC) perspective.

-Growth in mobile gaming revenues is likely to reduce earnings pressures:

Sohu's gaming business's third-quarter revenue was 150 million U.S. dollars (down 6.9% year-on-year, down 2.3% on the chain). 5% less than Deutsche Bank analysts expect. The company recently released a mobile version of "Tianlong eight 3D", the initial performance of the game is impressive (on the first day of the gross income of RMB 12.6 million yuan). Our channel survey shows that since the launch, the game has become one of the top ten iOS games in China's gross income.

We believe that this new mobile version of the "Tianlong Eight" game may in some way offset the adverse effects of the legacy PC gaming portfolio, but uncertainty still exists, mainly from: 1 mobile version of "Tianlong Eight" on the PC version of "Tianlong Eight" of the encroachment; 2 platform-oriented transition new mobile game release related investment 3. Tour CEO Wang Tao's departure.

-Reduce the target price by 3% to 56.4 USD; maintain the "hold" rating:

Based on our revised outlook, we cut Sohu revenue by 2% and 3% for fiscal year 2014/2016 respectively. At the same time, based on the weak performance of brand advertising growth, we also cut the 2014 fiscal year/2015 in accordance with the United States General accounting standards per share of US depository receipts losses by 4%, and the 2016 fiscal year, the U.S. depository receipts per share reduction by 7%. Our new 56.4 dollar target for Sohu shares is calculated on the basis of the cash flow discount method (assuming a discount rate of 12%, a long-term growth rate of 3%, no change compared to previous assumptions). We keep Sohu's stock rating unchanged in "hold".

-Key risks: Reorganization of the gaming sector; (Tangfeng)