Keep Sohu's stock rating on Hold (Hold) unchanged

Deutsche Bank today released its research report, keeping Sohu's stock rating at Hold, while raising its 12-month target price by 17% to $54.

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

performance is expected; The game business is expected to show weakness and lead to a loss of profitability; maintain a "hold" rating

Performance in line with expectations:

Sohu reported that in the second quarter of 2013 fiscal year, the U.S. Depository Receipts (not in accordance with U.S. General accounting standards) for 0.58 U.S. dollars, revenue of 339 million U.S. dollars, basically in line with Wall Street analyst average expected 0.59 dollars and 340 million dollars. Sohu's second-quarter revenue rose 33% per cent from a year earlier, close to the upper limit of the company's management's previous expected range.

Although Sohu's second-quarter results were largely in line with analysts ' expectations, we have lowered expectations to take into account the weak performance outlook for the third quarter. However, in order to reflect the recent trend in the industry, we will Sohu's target price increase of 17% to 54 U.S. dollars, and its stock rating maintained in the "holding" unchanged.

Advertising and search business performance is strong;

The growth of the brand advertising and search business has made a strong performance in Sohu's online advertising sales business. Sohu brand advertising revenue rose 45% from a year earlier, mainly due to: 1 real estate and FMCG (FMCG) vertical business performance strong; 2 online video business development is good. Meanwhile, Sohu's search revenues rose 61% from a year earlier, largely as a share of traffic increased (Management said its share of the search business had risen to 8.8%) and the CPC (per-click fee) increased.

Game business, "Tianlong Eight" is still a pillar, but Sohu's legacy game revenue is likely to achieve 10% to 20% range of high-end year-on-year growth.

Outlook: Online gaming business is disappointing; third-quarter net profit (not in accordance with US General accounting Standards) Outlook is 35% lower than average Wall Street analyst expectations

Sohu Management's forecast for third-quarter revenues is in line with Wall Street analysts ' average expectations, but a net profit of $19 million to $21 million (not excluding net capital inflows under US GAAP) is well below what Wall Street analysts are now averaging at $31 million trillion. We believe that this is due to weak prospects for gaming business.

The outlook, by sector, is as follows:

1 excluding the Seventh Avenue game business growth rate is only 5% to 6%, the second quarter average online number (APA) fell 25%;

2 in the third quarter of online video business will achieve growth of 60% to 70%, mainly because Sohu and "good voice of China" in the second quarter of the exclusive cooperation, but the third quarter results should be accounting for 70% to 80% related content costs;

3 Although Sohu's primary application (including Sohu News, Sohu Video and Sohu map) the development situation (from the penetration and the user Flow view) is encouraging, but the commercialization is still too early;

4 Sogou business is wandering around the break-even.

Target prices are up 17% to $54; maintain a "hold" rating

We will increase the revenue estimates for Sohu 2013 and 2014 respectively by 12% and 14%, but at the same time the earnings per share of US depository receipts (not in accordance with the United States General accounting standards) respectively cut 9% and 7%, mainly because of: 1 Low profit brand advertising and search business growth accelerated; 2) The growth of the high profit-margin gaming business slowed.

According to the revised classification plus the total method of valuation, we will increase Sohu target price to 54 U.S. dollars (11% from the video, including the brand advertising, 22% from the Sogou search business, 49% from the tour of the various sections of the game). We keep Sohu's stock rating unchanged in "hold".

Downside risk: Game business growth is slowing faster than expected.

Upside risk: Online advertising costs are strong.