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SOHU 3Q07: Summary of Analyst Actions

A Great Q3. Sohu (SOHU) reported strong Q3 results yesterday after market close. The major driver is its online game TLBB. The stock opened 9.8% higher than yesterday's closing price. Overall, it's a great Q3.

Analyst Actions. This morning,  nine analysts published reports on Sohu's Q3 results (see table below). Here is a summary: 1) No upgrades or downgrades. 2) Eight one the nine analysts maintained a positive rating; one maintained a neutral rating. 3) Eight of the nine analysts raised their price target. Average price target was up 40% from $45 to $63. The exception, Susquehanna, has a "No Target" policy.

Table: Analyst Actions Following Sohu 3Q07 Earnings Report

Company	Rating	Price Target
CIBC World Mkts	Maintained "Sector Outperformer"	Raised from $50 to $60
Citigroup	Maintained "Buy"	Raised from $40 to $65
Credit Suisse	Reiterated "Outperform"	Raised from $45.2 to $61.7
Goldman Sachs	Maintained "Neutral"	Raised from $35 to $51
JP Morgan	Maintained "Overweight"	Raised from $39 to $69
Pali Capital	Maintained "Buy"	Raised from $41 to $66
Piper Jaffray	Maintained "Outperform"	Raised from $61 to $68
RBC Capital Mkts	Maintained "Outperform"	Raised from $48 to $65
Susquehanna	Maintained "Positive"	Maintained "No Target"

Analysis. The average price target went up 40%, although there were no upgrades because most of the analysts already had a positive rating. Almost all of the analysts are positive on SOHU and raised their price targets. Overall, Wall Street's sentiment is overwhelmingly bullish on SOHU. We believe the stock will do well in the next several months on strong fundamentals and positive investor sentiment.

What's Next. In the next article of our China Internet Research, we will analyze SOHU's historical earnings, and its performance between earnings releases, so that investors will have a better sense of how the stock might perform before Q4 earnings.

Related: Compare 19 China Internet Stocks; Online Games Ranking; China Internet Research;

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Ten Most Popular Online Games in China

The table below lists the 10 most popular online games in China, as of 10/15/2007, according to a survey by 17173.com, the leading online gaming information website in China.

Analysis:

1. Perfect World (PWRD) claims three spots in the list. This recent IPO is covered by six Wall Street firms (Morgan Stanley, Credit Suisse, Citigroup, CIBC, SIG, Pali Research). All of them have a "Buy" rating on the stock.

2. Fantasy Westward Journey (FWJ), World of Warcraft (WoW), and TLBB are the only three games that received more than 80K votes. Other games trailed by a large margin. This shows that the flagship games of NetEase (NTES) and The9 (NCTY) continue to lead the market, and TLBB's developer and operator, Sohu (SOHU), has become a strong competitor in the industry.

3. After two and a half years' operation, CDC Games' Yulgang is still very popular. Yulgang is one of the earliest free-to-play, item-based online games in China. Its sustained popularity demonstrates that item-based games can have a long life cycle if they are operated appropriately. CDC Games is a subsidiary of CDC Corp. (CHINA) and the pioneer of the free-to-play, item-based business model in China.

4. Industry leader Shanda (SNDA) did not claim any spot in the Top-10 list. Is this a bad sign? Not really. Actually this demonstrates that Shanda is not overly dependent on any single game, and its revenues are very diversified. This reduces the "hit-or-miss" risk which has been investors' major concern on online gaming stocks. From this perspective, Shanda may be the safest investment among all the Chinese online gaming companies.

Table: 10 Most Popular Online Games in China

Ranking	Game	Operator	Ticker	Votes	% of No.1
1	Fantasy Westward Journey	NetEase	NTES	128,409	100%
2	World of Warcraft	The9	NCTY	96,224	75%
3	TLBB	Sohu	SOHU	81,988	64%
4	CrazyRacing	TianCity	N/A	68,091	53%
5	Legend of Martial Arts	Perfect World	PWRD	62,275	48%
6	Perfect World II	Perfect World	PWRD	58,806	46%
7	Yulgang	CDC Games	CHINA	53,228	41%
8	Zhuxian	Perfect World	PWRD	45,822	36%
9	Tianji Online	FerryGame	N/A	42,002	33%
10	Da Hanghai Shidai Online	Choei Net-Tech	N/A	36,447	28%

Source: 17173.com

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Baidu Monthly Traffic Tracker: July 2007

Topic: The first month of Q3 (July) has passed. What was Baidu's traffic growth rate QoQ (July vs. April)?

