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Long Sohu
- 1. SOHU Shiwei Zhang April 7, 2013
- 2. Proposal: Long SOHU (Nasdaq: SOHU) Severely undervalued Chinese Internet Player 2
- 3. Chairman & CEO Charles Zhang 3
- 5. Business Units • Portal: Sohu.com • #1 portal site in China: news, multi-media • Changyou (Nasdaq: CYOU) : Online Gaming • Top 3 leading online gaming service provider in China • 67% owned by Sohu • Sohu TV • Top 3 leading online video site • Sogou: Typing, Browser, Search • Largest Chinese typing software – 80% • Third largest browser – 8.9% • Third largest search engine – 7.6% 5
- 6. Thesis: Severely undervalued Methodology: Sum of the Parts Comparables Valuation Comparables better suited for tech & internet company than DCF 6
- 7. Business Unit Valuation Sohu.com Yahoo • Founded 1996 • Founded 1994 • 178 MM monthly unique visitors, ranked #16 globally by ComScore • 470 MM monthly unique visitors, ranked #4 globally by ComScore • 2012Q4 25% YoY traffic growth • Revenue $5 B • Profit $4 B • Revenue ? • Valuation: • Profit ? • Valuation ? • P/E: 7.11 • Mkt cap $25.66 B
- 8. Business Unit Valuation Sohu TV Youku Tudou (think Hulu) • 2012Q4 Revenue 70% YoY growth • 2012Q4 Revenue 30% YoY growth • 2012Q4 Market Share: • 2012Q4 Market Share: • Revenue : 12%, #3 • Revenue: 34%, #1 • DAU: 11% #4 • DAU: 31%, #1 • Average Time Spent: 10%, #4 • Content differentiation: Focus on documentary and TV shows • Valuation for Sohu: $2.66 B * 0.3 = $0.80 B • Average Time Spent: 37%, #1 •Valuation: • Mkt cap: $2.66 B
- 9. Business Unit Valuation Sogou Baidu (think Google) • 2013Q1 Customer 10% YoY growth • 2013Q1 Search volume -10% YoY decrease • 2013Q1 Search volume 1% YoY growth • 2012Q4 Revenue 41% growth YoY to $1 B • 2012Q4 Revenue 78% growth YoY to $41 MM • 2012Q4 70.81% mkt share • 2012Q4 7.6% mkt share • Valuation: • Goal: Spin-off & IPO • Valuation for Sohu: $29.2 B* 4% = $1.16 B • P/E: 17.3 • Mkt cap: $29.2 B
- 10. Business Unit Valuation Changyou (Nasdaq: CYOU) Sohu affiliation • 2012Q4 Revenue 26% YoY Growth to $623 MM • Changyou spun-off from Sohu in 2009 and went IPO • 2012Q4 Profit 15% YoY Growth to $282 MM • 66.7% equity owned by Sohu • 2012Q4 Registered accounts 41% YoY Growth to 248 MM • 80% voting power owned by Sohu • 2012Q4 Average revenue per active paying account 60% YoY growth to $58.8 • Valuation for Sohu: $1.5 B * 66.7% = $1 B • Valuation: • P/E 5.35 • Mkt Cap: $1.5 B
- 11. Sum of the Parts Valuation ? + $1.16 B + $1 B + $0.8 B ≥ $2.96 B > $1.79 B Sohu is severely undervalued. 11
- 12. 5 Year Stock Chart Market cap: $1.79 B Average Volume: 423 K Current price: $47.04 P/E ratio: 20.3 12
- 13. Financials As of Dec. 2012 Income Statement Balance Sheet Key Ratios • Revenue: $1,079 MM • 22.4% YoY Growth • Gross Profit: $705 MM • 65% Margin • EBITDA: $359MM • 33% Margin • Net Profit: $88 MM • 8.2% • $2,076 MM Total Asset • $1,232 MM Total Current Asset • $541 MM cash • $991 MM Total Liabilities • $552 MM Total Current Liabilities • • • • • EV/EBITDA: 3.4x EV/Sales: 1.1x P/E: 20.3 Current ratio: 2.23 5 Year Revenue CAGR: 41% 13
- 14. Trading below breakup value • Theories: • Operational: Disynergies among different business units • Transactional: Fees going to I-Banks • Financial: Uncle Sam • Industry specific: • Adversely impacted by other Chinese frauds • Sohu Specific: • Misperceptions from US investors • A combination of vastly different businesses 14
- 15. Investment Rationales The Positives The Negatives IPO of Changyou subdiary 7 Road (on track) Sohu TV dragging the whole group IPO of Sogou (on track) IPO of Sohu TV Privitization of Sohu 15
