In today’s Daily Alert Cabot China & Emerging Markets Report Editor Paul Goodwin
recommends a Chinese stock with strong momentum.
“It seems like Sohu.com, Inc. (SOHU, Nasdaq) has been around forever, at least for
investors interested in China. The company was founded in 1996 as a web portal for the
small-but-growing population of Chinese who were online. Like Yahoo, which
Sohu.com is often compared to, Sohu.com offers an enormous amount of free news,
weather, sports, entertainment, stock quotes, email, chat, e-commerce, maps, mobile
services, shopping and games for its users. The company’s Sogou.com search engine
stores more than 10 billion web pages and employs custom software to ease
inputting of Chinese characters.
“Internet search services, however, contribute just 12% of the company’s revenue.
When it comes to making money, Sohu.com is all about the games. The company
reported earnings of $308 million in Q1 and online gaming contributed $167 million
of that total, representing a 32% increase from year-ago levels.
“Part of the reason for the company’s success in the online game world is
Changyou.com, a leading game creation company that began as an in-house unit of
Sohu.com in 2003. The company was spun off from Sohu.com in 2007 (and listed
separately on Nasdaq in 2009), but maintains strong ties with its former parent.
Changyou gets strategic guidance, marketing and access to Sohu’s more than 290
million registered users and Sohu gets fresh content in the form of 2.5D and 3D
games and updates.
“The flagship game for both companies is Tian Long Ba Bu (TLBB: the name
means ‘Novel of Eight Demigods’), a 2.5D game based on a Chinese martial arts
novel. This MMORPG has been through two successful expansion packs, the most
recent just last month, and wins many awards.
“Sohu also has a source of new game content in 7 Road; Sohu is purchasing the
remaining 28% it doesn’t already own. 7 Road is the developer of the popular
DDTank web game, which is developing into a franchise and licensing star.
“Strong content and attention to freshness has kept revenue growth strong for
Sohu.com, with seven straight years of top-line growth of at least 19%. 2012
revenue growth was 25% and Q1 growth hit 36%.
“SOHU hit 109 in April 2011, but a 15-month slump dropped the stock to 34 last
July. Four months of base-building at that level gave way to a strong rally in
December that pushed the stock to 50, which formed resistance for another four
months. A cup formation that began in late January (and formed a handle in early
April) led to a strong rally beginning in late April. This rally gathered momentum
(and volume) in May, and SOHU has recently traded above 68.
“There is one anomaly in the SOHU chart. On March 5, SOHU popped from its open
at 44 to near 50 on six times average volume, propelled by a rumor that
management was going to take the company private. When that rumor was denied,
the stock returned to its original level and kept trading calmly.
“We think SOHU is a very solid bet, a stock of a proven company with competent
leadership and big opportunities as games and search expand into the fast-growing
mobile segment in China. This is a pure China play, and a buy at a good price (we
think you can buy here, though a dip toward 60 is possible). BUY.”
Paul Goodwin, Cabot China & Emerging Markets Report, www.cabot.net,
978-745-5532, 5/23/13