Data: Traffic to Baidu.com was up 7.5% QoQ in July (vs. April), according to our tracking of ~1,000 highly monetizable keywords on Baidu.com. The keywords we selected represent all the major industries including real estate, finance, IT, transportation, apparel, chemicals, machinery, sports, e-commerce, and so on. The appendix is the July and April data on a portion of the ~1,000 keywords tracked by China Analyst. To verify the accuracy of our tracking, please visit Baidu Index, where the company discloses search query data.

Analysis: We think the 7.5% growth in July vs. April was not bad for two reasons:

1. Traffic is not the only revenue driver. For a search engine, Paid Search Revenue = Total Searches (Traffic) x Click-through Rate (CTR) x Cost-per-Click (CPC). This shows traffic is not the only revenue driver for Baidu. In fact, in Q2 2007, Baidu's total revenue was up 47.6% QoQ while its traffic only increased 16.2%. This means the other two factors jointly contributed 27.0% QoQ growth, as shown in this equation: 147.6%=(1+16.2%)x(1+27.0%).

2. Implication for meeting Q3 guidance. Baidu's Q3 revenue guidance ($64.6M-$66.5M) implies a 23%-26% QoQ growth. For Baidu to meet the mid-point of this guidance (24.5% QoQ growth), the other two factors only need to jointly contribute 15.8% QoQ growth, as shown in this equation: 124.5%=(1+7.5%)*(1+15.8%). The assumption of this calculation is that for the remaining two months of Q3, QoQ traffic growth remains at the 7.5% level.

Our Baidu Monthly Traffic Tracker will continue to monitor the traffic pattern going forward. And we suggest that investors look into the July, April, and Q2 data for more information.

SINA 2Q07 (1): Historical Trading Pattern after Earnings

Summary of Q2 results. Sina just reported mixed Q2 2007 earnings with two "beats" and one "miss": Total revenue beat Wall Street consensus by 0.3%. Non-GAAP EPS beat the Street by 10.8%. The mid-point of next quarter (Q3) revenue guidance missed the consensus by 1.2%.

Trading pattern after earnings. As highlighted in the table below, from 4Q05 to 1Q07, SINA went up 4 out of 6 times in next-day trading. Below is our analysis on three next-day trading indicators:

1. Actual revenue beat Wall Street consensus every quarter. It correctly predicted next-day trading 4 out of 6 times (4Q05, 2Q06, 3Q06, 4Q06) with a 66.7% hit ratio.

2. Non-GAAP EPS beat consensus 5 out of 6 times - the only miss happened in 4Q05, the earliest period. This metric successfully predicted next-day trading 3 out of 6 times (2Q06, 3Q06, 4Q06) with a 50% hit ratio.

3. Next quarter revenue guidance beat the consensus 3 out of 6 times. It correctly predicted next-day trading 3 out of 6 times (1Q06, 2Q06, 3Q06) with a 50% hit ratio.

Conclusion. Based on the analysis above, actual revenue seems to be the best indicator of next-day price action, so the stock is more likely to go up tomorrow. However, the revenue just beat consensus by 0.3%, the smallest in the past six quarters (1Q06-2Q07). In addition, the mid-point of next quarter revenue guidance missed consensus by 1.2%. In our view, the market has expected too much from Sina in growing its revenues, so investors should be cautious before buying SINA. Sohu (SOHU) similarly delivered solid Q2 results and strong Q3 guidance, but it still dropped the next day, failing to repeat a 100%-correct historical trading pattern.

