Strategic trade
Trade view / 17 March 2015 at 1:48 GMT

Qihoo gets moving with its mobile education

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

The expansion of the Internet Of Things strategy amongst China’s tech leaders has seen firms focus on connecting education to the mobile ecosystem. The first major move in this industry came from Tencent and New Oriental Education, who have launched an English learning app called uDA, and will look to launch more apps to cover different subjects in the Gaokao (university entrance exam) syllabus.

Qihoo and Xueda Education Group have formed a joint venture in order to design mobile apps and services for K-12 education, which ranges from kindergarten to high school ages, and this should see Qihoo enter into a very profitable business, with Xueda getting access to a much larger potential user base. Qihoo’s management was rather vague on the subject during its fourth quarter earnings conference call, choosing instead to discuss the firm’s focus on the broader Internet of Things strategy. Xueda’s management did discuss the joint venture, although not in detail. However management did say that further details would be forthcoming within ‘the coming weeks’, and should this be similar to the partnership between New Oriental Education and Tencent, then we will likely see a positive reaction in both share prices.

Whilst it may seem that the more security focused Qihoo would find it difficult to compete with China’s biggest social networking firm Tencent on the education front, Qihoo has been actively targeting child users through its 360 Kids Guard smart watch. I believe that it is therefore a shrewd move by the firm, because by getting children and parents into the Qihoo ecosystem with the Kids Guard, at an age before children typically have their own smartphone and QQ and WeChat accounts, Qihoo and Xueda will hope that they will register for their educational courses.

Although the trade view could be seen as a recommendation of Xueda, I have chosen Qihoo as the best way to profit from this event because of the firm’s stronger near term drivers. Xueda posted disappointing results in the fourth quarter, and it is likely that investors will be waiting for signs of improvement from subsequent earnings releases before bullish sentiment returns. Qihoo, on the other hand, posted strong results, which weren’t reflected in the share price reaction, and with the growing opportunities in healthcare advertising, Qihoo continues to look undervalued. Its diversification away from search is a positive move by the firm, and management was stressing the ramp up in monetisation efforts during the fourth quarter.

Management and risk description

Qihoo’s fourth quarter earnings were strong, but the share price reaction was nullified by the S&P 500 and Dow Jones erasing all of their 2015 gains on March 10. Despite Qihoo trading near 52 week lows, another $200m share buyback program was initiated, and this should continue to provide support for the share price, after the previous buyback program was completed before the earnings release. 

This education business focused trade view should require longer than the three month duration, but I expect that management commentary in the first quarter earnings release from both Qihoo and Xueda should allow investors to see the revenue potential of the business.

Parameters

Entry: $46.32

Stop: $44

Target: $52

Duration: Three months

— Edited by Adam Courtenay

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