Thoughts on the impact on Sohu of a possible Sogou IPO

Bloomberg reports China’s Sogou Targets $5 Billion IPO to Chase Rival Baidu.  Here’s a quick look at what an IPO at this valuation would mean for Sohu which currently owns 38% of Sogou.

SOHU has three main businesses:

  • Media Portal, including sohu.com focus.cn and 17173.com.  These businesses reported an operating loss of $136mm in 9M16.  Advertising spending in China has been weak and the company incurs high costs for new services like video.
  • Games, 68% ownership of changyou.com with the remainder held by the public.  This business reported an operating profit of $121mm in 9M16.
  • Search, 38% ownership of sogou.com with 45% held by Tencent.  This business reported an operating profit of $74mm in 9M16

If a Sogou IPO is successful as suggested by the article then it would imply a value of ($1.8Bn) for the media portal business (Corrected table)

SOHU SOTP 010417 (Corrected)

Unfortunately Sohu’s value is unlikely to be this compelling:

  • It’s hard hard to see how Sogou would earn a $5Bn valuation in the US market.  This would be about a 90 P/E (based on annualized 9M16 net income) when other leading Chinese internet companies (Alibaba Tencent Baidu) trade in a P/E range of 30-40.  If Sogou trades at a 35 P/E then SOHU’s stake would be worth only $717mm
  • The portal business is incurring substantial losses and is borrowing cash from Changyou.  A new 1Bn RMB loan was disclosed with 3Q results.  It’s possible that the future value of this business really could be negative.
  • Investors are likely to apply a holding company discount of at least 20% to the sum of the parts valuation

The rumored IPO would be positive for Sohu but would not solve the problems that have kept the stock in a trading range for many years.  The IPO does suggest additional opportunities may exist for Sohu to sell all or part of current portal businesses (news, real estate,  and the 17173 game portal) to strategic buyers.  Such transactions might bring synergies that enhance profitability and provide more visibility into the value of these units.

 

 

 

 

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