Strategic trade
Trade view / 29 July 2015 at 22:57 GMT

Baidu's strong Q2 bodes well for Qihoo earnings

China Watcher / Shanghai
China
Instrument: QIHU:xnys
Price target:
Market price:
Background

Baidu’s earnings report gives a good overview of China’s search engine industry, and Monday’s release of the firm’s second quarter earnings showed good progress. However, the sharp decline in the firm’s share price was related to the weak revenue guidance, and the expected heavy spending to improve the firm’s position in the O2O (online to office) business. From this report, investors should get an indication as to what to expect from rival search engine firm Qihoo when it reports its own earnings at the end of August.

Baidu saw 29.6% quarterly revenue growth from its search business, and growth in both its active online market customers and revenues per online marketing customer. In addition, search metrics such as click through rates and cost per click all grew, which is a good sign for Qihoo.

The calendar first quarter was particularly disappointing for all Chinese firms as the late timing of the New Year festival had a notable effect. With Chinese New Year usually at the end of January, the weeks before are very slow, but firms can make this up as March sees a return to normal business conditions. However, as Chinese New Year was in late February, firms didn’t capture the post-New Year growth in the first quarter, and so Qihoo will have seen this in the second quarter instead.

With much of Baidu’s conference call spent discussing the potential of the O2O industry, investors were concerned with the amount of capital that will be spent on building up market share. For Qihoo, their O2O presence is much smaller, and it has no concrete plans to vastly increase market share. This should be reassuring to investors because it’s likely that the firm won’t announce a large scale spending plan to compete in the industry. Although the firm has released apps such as 360 Diantong, I expect that Qihoo’s O2O presence will be much more passive than its peers. In addition, the firm has only recently launched its new smartphone, from the joint venture with Coolpad. The earnings conference call should allow investors to see how the initial sales figures are.

The most important part of the earnings conference call will be commentary on the management buyout bid, which the firm is still considering. Management has reiterated its plan to delist in the US and relist in Mainland China, and I fully expect that the buyout bid will go through. As I have stated in previous trade views, the buyout price of $77 per share continues to present an attractive opportunity to investors, and the current difference between share price and buyout price is simply a product of investor concern over Chinese volatility.

Qihoo’s share price since its 2011 IPO

Qihoo's Stock Price Since Its IPO












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Management and risk description

Chinese markets had seemingly calmed down since the rout at the end of June and beginning of July, but after Monday’s 8% drop, investors remained concerned about volatility in the Mainland, and its impact on US-listed Chinese firms. I have often stated that the government will do whatever it takes to support equity markets in the short term, and we have seen continued buying from state entities.

The earnings release will be a major source of volatility for this trade view, in what has already been a volatile trade. Investors should expect large swings over the next month, but the conference call should bring a lot of clarity to Qihoo’s privatization bid.

Parameters

Entry: $62.99

Stop:
$60

Target:
$77

Time Horizon:
Two months

– Edited by Robert Ryan

Non-independent investment research disclaimer applies. Read more

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