Table: SINA Next-day Price Action vs. Earnings Results

Source: Company reports and Yahoo! Finance

Related:

SOHU 2Q07 (1): Historical Trading Pattern after Earnings

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

BIDU 2Q07 (3): Revenue Share Up 1.1% to 58.1%

BIDU 2Q07 (4): Historical Patterns Reveal Key Metrics to Watch

BIDU 2Q07 (5): Strong Results; Expect Positive Next-day Trading

Q2 Earnings Schedule and Conf. Call Links for U.S.-Listed Chinese Stocks

SOHU 2Q07 (1): Historical Pattern Indicates Positive Price Action Tomorrow

Sohu just reported Q2 2007 earnings. Next quarter revenue guidance is $45-$47M, whose mid-point ($46M) is 11% than Wall Street's average estimate ($41.6M). We believe the stock will go up tomorrow based on the following historical trading pattern:

As highlighted in the table below, from 1Q06 to 1Q07, next Q revenue guidance correctly predicted SOHU's next-day price action with a 100% hit ratio. When the next Q revenue guidance beat the consensus in 1Q06 and 3Q06, the stock went up on the next trading day. When the next Q revenue guidance missed the consensus in 2Q06, 4Q06, and 1Q07, the stock declined the next day.

Table: Sohu Next Quarter Revenue Guidance vs. Next-day Price Action

Source: Company reports and Yahoo! Finance

Related:

Q2 Earnings Schedule and Conf. Call Links for U.S.-Listed Chinese Stocks

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

BIDU 2Q07 (3): Revenue Share Up 1.1% to 58.1%

BIDU 2Q07 (4): Historical Patterns Reveal Key Metrics to Watch

BIDU 2Q07 (5): Strong Results; Expect Positive Next-day Trading

BIDU 2Q07 (5): Strong Results; Expect Positive Next-day Trading

Topic: How will BIDU trade on Thursday, July 26th?

Data: Baidu (BIDU) reported strong results, beating all the three major metrics: Q2 revenue (7%), Q3 revenue guidance (9.9%), and EPS (22.1%). The table below is a historical review of BIDU's price action vs. earnings results.

Analysis: As we mentioned in the 4th article of our "BIDU 2Q07" series, next quarter revenue guidance is the key metric to watch in Baidu's earnings report. The company's Q3 revenue guidance beat Wall Street consensus by 9.9%, while the other less important metrics, revenue and EPS, also beat consensus. Operating metrics were also strong with a 14.3% QoQ growth in customer counts and a 24% QoQ growth in average spending per customer. Therefore, we believe the stock will definitely surge at least 10% in the Thursday (July 26th) trading session.

Table: BIDU Historical Next-day Price Action vs. Earnings Performance

 

Source: Yahoo! Finance, Reuters, and company reports

Related:

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

BIDU 2Q07 (3): Revenue Share Up 1.1% to 58.1%

BIDU 2Q07 (4): Historical Patterns Reveal Key Metrics to Watch

Q2 Earnings Schedule and Conf. Call Links for U.S.-Listed Chinese Stocks

BIDU 2Q07 (4): Historical Patterns Reveal Key Metrics to Watch

Topic: What metrics should be investors' focus when reading Baidu's Q2 report? Are there any historical patterns?

Data: Below is Baidu's earnings history since its IPO. The following items (highlighted rows) deserve special attention: 1. By how much did actual revenue beat or miss the Wall Street consensus?  2. By how much did next quarter guidance beat or miss the consensus? 3. Price action on the trading day following the earnings announcement.

Table: Baidu (BIDU) Earnings History Since IPO

Source: Yahoo! Finance, Reuters, and company reports

Analysis: Based on the data above, we found the following patterns:

1. Next Quarter Revenue Guidance Is the Key. This metric shows Baidu's business outlook for the next quarter. When the next Q revenue guidance beat the Wall Street consensus (3Q05, 4Q05, 1Q06, 2Q06, 1Q07), the stock went up the next day 3 out of 5 times. When the next Q guidance missed the consensus (3Q06, 4Q06), the stock declined both times. We believe this metric is the BEST indicator for next-day performance with a 71% hit ratio (=5/7). And we suggest that investors pay most attention to this metric, which will be located in the "Outlook for Third Quarter 2007" section of the earnings press release.