- 16. China Internet Users Online Video Users to Reach 450 Million by 2012 Millions 600 100% 90% 500 80% Internet Users 70% 400 60% 300 50% Online Video Users Penetration 40% 200 30% 20% 100 10% 0 0% 2006 2007 2008 2009 2010 2011 2012 16
- 17. Market size • 4.1 billion hours watched in August--comScore • Youtube monthly average 4 billion hours (70% intl). • Hulu 2011 revenue -- $420 million Online Video Market Size (in million $) 416 $450 358 $400 $350 303 $300 278 231 $250 $200 155 $150 $100 289 159 156 106 70 $50 $0 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 17
- 18. Exit When any one or more of the subsidiaries go public, or after holding for 2 years, or the company goes private. 18
- 20. Appendix 20
- 21. China Internet • 538 million internet users 21
- 22. 2012Q4 China Online Gaming Market Share 22
- 23. 2012 Q4 Market Share in Revenue Youku 22% Tudou 12% Sohu 12% Tencent 5% iQiyi 7% CR4: 51% CR8: 85% 23
- 24. 2012 Q4 Market Share in DAU iFeng 6% PPTV 6% CNTV 7% Youku 20% LeTV 7% Tudou 11% Xunlei 10% iQiyi 13% Tencent 9% Sohu 11% CR4: 64% CR8: 94% 24
- 25. 2012 Q4 Market Share in time spent CNTV 4% iFeng 3% PPTV 5% Youku 25% Tencent 5% Xunlei 6% LeTV 10% Tudou 12% Sohu 10% iQiyi 20% CR4: 77% CR8: 97% 25
- 26. Revenue Sources As of Dec. 2012 26
- 27. Future – Mobile, Content 27
- 28. Mobile • China Mobile Internet Users (2012 1H) 388 million • In 2012 1H mobile internet users surpassed PC internet users (380 million) • 27.7% (107 million) of mobile internet users watch videos online 28
- 29. 3G User Growth China 3G user to reach 300 million by the end of 2012 China 3G user to reach 300 million by 2012 1,200 30% 1,112 986 1,000 859 800 747 20% Mobile phone user 600 3G user 3G penetration rate 400 301 200 10% 128 47 12 0 0% 1 2 3 4 29
- 30. Sogou Typing & Search Weather TV show 30
- 31. Data Source iResearch CNNIC – China Internet Network Information Center comScore 31
- 32. Business Model Youtube—UGC Hulu—copyrighted content Self-produced Content Netflix Copyright distribution 32
- 33. China Online Video Industry Key Players 33
- 34. Key Players Youku Tudou Youku (NYSE:YOKU, Mkt cap: $2 B) is the largest online video streaming company in China. “Youtube” of China. Tudou, along with Youku, is one of the oldest players in China online streaming industry. Business model: UGC+Hulu+Selfproduce+Netflix Business model: UGC+Hulu+Selfproduce+Netflix Focus: Comprehensive Focus: UGC 34
- 35. Key Players iQiyi (Baidu) Baidu (Nasdaq: BIDU, Mkt cap $33.7 B) second largest public internet company in China. “Google of China” Sohu Video (Sohu) Sohu (Nasdaq: Sohu, Mkt cap $1.5 B). Once a giant as a news portal site like Yahoo. Business Model: Hulu Joint Venture between Baidu and Provident Equity Partners. Focus: Movies, US shows, Documentary Business Model: Hulu Focus: Hot movies and shows 35
- 36. Key Players Tencent Video (Tencent) LeTV Tencent (HKG:0700, Mkt cap $60 B) the largest public internet company in China. LeTV(SZ:300104, $1 B) focuses on copyright distribution. The only profitable site among all. 1/3 profit from ads, 2/3 from copyright distribution 36
- 37. Horizontal Integration: Youku acquires Tudou 37
- 38. Vertical Integration: Baidu purchase iQiyi Nov. 2, 2012 -- Provident equity fund exited iQiyi What this means: • Baidu fully owns and controls iQiyi • iQiyi has huge capital backup 38
- 39. Vertical Integration: Tencent invests in video production $70 million investment in Huayi Brothers, largest media production in China Established a $80 million investment fund that specializes in video content investment 39
- 40. LeTV – Box strategy Challenge: Privilege position as an online distribution agency reduced. Solution: Expanding into TV. 40
Hinweis der Redaktion
- Historically Sohu has been the largest internet portal website in China. Think Yahoo.
