JPMorgan keeps Sohu Neutral rating down to $68 trillion

Beijing time February 18 Morning news, JPMorgan Day released a study to maintain the "neutral" rating of Sohu (Nasdaq:sohu) shares, and the target share price from 71 U.S. dollars to 68 dollars.

The main contents of the report are as follows:

We expect Sohu's 2013-year profitability to fall sharply (J.P. Morgan is expected to be 7%, and 2013 is 13%). This is mainly due to the strategic transformation of the game business from PC game developers to Cross-platform distributors. We estimate that in the next 12 months the gaming business will turn from a profitable sector (operating at $306 million trillion in 2013) to a cost center (JPMorgan is expected to operate at $13 million trillion in 2014), and it is hard to predict when margins will recover. Non-gaming businesses, especially search and video advertising, remain fast growing.

From a valuation standpoint, the impact of the decline in gaming business margins is limited, as the business accounts for only 24% of our previous valuations. That's because the gaming business has a low P/E ratio (4 times times more than cash) and Sohu only holds 67% of the business. In addition, High-value gaming businesses (which account for 38% of our previous valuations) have better prospects than expected. We expect that Sohu's share price will not be sensitive to short-term earnings prospects for 2014, given that it accounts for 37% of Sohu's market value and that 23% of its assets are valued by market rates. Given the different prospects of several business units, we maintain a "neutral" rating on Sohu shares and cut the target share price to 68 US dollars.

Gaming business affects 2014 earnings

Sohu executives forecast that the profit margin for the first quarter of 2014 would be weaker than expected due to operating costs associated with gaming operations (1.1 to 1.2 USD per share), which is surprising. We believe that the tour will enter a period of heavy investment. We support the bold strategic transformation of management. But we are cautious about the outcome and the timing of the transition.

Search business Consolidation brings short-term synergies

The combination of Sogou and search will bring the short-term synergy effect. We expect the commercial capabilities of the search business to be strengthened over the next few quarters.

Promotion of brand advertising business

We anticipate that video and real estate advertising will promote the development of the brand advertising business in the first half of 2014.

Maintain a "neutral" rating, cut target prices to 68 U.S. dollars

Our valuation includes 9 US dollars in the game business, 14 U.S. dollars in portal advertising, 8 U.S. dollars in search business, 10 dollars in video business, and $27 per share.