2. Revenue Is Somewhat Useful. For the first three quarters (3Q05, 4Q05, 1Q06) after IPO, Baidu's revenue easily beat the consensus by at least 10%. The stock was up 2 out of 3 times after earnings. In the next three quarters (2Q06, 3Q06, 4Q06), Baidu barely beat or met consensus (1.9%, 0.5%, 0.0%). As a result, the stock dropped next day in all these three quarters. In 1Q07, Baidu reversed the tide a little bit, beating consensus by 3.7%. The stock climbed on the following trading day.

3. EPS Is Less Important. For 5 out of 7 quarters, Baidu handily beat EPS consensus. For the two quarters (1Q06 and 1Q07) it failed to do this, the stock actually went up (37% and 14%) after earnings report. The implication is that BIDU is generally not impacted by whether or not it beats EPS consensus. An explanation for this is: China's paid search market is still in its early, high-growth stage. Therefore, growing revenue market share is the priority for both Baidu and investors.

Related:

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

BIDU 2Q07 (3): Revenue Share Up 1.1% to 58.1%

Q2 Earnings Schedule and Conf. Call Links for U.S.-Listed Chinese Stocks

BIDU 2Q07 (3): Revenue Share Up 1.1% to 58.1%

Topic: How was Baidu doing in 2Q07 in terms of revenue?

Data: According to consulting firm Analysys International, Baidu's revenue market share in China was 58.1% in Q2 2007, up 1.1 percentage points. Google China's market share increased 4.1 percentage points to 22.8%. Yahoo China's market share declined 2.0 percentage points to 11.6%. The appendix is a table showing revenue market shares of Baidu and its competitors from 1Q06 to 2Q07. Analysys International also estimates total revenues of all Chinese search engines were $86.34M in Q2.

Analysis: Based on the estimated total market size ($86.34M) and Baidu's market share (58.1%), Baidu's total revenue in 2Q07 was $50.2M (=$86.34M x 58.1%). On average, Wall Street analysts estimate Baidu generated $49.25M in revenues in Q2. Baidu's official Q2 guidance is $48.9M to $50.2M. This means Baidu's revenue in Q2 will beat Wall Street consensus and reach the high end of guidance.

Note: The analysis above is based on the assumption that Analysys International was right on their estimates. We suggest that investors do some research on this consulting firm's track record, before believing their estimates.

In the next article of our "BIDU 2Q07" series, we will outline the key points to watch from Baidu's 2Q07 reports.

Related:

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

BIDU 2Q07 (2): Traffic Up 16.2% QoQ

Topic: How was Baidu doing in Q2 in terms of traffic? Did total searches increase or decrease, and by how much?

Data: Traffic to Baidu.com was up 16.2% in Q2 vs. Q1, according to our tracking of ~1,000 highly monetizable keywords on Baidu.com. The keywords we selected represent all the major industries including real estate, finance, IT, transportation, apparel, chemicals, machinery, sports, e-commerce, and so on. The appendix is the Q2 and Q1 data on a portion of the 1,000 keywords tracked by China Analyst. To verify the accuracy of our tracking, please visit Baidu Index, where the company discloses search query data.

Analysis: The 16.2% QoQ traffic growth looks good, but Wall Street and Baidu itself expect a much higher revenue growth rate: On average, Wall Street analysts estimate Baidu generated $49.25M in revenues in Q2, implying a 38.0% QoQ growth vs. $35.7M in Q1. Baidu's official Q2 guidance is $48.9M to $50.2M, implying a 37.0%-40.6% QoQ growth. These numbers are a lot higher than the 16.2% traffic growth.

For Baidu to meet these revenue expectations, where can the remaining growth of 21.8% (=38%-16.2%) come from? The answer is in the following formula:

Paid Search Revenue = Total Searches x Click-through Rate x Cost-per-Click

Total searches on Baidu were up 16.2% in Q2. This means the remaining portion of the growth (21.8%) has to come from the other two factors: click-through rate and cost-per-click. In the future articles of our "BIDU 2Q07" series, we will discuss these two factors in detail.

Related:

BIDU 2Q07 (1): Traffic Lead Maintained

BIDU 2Q07 (1): Traffic Lead Maintained

How was Baidu (BIDU) doing in Q2 2007? In the "BIDU 2Q07" series, we will publish information from various sources and analysis from different angles.

