Morgan Stanley Internet and media analyst Richard Ji initiated coverage of Sohu (ticker: SOHU) with an equal-weight rating. Key extracts / conclusions from his note to clients:
- We rate Sohu Equal-weight-V and have with keen eyes on its execution. We see potential upside from Sohu’s sponsored search, online properties, and the recovery of its mobile value-added services (MVAS). However, its ability to execute holds the key to unlocking these hidden values, in our view.
- ‘Purest’ advertising portal, premium virtual property owner. Sohu may be the closest benchmark for China’s online advertising growth as it relies more on advertising sales than other listed Chinese Internet peers. It has acquired or developed five of China’s top 50 most frequented websites, which is second to none.
- Paid search – Sohu’s best opportunity to claim its glory? Relative to other listed rivals except Baidu, Sohu generates the most revenue from paid search (10% of its sales or around 15% of China’s search industry revenue in 2004). Sohu is challenging the search market leaders by leveraging its nationwide sales network, brand awareness, and differentiating search products, including SoGou.
- Risks – Competition, management turnover, monetization. Sohu faces formidable rivals, such as Sina in brand advertising (although the gap is narrowing), Baidu and Google in sponsored search. We view management stability as pivotal for Sohu to outmuscle its competition and expedite the monetization of its online properties.