Hong Kong investment bank Day Hao Capital released a research report today to maintain the holding rating of Sohu shares

The following is the full report:

In the first quarter of 2014, Sohu reported Better-than-average analysts ' forecasts, disappointing second-quarter earnings forecasts, weak revenue expectations and a higher-than-expected loss per share. We still believe that 2014 will be a challenging year for Sohu, the company's two major businesses will be facing problems: 1 online gaming business into a stagnant growth situation, and Sohu is actively investing to try to reverse the situation; 2. The network video business is still losing money and is facing higher regulatory risk. As a result, Sohu's profit margins are likely to fall further, and there is no sign of stabilisation. Therefore, we maintain the "holding" rating of Sohu stock.

High investment in the online gaming business may not contribute to short-term performance

Due to the rapid changes in the market, Sohu's online gaming business is now stalled. Users spend more time on mobile devices, and specific activities include watching network video, mobile gaming, and social media. The shift in user behavior makes it harder for online gaming companies to attract players ' interest. Sohu's online gaming business is facing a more difficult situation, as the company has only one prominent large multiplayer online (MMO) game, and the game is outdated.

Compared with a year ago, Sohu's online gaming business sales and marketing costs increased by 519.8%, from the first quarter of 2013 to 13 million U.S. dollars to 2014 the first quarter of 80.5 million U.S. dollars. However, revenues did not grow, at $180.8 million in the first quarter of 2014, and 177.6 million in the first quarter of 2013. Therefore, the tour should promote revenue growth through investment, and the main way is product development, including internal development, platform building, as well as game licensing. In the first quarter of 2014, Sohu's product development spending has risen 246.3% from 20.1 million U.S. dollars in the first quarter of 2013 to $69.6 million. But we believe that this trend will continue for some time before meaningful results can be achieved. Due to active investment, the second quarter of the online gaming business is likely to be the non-US general accounting standards Net loss of 14 million to 20 million U.S. dollars, and the first quarter of 19.2 million U.S. dollars.

Network video business faces tougher regulatory environment

Sohu's network video business may be affected by the recent ban on American dramas. The Chinese government recently asked China's video site to frame some American dramas, including the Big Bang and lofty. Sohu has the exclusive authorization of the Big Bang of life. With regard to the government's ban, it is not clear how long the ban will last and whether the ban will be extended. This will bring risks to Sohu's future. In addition, according to our private data, in China's major video sites, Sohu 2014 of the content of the least number of years. At present, due to the lack of exclusive content to promote traffic, we believe that the 2014 Sohu Network Video advertising potential is limited, and the loss of this business in the short term can not be reduced.

Search business showing good momentum

Sohu reported that the first quarter of the search business revenue of 64 million U.S. dollars, an increase of 78%, and the second quarter of the search business revenue is 86 million to 90 million U.S. dollars, the chain growth of 23% to 29%, the year-on-year increase of 72% to 80%. We believe that through the cooperation with Tencent search, Sohu has been very good momentum. Sohu is currently expected, Sogou will be in 2014 to achieve profitability.

The active investment of online games business and the burning Money strategy of network video business lead to profit margin worsening

We currently expect Sohu's second-quarter operating profit margin to be 13.5%. Operating margins for 2014 and 2015 are expected to be 8% and 0.3%, respectively.

Second-quarter earnings outlook lower than average analyst expectations

Sohu forecast, the second quarter total revenue will be 397 million to 411 million U.S. dollars, the middle point 404 million U.S. dollars below the analyst average estimated 409.5 million dollars. Brand advertising revenue is expected to be 130 million to 135 million dollars, slightly below our estimated 135.3 million dollars. Sogou's revenue is expected to be 86 million to 90 million U.S. dollars, higher than our estimated 70.4 million dollars. NET business revenues are expected to be 161 million to 166 million U.S. dollars, below our estimated 169.9 million dollars. Sohu also forecasts that the non-US general accounting standards Net loss of 48 million to 52 million U.S. dollars per share loss of 1.25 to 1.35 U.S. dollars. Analysts expect US GAAP to lose 0.68 dollars per share.

First-quarter results lower than analysts ' average expectations

Sohu reported that the total revenue in the first quarter was 365.3 million U.S. dollars, below analysts ' average estimated 365.9 million dollars. Brand advertising revenue of 111.3 million U.S. dollars, below our estimated 113.3 million dollars. Sogou revenue of 64.3 million U.S. dollars, in line with our expectations. NET business revenue of 163.4 million U.S. dollars, less than our estimated 164.8 million dollars. The US General accounting standard has a loss of $2.05 per share, significantly worse than the average analyst's estimated $1.20 trillion and our projected $1.33 trillion.

Performance expectations Adjustment

We expect Sohu's second-quarter revenue forecast to fall from $409.8 million trillion to $398.8 million, raising the forecast for each share loss from $0.35 to $1.20. We will increase the revenue for Sohu 2014 and 2015, respectively from 1.6639 billion U.S. dollars and 1.9874 billion U.S. dollars to 1.7113 billion dollars and 2.051 billion U.S. dollars. We are expected to increase the 2014 per share loss of Sohu from 0.75 U.S. dollars to 3.12 U.S. dollars, the 2015 per share losses are expected to be reduced from 3.25 U.S. dollars to 0.91 U.S. dollars.

Valuation

We maintain a "hold" rating on Sohu stocks due to the slowing growth of online gaming and online video business and the worsening profitability.