Concern: Some investors worry that Baidu may have lost traffic market share in Q2 as a result of several strategic moves by Google.

Background: Recently, Google China has been aggressive in growing its traffic: It has partnered with No.1 Chinese portal Sina, acquired No.2 Chinese directory website 265.com, and obtained an ICP license to clear the hurdle in setting up more servers in China.

Data: Below is the market shares of major Chinese search engines based on total number of search queries, estimated by consulting firm iResearch.

Table 1: Market Shares of Chinese Search Engines Based on Queries

Search Engine	Dec-06	Jan-07	Feb-07	Mar-07	Apr-07	May-07
Baidu	69%	71%	76%	75%	74%	75%
Google China	9%	10%	10%	12%	13%	13%
Yahoo China	6%	7%	6%	6%	6%	5%
Tencent Soso	9%	6%	3%	3%	3%	3%
Sohu Sogou	2%	2%	2%	1%	2%	2%
Sina iAsk	1%	1%	1%	1%	1%	1%
Other	3%	3%	2%	2%	2%	2%
Total	100%	100%	100%	100%	100%	100%

Source: iResearch

Conclusion: Investors do not need to worry too much about Baidu losing traffic to Google in Q2. As the data indicate, we believe Baidu maintained its traffic lead over other search engines in China during 2Q07. It is still the dominant Chinese language search engine serving 75% of total queries.

In the second article of the "BIDU 2Q07" series, we will provide data and analysis on Baidu's traffic growth in Q2.

Baidu Lost Market Share in Q1 2007

Baidu had a decent 1Q07 (revenue: $35.7M; EPS: $0.32) and provided a bullish revenue guidance for 2Q07 (37%-41% QoQ growth. However, in 1Q07, Baidu lost market share against Google China and Yahoo China, based on the table below. Key observations:

1. Baidu's market share in 1Q07 decreased one percentage point to 57% from 58% in 4Q06.

2. As highlighted in yellow, during 1Q07, Google China and Yahoo China gained market share at the expense of Baidu.

3. Despite a slower growth, Baidu still dominates China's paid search market by a large margin.

NetEase (NTES) Q4 2006 Earnings: What Does History Tell Us?

NetEase (NTES) will report Q4 2006 earnings next Monday (Feb 26) after market close. The stock has been performing well recently. Will it maintain the momentum following the earnings report? What should investors focus on when looking at the press release and listening to the conference call?

In this article, we will analyze NetEase's earnings history for the past six quaters, and try to find some useful patterns that can be used by investors to evaluate the incoming earnings report.

The table below shows NetEase's key financial numbers from 2Q05 to 3Q06, and compares them with company guidance and Wall Street consensus. Stock prices and EPS have been adjusted for stock splits. We highlighted the key metrics (in red borders or shaded backgrounds) that determined the direction of the stock following earnings reports. And we concludes several useful patterns and rules below the table:

BIDU: Disappointing Results May Lead to Lower P/E and Lower Price

Baidu (BIDU) has reported Q4 2006 earnings. The results are obviously dissappointing, as shown by the table below:

1. Revenue barely met consensus. The spread between actual and consensus revenues continued to shrink to 0%.

2. Guidance for 1Q07 ($34-$35M) indicates 0% quarter-over-quarter growth, and is below consensus estimate of $39.0M. Last quarter when BIDU reported, the stock dropped largely because the guidance for this quarter ($34-$35M) missed Wall Street consensus ($36M).

BIDU 4Q06 Earnings: What Can We Learn from History?

Baidu (BIDU) will report Q4 2006 earnings on Wed, Feb 14, 2007 after market close (for conference call details, refer to this article). In this article, we will analyze BIDU's earnings reports history since its IPO. Hopefully investors can make more knowledgeable decision based on the information.

The table below compares actual financial results with Wall Street consensus and Baidu's own guidance. Whether the actual results beat the consensus and guidance, and whether next quarter's guidance meets Wall Street's next quarter consensus estimates, will largely determine where the stock is going following the earnings report.

