Maintain the overweight rating of Sohu stock

The following is the full report:

Summary。 Sohu reported on the expected quarterly results, the revenue is close to the previous performance forecast on the line, while the earnings per share (excluding the impact of content cost accelerated amortization) conforms to the forecast. However, the midpoint of the second quarter's revenue outlook was slightly below analysts ' average expectations, possibly due to the recent impact of the Chinese government's ban on American dramas.

Sogou search business continues to develop, especially at the mobile end. The combination of Sogou and search drives the growth of mobile search traffic (up 24% in the chain), while mobile search currently accounts for 12% of total revenue. Sohu management expected, as expected, Sogou will be in 2014 to achieve profitability. We still believe that if the market conditions are right, the Sogou will be IPOs later this year or early next year (IPO).

In view of the development momentum and potential high growth, the real estate vertical business should be independently valued. Sohu Focus Network in the first quarter of the year-on-year growth rate reached 52%, higher than the industry average level. We still believe that investors underestimate Sohu's real estate vertical business.

Game platform projects have been developed, but investment in the near future will still put pressure on profitability. In the first quarter, the number of active users on the platform increased by 60% on a month-on-month basis. Sohu Management reiterated that the future will continue to invest in "platform projects."

We gradually look at the air Sohu video business. While the video business is still strong, we believe that Alibaba's investment in Youku will be detrimental to Sohu's video because the investment could lead to an increase in future content costs. In addition, the Chinese government issued a ban on some American dramas, which will not benefit Sohu's second-quarter network video business revenue.

Expected adjustments. We cut the earnings per share for Sohu to take into account changes in content costs. At present, we expect Sohu 2014 revenue for 1.712 billion U.S. dollars, an increase of 22%, 2015 revenue of 2.167 billion U.S. dollars, the year-on-year growth of 27%. In addition, we estimate that in 2014 and 2015, Sohu's non-US GAAP earnings per share were $3.85 and USD 1.43.

Ratings and target stock prices. In the long run, we believe that the network video business and real estate vertical business will bring positive, and Sogou may also become a potential price catalyst. For 54.10 dollars, Sohu's valuations and risk-reward ratios are attractive. We maintain the "overweight" rating of Sohu shares, but cut the target share price from 100 US dollars to 80 dollars. This is due to the reduction of the network video business and online gaming business valuation multiples.