Strategic trade
Trade view / 29 January 2015 at 1:02 GMT

China's Qihoo diversifying into smart home revolution

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

The concept of a smart home has been discussed for years and whilst this is usually focused on the interaction between electronic devices such as TVs and smartphones, a major area of the smart home concept is security. Qihoo has targeted this market as a key revenue driver for the coming years, and would be able to leverage the business on its market leading status in the personal security software market. 

In the smart home concept, all products in the home will be interconnected, forming a LAN for the family and the home. But with all of this personal information within the network, there is a risk that if a network is hacked, then personal information and expensive electrical goods compromised.

So Qihoo is developing smart security routers to prevent this, and to protect the smart home concept. In my opinion, this is the best way for Qihoo to enter the market, because it can leverage its market leading personal security software reputation in China to promote its home security services. In turn, a smart home that is protected by a Qihoo router will encourage users to download Qihoo software on other devices, such as smartphones and computers, which will help to build market share in China’s highly competitive tech industries.

Qihoo has begun producing a range of smart watches for children and the elderly, so that if these two vulnerable demographics get lost, they can be readily located and called via the watch. The watch essentially acts as a walkie-talkie, whose location can be tracked on a smartphone, and this allows parents to give their children more freedom, and to be reassured that elderly relatives are safe.


Qihoo Kids Smart Watch












Source: Qihoo  


In 2014, Qihoo had the highest sales of children’s smart watches in the world, and it is likely to become the world’s largest child security firm within the near future. I personally think that this is a potentially huge market, because the smart watch only costs 239 yuan ($38.26), and this includes a three-month connection service. So after the three-month service period expires, parents have to continue to subscribe to the service. It could also take business away from the smartphone industry, because a smart watch is a much cheaper way for parents to keep in contact with their children.

Along with their PC and mobile security products for both individuals and enterprises, the introduction of the smart watches for children and the elderly, as well as the smart home security will likely see Qihoo become one of the world’s largest internet security companies. The conference call for the fourth quarter should see management discuss their hardware strategy for 2015.

Management and risk description

Trading through an earnings release is inherently risky, and investors should be wary that if earnings fail to meet expectations, then Qihoo’s share price will likely fall, and lower the probability of the trade thesis coming to fruition. 

The concept of the trade will understandably take longer than the three-month duration that I have assigned, but I expect that management will discuss the firm’s strategy for 2015, including the smart home security and smart watch products. This diversification of the business model into hardware should see a positive reaction from shareholders, particularly as the firm can leverage its personal security software reputation to gain a strong share in the industry.

Parameters

Entry: $60.16

Stop: $55

Target: $70

Duration: three months

— Edited by Robert Ryan

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