Morgan Stanley maintains Sohu reduction rating target price 51.5 USD

Beijing time July 29 Morning News, Morgan Stanley published a study today, the Sohu (Nasdaq:sohu) stock rating maintained in the "reduction" (underweight) unchanged, and its target price of 53 U.S. dollars down to 51.5 U.S. dollars.

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

Sohu Performance performance is solid, but heavy investment leads to lower visibility of overall profit margin

Despite the steady performance of the Sogou business, Sohu's ongoing online video and tour-related investment activities should bring profit margins into the near term. We maintain the Sohu stock rating in the "reduction" unchanged, while its target price from 53 U.S. dollars to 51.5 U.S. dollars.

Changes：

Target price reduced from 53 US dollars to 51.5 dollars;

For fiscal year 2014, earnings per share are expected to be lowered from $5.06 to $5.75;

For fiscal year 2015, earnings per share are expected to be lowered from USD 0.60 to $0.53;

Earnings per share in fiscal year 2016 are expected to be lowered from $2.20 to $1.94.

-Brand advertising and search business performance:

Sohu's total advertising sales rose 49% to $218 million in the second quarter, mainly as sales of branded advertising rose 33% Year-on-year (driven by the steady performance of online video services and 17173 sites) and revenue from search and other operations rose 84% ( The impetus comes from the increase in traffic and the degree of commercialization. In the second quarter, Sohu's online video sales rose 85% Year-on-year, the proportion of brand advertising revenue reached nearly one-third, while the mobile business in its total online video sales accounted for the proportion of 20%, in the total search revenue accounted for the proportion of 10% to 15%.

Sohu forecasts that the third quarter of brand advertising sales will increase 19% to 23% Year-on-year, Sogou sales will increase 76% to 84% year-on-year.

-The online gaming business is still in the transition phase:

Sohu's second-quarter online game sales fell 9% year-on-year, less than the company had expected (down 1% to 4%), mainly due to the core game ("Tianlong Eight", "the Divine Comedy" and "Pinball Hall", etc.) performance than expected, the total monthly active account number of these games in the second quarter of the chain fell 14%, To 24 million, year-on-year decline of 33%. Sohu expects online game sales to fall 1% to 2% Year-on-year in the third quarter.

-Recent profit margin pressure:

Sohu's overall gross margin fell 8% to 58% in the second quarter. In this quarter, Sohu's advertising business gross profit rate fell 4%, to 44%, mainly because of the brand advertising gross margin of the soft (down 11%, the reason is the content cost and broadband cost growth), but more than the search business profit margin offset by the increase in part (6%, The main driver is the operating lever. Sohu's second-quarter online game's gross profit margin fell 6% Year-on-year, mainly due to employee-related cost growth.

Sohu's second-quarter operating margin was 15%, compared with 19% in the same period last year. Margins are still at a low level because Sohu has invested heavily in the cruise and online video business.

Sohu estimates that the third quarter of each share of the total diluted losses (not in accordance with the United States General accounting standards) for 0.75 U.S. dollars to 0.85 U.S. dollars, in contrast to the second quarter, each share of the total diluted losses (not in accordance with the United States General accounting standards) for 0.88 U.S. dollars, the same period last year, a total dilution of earnings (not in accordance with U.S. General accounting standards) For 0.51 dollars.

-Maintain a "reduction" rating, cut target prices to 51.5 U.S. dollars:

We are expected to reduce the loss per share of the fiscal year 2014 from 5.06 U.S. dollars to 5.75 U.S. dollars, while the 2015 fiscal year Sohu earnings forecast from 0.60 U.S. dollars to 0.53 U.S. dollars. Once Sohu offers better margin visibility, we will reassess its stock.

-Investment Theme:

1 because of the mobile game and platform strategy, including the online game (swim) business has been heavily invested, Sohu's short-term profitability is still under pressure. If the business can once again achieve sustainable profitability, we may be able to change its earnings per share from loss to profit.

2 and Tencent (0700.HK) between the strategic cooperation should be able to promote Sogou business to achieve more rapid growth, and consolidate Sohu in China's PC and mobile market position.

3 The recent stricter content censorship and increased competitive pressures may have an impact on the Sohu online video business, but will be offset by the World Cup growth.

-Main value driving force:

1 The expansion of customer base and the growth of average advertising expenditure per customer;

2 online game sales in the increase in the number of gamers and increased spending driven to achieve growth;

-Potential irritant factors:

1 continue to actively invest in the platform strategy, while the new game brings less revenue than expected;

2 The regulatory risks of the Chinese media industry, especially the increasing severity of the control measures for online audio and video content;

3 from the large portal (Sina Nasdaq:sina), Tencent, etc., online video competitors and online game competitors competition.

-Target price to reach the risk:

1 The online video business recovery faster than expected;

2 profit margin in better cost control measures and the help of operating leverage to stabilize faster than expected;

3 Mobile commercialization faster than expected. (Tangfeng)