- Charles Zhang was born in 1965 in China. In 1986 he graduated from the best university in China—Tsinghua university with a degree in physics, and later on went to pursue PhD in MIT. His life in US made him both technically capable to build a great technology and financially seasoned about the US financial market, compared to the rest of the business world in China. In 1994 Charles returned to China, and two years later founded Sohu with venture capital from 2 MIT professors. It was the first Chinese internet company backed by venture capital investment. In 2000 Charles led Sohu go public in Nasdaq. Soon it became profitable. Started off as a media portal website, Sohu has been branching out into other areas and earned great reputation as well as significant market share.
- Yahoo net income margin: 79.1%Baidu: 47.5%Youku: (23.6%)Changyou: 45.3%
- Blue bar represents number of internet users, gray bar people who watch videos online, yellow line penetration rate. As you can see both internet users and penetration rate have been growing at a healthy rate, and it is safe to assume, given the gap between current internet penetration of China and the western world, potential is immense.
- In a recent analysis conducted by comScore, 4.1 billion hours of video was watched. In comparison, Youtube on average has 4 billion hours watched worldwide, 70% of which coming from international market. Market size in dollar terms. In third quarter 2012 the market size reached $412 million. To put in terms you are more familiar with, the annual revenue for Hulu last year was $420 million.
- In terms of revenue, CR4 increased by 5 percent, but the market leaderYouku’s position significantly increased to 22%. Network effect.
- Daily active user, CR4 is a lot higher 64%. CR8 94%.
- Time spent on site, CR4 is 77%. The industry maybe a lot more concentrated than it initially looked like. Some companies pulled the strategy to attract more users at first, e.g. iQiyi as an entrant, has been hugely successful in terms of attracting users to spend time. They went live in 2010 and is already the 3rd largest both in terms of DAU and time spent. They achieved this by presenting less advertising when displaying shows, thus creating a better user experience but at the same time monetizing the content less effectively.
- With mobile users growing exponentially it has been made clear that who ever succeeds in attracting users to start watching videos on mobile devices, who is better positioned to monetize content in the coming years.
- iResearch and comScore are both independent third party internet observers. iResearch from China and comScore from US.
- OriginalYoutube model – user are free to upload their own video to the websiteHulu – purchase movies and shows from content producer, play for free onlineSPC: Similar idea but content is produced on its ownAll three above make revenue from advertising.Netflix: model where users can pay to have movies /shows they’d like to watch streamed to their desired platform (computer, TV)Copyright distribution: after purchasing content, also resell it to other companies, according to the contract it has with content producer.
- Youku: largest and oldest online video site in China by all measure. They strive to become the number one place for all form of video streaming in China.Tudou: comprehensive platform similar to Youku, except it has a stronger focus on UGC.
- iQiyi was funded by Baidu and PEF, one of major investor for Hulu. Not surprisingly iQiyi adopted the same business model as Hulu. Baidu is the search the most popular search engine company “Google of China”. Second largest public internet company, largest online advertising company.Sohu video is again a subsidiary of an existing internet giant, focuses primarily on popular movies, US shows (how I met your mother, big bang), and documentary.
- Tencent is the largest public internet company in China. They have recently broken in the industry as well. LeTV: is somewhat unique. The only profitable company right now. Majority of profit comes from copyright distribution. Whereas for all other companies it is online advertising.
- Background: March 11, 2012, Youku and Tudou entered into an Agreement and Plan of Merger, or the Merger Agreement, for Tudou to combine with us in a 100% stock-for-stock transaction.Each of Tudou’s ADSs will be cancelled in exchange for the right to receive 1.595 of Youku ADSs.All share acquisition. Synergy: share resources with each other. Buyer power increased. Use resource more efficiently.
- Buyer power increased. Baidu is a huge company on its own and similar to Google, is the largest online advertising company in China. iQiyi instantly has access to much larger advertisement cross-sell opportunities from the Baidu sales team. Packaged ad services.
- Supplier power reduced. Access to unique content. As demonstrated in class, a integration between upstream and downstream firm will eliminates middle man – more efficient, provide better welfare to the society.
- Regarding everything we talked about before, as a content redistributor, the barganing power of LeTV substantially decreased and it impacted their earnings. Instead of sticking only to its original role, LeTV developed another route—expanding into TV industry. They started creating devices like AppleTV with content streamed from internet. They’ve got regulatory license and at the same time trying to lobby the government to issue such license as few as possible.