Strategic trade
Trade view / 11 June 2015 at 3:36 GMT

Coup for Qihoo with medical e-commerce joint venture

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

Chinese search engine Qihoo has formed a joint venture with Sinopharm Group to develop a medical e-commerce platform, which will sell prescription and over-the-counter drugs online. Sinopharm will provide the resources and drugs, while Qihoo will develop and protect the e-commerce platform, as well as provide search, cloud computing, big data and mobile applications.

The medical e-commerce business is set to be a major revenue driver in China this year. Industry leaders Alibaba and JD.com have invested heavily in developing e-commerce platforms and forming partnerships with pharmaceutical firms in order to take a large share of this growing market. Sinopharm is the largest pharmaceutical company in China, which makes this joint venture quite a coup for Qihoo.

Over the past 12 months, healthcare has been a major target for search engines. Healthcare advertising is a major revenue driver for the industry, and after Baidu’s dispute with private healthcare union Putian, Qihoo will likely have gained some ground on its biggest rival. 

Search engines are also focusing on connecting users with hospitals and doctors. For Qihoo, the addition of a medical e-commerce platform would be valuable because it would allow users to make purchases after receiving advice from doctors.

I have discussed previously how Qihoo needs to diversify away from search, because rival Baidu has such a large market share of the search engine industry. The company has made several strategic moves into new markets that I believe will generate strong revenue streams in the long run. 

First, the firm invested in a hardware factory in southeast China to produce products such as wi-fi cameras, children’s smart watches and smart home routers. Second, the firm has leveraged its reputation as a market-leading personal security software provider to produce enterprise security software. 

The entry into medical e-commerce is a very promising move by Qihoo, and should help the firm develop its e-commerce business as a whole. Its hardware products are sold through its proprietary Qikoo (奇酷) e-commerce platform, and the joint venture with domestic smartphone manufacturer Coolpad has seen the jointly developed Dazen (大神) phones sold on the platform. Although few details have been released out this joint venture, I would expect that the medical e-commerce platform would be built within Qikoo.

Management and risk description

Investors shouldn’t expect to see the new medical platform until the second half of the year at the earliest, but the key event in this trade view will be the second-quarter earnings release, which is expected in August. 

Management should give investors an indication as to how the joint venture will operate, and the expected time that the new platform will be operational. However, there is an inherent risk with basing a trade view around an earnings release, so investors should be prepared for volatile trading in and around that time.

It should also be noted that despite consistently beating earnings and revenue consensus, Qihoo’s share-price reaction after an earnings release is difficult to predict, and is often negative over a three-day period. Investors should be aware that even despite strong earnings, the share price may react negatively to the release.

Parameters

Entry: $63.14

Stop: $60

Target: $68

Time horizon: Three months

— Edited by Gayle Bryant

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