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February 7, 2012 7:25 pm
The trouble with US-listed Chinese internet stocks is that they exist in the shadow of Baidu, the country’s leading search engine. Take Sohu, the online media group and the fourth-biggest Chinese internet stock listed in the US. Its 20 per cent share price gain this year was almost reversed overnight on Monday when Charles Zhang, chief executive, said net income in the fourth quarter plunged by two-fifths year on year, and gave a modest forecast for first-quarter advertising revenue.
These problems look to be short-term. Most of Sohu’s profit fall was the result of a $27m impairment charge (it clearly overpaid for recent acquisitions). Advertising growth was understated because most of the sales force was on holiday (an earlier than usual Chinese New Year). Overall, online advertising remains one of the sweetest spots in China’s economy. It was two-fifths of Sohu’s total sales last year and outpaced online games growth.
Helped by tough competition among newly capitalised e-commerce sites, online advertising sales in China jumped by 80 per cent last year, almost six times faster than the global average. This growth has a way to go because it makes up less than a 10th of China’s Rmb600bn advertising spend. Key word search takes the biggest slice; Sohu’s sales here more than tripled in its fourth quarter thanks to its easy-to-use Sogou (search dog) web browser.
Sohu is China’s third-biggest recipient of online advertising spend, trailing Baidu and Alibaba. While Baidu has seen historically strong annual revenue growth, helped by Google’s exit in 2010, it carries a price to this year’s earnings ratio of 30 times, almost three times that of Sohu. Sohu’s revenues gained 42 per cent last year, considerably higher than Google’s at 29 per cent, yet the latter trades at a 20 per cent premium. Twists in the tale apart, Sohu still looks good value.
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