Chinese search engine Qihoo announced on Tuesday that it had entered into a joint venture with smartphone manufacturer Coolpad, which sees Qihoo investing $410 million for a 45% stake. The joint venture allows Qihoo to install its software onto the popular smartphones, so that users become familiar with Qihoo’s ecosystem and their user base grows.
Coolpad is a Chinese smartphone manufacturer that tends to cater for the budget smartphone market. While relatively unknown outside of China, it has a reasonable market share within China, and as of October 2014, it had the fifth-largest market share of domestic Android smartphone manufacturers.
As part of the joint venture agreement, Coolpad will market the Dazen (大神) brand, whose range of phones can be found here
Source: Internet Consumer Research Centre
The deal is likely to be a beneficial move for both firms, as China’s smartphone market is fiercely competitive. Along with the large overseas manufacturers such as Samsung and Apple, Coolpad faces strong competition in the budget smartphone market. However, with software from Qihoo, Coolpad should begin to see an increase in market share.
In addition, it is likely that Coolpad would be grateful for the investment from Qihoo, as reports emerged in September that the smartphone manufacturer had reduced its headcount by 10% in order to cut costs.
From Qihoo’s point of view, it has always preferred to build its user base by offering free software, and once the user base is dedicated, it can be monetised. So by offering its software to a significant number of China’s smartphone users, Qihoo hopes that it will increase its dedicated user base, which has only recently started to be monetised.
The firm is cash rich, so the investment in this joint venture shouldn’t put the firm under any financial constraints. Likewise, if the partnership is successful, it’s likely that Qihoo will eventually acquire Coolpad.
This concept of an ecosystem has been the buzzword of 2014 for China’s tech firms, as firms offer a wide range of services to users so that they don’t need to use those of a competitor. It isn’t the first time that a Chinese tech firm has partnered with a domestic smartphone manufacturer. Alibaba recently announced that it will partner with Meizu so that the smartphone manufacturer will run Alibaba’s YunOS mobile operating system, and from there, users can have direct access to Alibaba’s shopping and media services.
The deal by itself should be seen as a bullish driver of revenues in the long run, but with the wider concerns over falling crude oil prices, Qihoo fell 6.9% to $55.52 on Tuesday, before recovering to $56.87 on Wednesday. Next year, 2015, will see Qihoo increasing the monetisation of its user base, so we should see strong revenue growth throughout the year, and given the decrease in equity valuation since August, Qihoo looks cheap at these current levels.
Management and risk description
As with all Chinese equity trade views at the moment, two short-term risk factors are the continued weak data out of China, which continued today as property prices fell 3.7% in November. In addition, global macro concerns over the volatile crude oil price and Russia’s financial health continue to dominate the news, so any major developments in these issues will likely affect Qihoo’s share price.
I have set the duration of two months for this trade, which will cover the firm’s fourth-quarter earnings report in February.
Duration: Two months
— Edited by Gayle Bryant
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