Maintain the overweight rating of Qihoo stocks

The following is the full report:

We expect Qihoo's non-US GAAP earnings to be 0.41 US dollars per share in the quarter, compared with an average of 0.42 dollars expected by analysts below Bloomberg's estimates. On March 6, Tiger released its quarterly results after the U.S. stock market closed.

Key financial performance forecasts. We estimate that Qihoo's revenue for the quarter was 208 million U.S. dollars, which grew by 11% in the year to 102%, compared with an average forecast of 210 million dollars by analysts. The U.S. general accounting standards operating profit is expected to be 45 million U.S. dollars, while analysts expect an average of 49 million U.S. dollars. We expect the fourth quarter gross margin will be flat, 86%. And because of the impact of marketing activities, non-US general accounting standards operating profit margin will fall 7% to 29%.

Business development: Overseas expansion. Qihoo launched a key mobile security product in the Taiwanese market in January, followed by mobile phone aides and 360 security guards. At the end of February, Qihoo showcased 10 products at the Mobile World Congress (MWC), including the latest release of 360 total security, the international edition of 360 Safety guards. The moves suggest that Qihoo is emphasizing more user growth in overseas markets. We expect growth in 2014 of Qihoo's marketing spending as a result of overseas expansion plans.

Key factors to be concerned

1 The commercialization of the search business. At present, there is a significant gap between the market share of Qihoo's traffic (over 20% in the fourth quarter) and the revenue market share (about 1% to 2% in the fourth quarter). We estimate that search revenue will account for 15% to 20% of Qihoo's total revenue in the quarter. We advise investors to pay attention to: 1 How Qihoo continues to promote the commercialization of the search business; 2 The management's expectations for the 2014 search revenue contribution.

2 Management comments on the game business, especially how to balance web games and mobile games. Growth in the Web-game market appears to have slowed over the past few quarters. This is likely to affect the revenue of Qihoo (more than 30% of revenues come from web game operations). We believe that Qihoo's mobile gaming program will be an important driver of growth in the 2014.

3 The future of advertising business in 2014.

4 profit margin forecast and investment strategy for 2014.