SINA vs. SOHU: Wall Street's Reactions to 4Q06 Earnings

SINA and SOHU reported Q4 2006 earnings on Feb 7th and Feb 5th, respectively. Judging from price movements in the first trading session following earnings reports, investors are favoring SINA over SOHU: SINA is up 13.4% intraday on Feb 8th, while SOHU declined 6.6% on Feb 6th.

This sharp difference is largely driven by Wall Street analysts, who reacted quickly and published their updated opinions on the stocks. Below is a summary of Wall Street's reactions to Sina and Sohu results:

Guess How Sina and Tencent Commented on Sohu's Q4 2006 Earnings?

Sohu has reported Q4 2006 earnings. How would Sohu's rivals, Sina and Tencent, comment on the results? Let's look at some screen shots of their websites:

Wall Street Luckily Found Something to Congratulate SOHU on

Here's something interesting during the SOHU earnings conference call (those who listened to it may have caught this):

In an earnings conference call, when the results are good, Wall Street analysts would typically say "Congratulations on a great quarter!" before asking questions. In SOHU's Q4 2006 call, several analysts did say "congratulations". HOWEVER, instead of talking about the quarter, they were congratulating Carol Yu, the CFO, on her promotion to co-President!

IN FACT, during the call, none of the analysts congratulated SOHU on its Q4 2006 results. This is NOT a good sign. Obviously, those analysts wanted to create goodwill with Charles Zhang and Carol Yu, but the earnings made it a difficult task. They finally decided to find something else to congratulate on, and what they luckily found was the CFO's promotion.

The truth is not pretty: SOHU has missed both the revenue and EPS consensus for Q4 2006:

Actual revenue: $34.4M vs. Wall Street Consensus: $35.5M
Actual GAAP EPS: $0.16 vs. Wall Street Consensus: $0.17

Based on the revenue and EPS misses, and the downbeat atmosphere of the conference call, it's clear that the Wall Street are not satisfied with SOHU's results. We will likely see several negative research reports on SOHU coming out on the morning of Tuesday Feb 6, 2007. The stock will likely be under downward pressure following the earnings report.

Related articles:

• SOHU's Q4 2006 Report - What to Watch
• Why Has SINA Outperformed SOHU?
• YTD Performance Ranking of US-Listed Chinese Stocks
• What Can We Learn from China Internet Guide 2007? (2) 
• Watch Chinese Stocks: Q4 2006 Guidance & Consensus
• Watch Chinese Stocks: Q4 2006 Reporting Schedules

SOHU's Q4 2006 Report - What to Watch

Sohu is reporting Q4 2006 results on Monday Feb 5th, the first among China Internet companies (for a detailed reporting schedule of Chinese companies, click here). Sohu's financial and operating results can be used as an indicator of how its peers (BIDU, SINA, TOMO, CHINA) are doing in online brand advertising, WVAS, and paid search.

In this article, we will outline positive and negative factors for Sohu during Q4, and key issues that investors should watch closely, when looking at the press release and listening to the conference call.

Why Has SINA Outperformed SOHU?

Investors following Chinese Internet stocks may have noticed this: Since late June, 2006,  SINA has outperformed SOHU by a large margin - in this period, SINA shares have climbed nearly 60%, while SOHU shares have gained 10%. There are many theories regarding this performance gap by the two major Internet portals in China. In this article, we will summarize several mainstream explanations.

First, let's get a better feeling of the phenomenon that we are trying to explain: The chart below shows the ratio of SINA price divided by SOHU price over the last two years.

What Can We Learn from China Internet Guide 2007? (2)

In its Internet Guide 2007, Internet Society of China revealed some data points that can help investors make more knowledgable decisions on stocks such as SINA, SOHU, NTES, SNDA, BIDU, etc. Key points:

1. Sina remains No.1 in portal and became No.1 in blog.

2. Sohu is no longer among the top three portals in China.

3. Baidu has solidified market leadership over Google and Yahoo.

4. Tencent's QQ has maintained No.1 in instant messaging.

5. Alibaba's Taobao.com is still No.1 in C2C, ahead of eBay China.

The table below summarizes the top three companies in 10 segments, according to Internet Guide 2007.