Strategic trade
Trade view / 24 March 2015 at 1:58 GMT

Qihoo targets Xiaomi with new operating system

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

Following on from Qihoo’s investment in domestic smartphone manufacturer Coolpad, the firm has launched a new website for the joint venture called 360 手机 (360 Mobile), which has introduced the new mobile operating system called AK47. This is based on the Android operating system, and users will be able to discuss upgrades and suggestions with Qihoo’s developers.

Qihoo 360 Mobile
The homepage for Qihoo’s new smartphone. Source: Qihoo 360 Mobile

Qihoo is targeting Xiaomi with this new phone, which is unsurprising given the popularity that the world’s most valuable startup is enjoying around the world. In fact, the slogan on the 360 Mobile website means "This operating system is probably more suitable for Xiaomi phones than Xiaomi’s own MIUI OS” (这可能是比MIUI更适合小米的OS). 

This is an important move by the firm, because I have discussed how Qihoo needs to move away from search and diversify into other business lines. With search, there is a glass ceiling because Baidu will never surrender significant market share to its rivals. Therefore, Qihoo has been actively focusing on its hardware and security products, as the firm concentrates on the security aspect of China’s Internet Of Things revolution. 

As these business lines generate revenue, it takes pressure away from management to increase search monetisation, which it has been reluctant to do too quickly.

I have previously discussed that China’s tech firms are developing their own mobile operating systems in order to build a closed-loop mobile ecosystem. We have seen that, along with Qihoo’s partnership with Coolpad, Alibaba and Baidu have set up similar partnerships with Meizu and Lenovo respectively, and this is a trend that I expect to see developed throughout 2015. Tech firms form these partnerships in order to preload smartphones with their apps, and to build their mobile-user base. By developing a mobile operating system, it builds the mobile user base further, because even if users do decide to download rival apps, the OS continues to collect data on users, which can be monetised.

Since my previous trade view last week, Qihoo has rallied 10.9% from $46.32 to last night’s close of $51.39, and I believe that this rally is a result of Qihoo showing investors that it is actively monetising its user base, through search and product diversification. Should we see further announcements that demonstrate this prior to the first-quarter earnings, Qihoo should continue to rally.

Management and risk description

Qihoo reached a low of $45.28 on March 2 and while the 13.5% rally has been promising, given the short space of time, investors may be waiting for the first-quarter earnings release before we see a sustained rally. I have set the duration of this trade for 3 months in order to cover the next earnings release, as management should give further discussion on the Coolpad partnership.

While Alibaba has developed its own mobile operating system for Meizu phones, Baidu has recently closed its own operating system because demand for Android and iOS was too high. Qihoo’s strategy is more similar to that of Alibaba, but the Baidu experience shows it can be very difficult to build market share in the mobile operating system market.

Parameters

Entry: USD 51.39

Stop: USD 45

Target: USD 55

Duration: 3 months 


— Edited by Susan McDonald


Non-independent investment research disclaimer applies. Read more

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail