In Sohu's case, the rumor mill might also be helping out. A source tells Marbridge Consulting Sohu CEO Charles Zhang and Tencent (TCEHY +1.2%) CEO Pony Ma have talked about merging their companies' online video units. Both Sohu and Tencent trail market leaders Youku and Baidu in China's burgeoning online video market.
Dangdang (DANG +8.6%) is adding to yesterday's big post-earnings gains after Oppenheimer hiked its PT to $15. The firm likes Dangdang's improved efficiency and partnerships with e-commerce rivals (inc. Alibaba's Tmall), and the fact mobile accounted for 13% of Q4 orders.
SEC administrative law judge Cameron Elliot has barred the Chinese units of the Big-4 accounting firms - KPMG, Deloitte, PwC, and Ernst & Young - from auditing U.S.-listed companies for six months.
Elliot declares the accounting firms "willfully" chose to withhold audit work papers from U.S. regulators for Chinese companies being investigated for accounted fraud. The firms have been worried about violating Chinese privacy laws by turning over the papers, and have argued the dispute needs to be resolved politically.
Though the firms plan to appeal and say they can continue serving Chinese clients for now, shares of Chinese Web and solar names aren't handling the news well. Soft Chinese PMI data could be worsening matters.
Qihoo (QIHU -4.6%) has joined the selloff in spite of a BrightWire report stating Alibaba (ABABA) has reached a deal to acquire a stake in the company. Marbridge Consulting reported two weeks ago Qihoo and Alibaba were in talks about a possible investment.
The service will be aimed squarely at Chinese online/mobile gaming leader Tencent (TCEHY), and will give developers a hefty 70% cut. Alibaba also plans to integrate the service with its Laiwang messaging app (competes with Tencent's dominant WeChat) and the mobile app for its Taobao e-commerce platform.
In addition to Tencent, Alibaba will be taking on a slew of other mobile game distributors, including NQ Mobile's (NQ +1.7%) FL Mobile unit.
Chinese game developer Perfect World (PWRD +10.1%) has skyrocketed in morning trading. Peers Changyou (CYOU +4.1%) and NetEase (NTES +3.5%) are also up sharply.
Also: Alibaba's Alipay online payments unit has struck a deal with Sina (SINA +1.5%) to allow Weibo users to make online and offline payments via Alipay. Sina investors have been expecting the company's partnership with Alibaba (bought an 18% stake last year) to yield service launches that would improve Weibo monetization.
Making good on a November Marbridge Consulting report, Baidu (BIDU +4.1%) has reached a deal to acquire Perfect World's (PWRD +1.8%) Huanxiang Zongheng online literature business (provides Chinese e-books, digital comics, and animations) for RMB191.5M ($31.5M). (PR)
Marbridge previously noted Zongheng offers 100K+ e-book titles, receives 60M+ daily page views, and gets over 1/3 of its site traffic via mobile.
The purchase is the latest in a string of 2013 acquisitions by Baidu, as the Chinese search giant attempts to create a far-reaching empire of Web/mobile content and services. Prior acquisitions: PPS, 91 Wireless, Nuomi.
Perfect World says the deal will allow it to focus on its core online gaming business. The company has been investing heavily in both developing new games and promoting existing ones.
Perfect World (PWRD) expects Q4 revenue of RMB850M-892M ($139.6M-$146.5M), above a consensus of $137.3M.
The company attributes its Q3 beat to the strong performance of new titles, including Swordsman Online and Saint Seiya Online. Average concurrent users for Chinese games rose to 778K from 742K in Q2 and 601K in the year-ago period.
Going forward, Perfect World is counting on the launch of DOTA2, as well as a Chinese version of U.S./European title Neverwinter, to maintain its momentum.
Sales/marketing spend rose 10% Q/Q and 21% Y/Y to $34.9M. The Y/Y rate is well below the 102% clip Perfect World reported for Q2, much to the concern of investors. R&D spend rose 19% Q/Q and 20% Y/Y to $38.8M. Gross margin was76.7%, up from 75.5% in Q2 but down from 81.5% a year ago.
Chinese Internet and solar stocks, many of which have skyrocketed this year, have closed with decent losses after the Shanghai exchange fell for the fourth day in a row amid credit crunch worries, and as NQ Mobile continued to feel the impact of Muddy Waters' fraud allegations.
Muddy Waters' detailed accusations regarding ghost addresses, a shell company, inflated market share figures, dubious cash balances, and spyware are likely to yield fresh scrutiny of the financial statements provided by Chinese ADRs, and could also affect the reception given to upcoming IPOs (I, II). Investor concerns about the bookkeeping of U.S.-traded Chinese firms had diminished some this year.
Today's downturn in Chinese game makers is outpacing a broader tick down in the Chinese tech space (CQQQ -0.2%). Perfect World (PWRD -1.5%), NetEase (NTES -4.7%), and Giant Interactive (GA -2.4%) are falling in sympathy after Shanda Games (GAME) was walloped yesterday following a Q2 beat.
NetEase is the lame duck, as a downgrade from JPMorgan to Neutral (albeit with a PT hike to $75 from $65) weighs the stock.
Shares of Perfect World (PWRD -6.6%) continue the descent they began during AH yesterday. Although the Chinese web/mobile game maker beat Q2 consensus and issued strong Q3 guidance, investors appear to have been left wanting.
A chief concern is ballooning costs. Cost of revenue grew 37% Y/Y in Q2 while opex grew 18.6% Y/Y. Revenue was up 4.7% in the same period. Marketing expenses were the largest culprit, up 60.1% Y/Y. Pacific Crest noted, "Q3 guidance is strong but spending is expected to remain elevated."
Morgan Stanley chopped its rating earlier today to Equal Weight from Overweight following Perfect World's Q2 release: "This mainly reflects rich valuation. Perfect World is trading at 10.7x 2014e P/E, vs. 4.6-10.8x for peers." However, the bank raised its PT to $20, reflecting its expectation of strong revenue growth in 2H on the back of "strong reception of new games such as Saint Seiya Online and Swordsman Online."
Perfect World is up 81.1% YTD, its climb nearly two-fold that of peers.
Other Chinese game makers: Shanda Games (GAME), NetEase (NTES), Giant Interactive (GA)
Perfect World (PWRD) expects Q3 revenue of RMB779M-RMB815M ($127.3M-$133.4M), well above a $116.8M consensus. The company cites expected revenue from newly-launched titles Swordsman Online and Saint Seiya Online.
It looks as if the good news was priced in. Like many other Chinese Internet stocks, Perfect World has been on a tear in recent months.
The Q2 beat is attributed to successful launches for Saint Seiya Online (launched in China) and Neverwinter (launched in North America/Europe, Chinese launch upcoming). The company launched numerous Web/mobile titles during the quarter, and is looking to further diversify its pipeline.
Sales/marketing spend +102% Q/Q to $31.8M thanks to ad/promotional efforts for new games. R&D +5% Y/Y to $32.5M.
Gross margin was 75.5%, -100 bps Q/Q and -580 bps Y/Y.
Perfect World's global network (covers both subsidiaries and partners) accounted for over 1/4 of its revenue.
Shanda (GAME) is nosediving as investors balk at the price it's paying to acquire affiliates responsible for handling its online game billing and customer service work, among other activities.
One of the affiliates (Shengzhan) owns valuable data about user activity. The other (Shengjiang) runs a network that sells 2M+ real/virtual prepaid gaming cards via 180K distribution channels.
Shanda claims service fees paid to the affiliates made up 21.3% of its Q1 revenue, and that buying the companies will help it deliver the kind of integrated platform it considers crucial for mobile success.
Shanda is paying for the deals with cash, deferred payments, and the settlement of an outstanding loan receivable.
Fellow online game providers NetEase (NTES -2.6%), Qihoo (QIHU -4.1%), Perfect World (PWRD -5.3%), and Giant Interactive (GA -5%) are selling off. Sohu and subsidiary Changyou's disappointing Q2 results and Q3 guidance are the main trigger, though a moderate selloff in Shanghai isn't helping either.
A roundup of tech analyst ratings changes: 1) Baidu (BIDU +4.7%) has been upgraded to Neutral by Citi following the 91 Wireless deal. 2) Sonus (SONS +4.7%) has been upgraded to Buy by Lazard. 3) Stamps.com (STMP -7.7%) has been cut to Neutral by B. Riley. 4) Move (MOVE +2.9%) has been started at Overweight by Stephens. 5) Cavium (CAVM -2%) has been started at Reduce by Nomura. 6) Perfect World (PWRD +1.8%) has been upgraded to Buy by Citi. 7) Trina (TSL -0.5%) has been cut to Underperform by Raymond James; shares would be faring worse if not for ReneSola's guidance hike.