JPMorgan keeps Sohu Neutral rating at $65

Beijing time July 30 Morning News, JPMorgan released a study today, the Sohu (Nasdaq:sohu) stock rating remained "neutral" (Neutral) unchanged, and its target price from 68 U.S. dollars to 65.

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

Low visibility of investment returns; financial outlook still under pressure; maintain a "neutral" rating

We believe that Sohu's immediate financial pressure will be increased, because: 1 core business (that is, games and brand advertising business) is facing the revenue pressure; 2 Sohu continues to invest in all major business units. Although the search business created 9 million of dollars in profits in the second quarter, we still expect the profit contribution of the business to be limited over the next four quarters, because Sohu management sees market share as the top priority.

The visibility of Sohu's long-term financial outlook is low because of uncertainty about its investment opportunities. However, given that Sohu continues to invest in its client-side gaming, the company's financial prospects will have upside potential if it can launch a successful new game, especially in a less competitive market environment. We will maintain Sohu's stock rating in the "neutral" unchanged.

-The weak gaming business has brought disappointing quarterly results:

Sohu's second-quarter revenue (USD 400 million) was 6% lower than what we had previously made, mainly due to lower revenue from gaming operations. Gross profit margins in the second quarter fell 5% per cent from the previous quarter, but did not shrink by 10% in line with U.S. general accounting standards, largely because operating expenses were lower than expected.

-In our view, Sohu is taking a balanced approach to the game market, while the introduction of client games and mobile games:

Unlike some client-game companies, these companies have shifted a lot of resources to the mobile gaming market, while the Sohu Gaming Business Tour (Nasdaq:cyou) is still investing significant resources in the area of client game development and licensing. We believe that this strategy is likely to be successful in the less competitive client gaming market.

-Search business is encouraged:

Sogou business revenue and profits in the second quarter of the strong growth, but we expect in the near future Sogou business to Sohu profit contribution will be limited, because Sohu management will gain market share as the first priority, which means that search related spending will increase.

-Maintain a "neutral" rating, with target prices reduced from USD 68 to $65:

We set the Sohu target price on June 15 based on the assumption that: 2015, the expected price/earnings ratio of the portal advertising business (based on the U.S. General accounting standards of earnings per share) of 8 times times, 2015 Sogou business, the expected market sales rate of 2.5 times times, 2015 video business expected sales rate of 1.8 times times, 2015 game business expected market sales rate of 1.2 times times. The target price we set for Sohu means that its 2015 overall earnings ratio is 66 times times higher.

-Expected Revisions:

We cut the revenue forecast for Sohu in the third quarter of fiscal year 2014 by 7%, mainly because it expects its online gaming revenues to drop 15% in the quarter. Our estimates of Sohu revenue for fiscal year 2014 and 2015 were 6% and 3% lower than previously expected. As for the revenue prospects for the search business over the next two years, we move to a bullish position and increase revenue estimates for search operations in the third quarter of fiscal year 2014, 2014 and 2015 for fiscal year 17%, 9% and 17% respectively.

We are expected to increase the 59% per cent of Sohu's operating loss for the 2014 fiscal year (not in accordance with US GAAP), mainly due to lower revenue forecasts and a projected increase in costs and spending. We estimate that Sohu's operating loss for fiscal year 2015 (not in accordance with US general accounting standards) is $56 million, compared with the previously expected operating profit (not in accordance with US GAAP) for 59 million dollars. We expect the 2014 and 2015 Sohu operating losses per share (not according to US GAAP) to be 3.39 US dollars and 0.83 U.S. dollars respectively, compared with the previous estimates of 2.19 dollars and 0.31 dollars respectively.

Valuation：

We keep the "neutral" rating of Sohu shares unchanged, while lowering its target price from 68 US dollars to $65.

We use the classification and the general method to the Sohu stock valuation, the composition is as follows:

1) from the 362 million US dollars in portal advertising, the forecast is based on the expected P/E ratio for the 2015 fiscal year (based on earnings per share not in accordance with U.S. General accounting standards) of 8 times times;

2) from the Sogou business of the 457 million U.S. dollars, its forecast based on the 2015 fiscal year expected market sales rate of 2.5 times times; the business is expected to be 2015 U.S. dollars in the fiscal year, and is expected to be held by Sohu, the proportion of the Sogou shares is 508 million;

3) from the video business of 327 million U.S. dollars, its forecast based on the 2015 fiscal year, the business revenue of 182 million U.S. dollars, 2015 expected P/E earnings are 1.8 times times;

4) from the online gaming business of the 573 million U.S. dollars, its forecast based on the 2015 fiscal year, the business revenue of 793 million U.S. dollars, 2015 expected P/E earnings are 1.2 times times;

5 from 768 million dollars in cash.

-rating and target price risk:

1 Upside risk: Video business revenue growth faster than expected; the performance of the PC gaming business was pushed beyond expectations by new game launches.

2 Downside risk: the future of brand advertising business is weaker than expected; No Fiat video traffic is growing; Legacy games are not performing as expected; research and marketing expenditures exceed expectations. (Tangfeng)