Finance Research Paper
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tai_zhang_-_research_paper_final.docxQihoo.
Qihoo 360 Technology Co. Ltd., headquartered in Beijing, China and founded by Zhou Hongyi and Qi Xiangdong in 2005, is a leading Chinese internet security company known for its antivirus software, web browser, and other internet and service products on both PCs and mobile phones. The company was successfully listed on NYSE with the ticker QIHU in the end of March 2011.
The company has a very unique business model. According to Yahoo Finance, “Qihoo 360 initiated its business operations by selling third-party antivirus software online. Soon afterwards they realized the potential of the freemium business model in the Chinese market and started providing their own antivirus products free of charge. In a short period of time, Qihoo 360's security products gained popularity and market share in China. Their current revenues are generated by leveraging their massive user base through online advertising and services such as online games, remote technical support, and system integration.”
The company has huge popularities in Chinese market. According to IReaserch, in March 2015, Qihoo 360 had about 503 million monthly active users for its PC-based products (479 million in March 2014), and about 778 million active users for its primary mobile security product (538million in March 2014) and also its internet browsers occupied 70.8% of total monthly active users by 376 million monthly active users. In addition, by user base, the company ranks number 1 among both PC and mobile internet security, web browser, and mobile app store providers in China, and number 2 in search engine in China.
Qihoo, with its large customer base, derives its income mainly from advertisement and other value added services. Among 1390.7 million revenue of 2014, advertisement income has contributed by 54%, and value added services by 44%. (Source: Company Data).
Some of the current key statics are given below:
Growth:
Qihoo 360 is a company that has achieved amazing growth since its listing and that is subject to have huge potential for further growth in the future.
Reflected from its past data, the company’s fast and stable growth capability is impressive. According to the data below by Capital IQ, the company has grown in an extremely fast speed in the past 5 years that besides 2011 alone with 191% growth, Qihoo kept about 100% growth each year from 2012 to 2014. In the end of Jun 30th 2015, Qihoo’s revenue has already grown 64.2% comparing with the total amount of revenue generated in the whole 2014 year. Moreover, during the second half of 2015, it is expected to have another 39.65% growth, totaling 103.85% growth in 2015.
Growth Continued: Search Business Progress Well
According to Credit Suisse, Qihoo's search revenue is estimated to surge by 147% in 2015 to $735 million or 37% of the company's total. According to iResearch, Qihoo's PC search market share by queries has grown steadily over the past two years and has reached 15% by the end of 2014. Testified by some search agencies, the overall performance of Qihoo's PC search service has been very impressive. The ROI of Qihoo's search ads for some selected items such as travelling, online games, and ecommerce has been particularly good. Qihoo has recently cut commission rates by 5 percentage point for search agencies serving its K accounts (big advertisers) in 2015, likely on the back of increased recognition of its search service by advertisers.
Qihoo recently released a new brand name for its search engine, HaoSou, as against the 360 search brand used previously. In the meantime, the company has increased the number of paid listings from the original three to a maximum of eight for some hot key words, due to the strong demand derived from increasing market share.
Qihoo began to provide search ads service for medical advertisers in February 2015. It has managed to sign up hundreds of advertisers as of now. Medical advertisers are usually the biggest advertisement spenders across all ads categories. Also, Chinese government is now slowly lowering the barriers to entry for imported medicine. According to China Briefing, “on May 19th 2015 the State Food and Drug Administration of China released a document titled the Technical Guildelines for the Clinical Evaluation of Medical Devices. This document removes the need for certain imported medical devices to have a clinical trial in China if they have already had one abroad”. Faster procedure for the imported medicine to be able to sell in China is likely to boost the medical advertisement market, and expected broader open for foreign pharmaceuticals is estimated drive the medical advertisement market. With the stepping into the medical advertisement market and expected decreasing barriers to entry for foreign pharmaceuticals, Qihoo will further fuel the search revenue by promising revenue generated by medical search sector through this year and also in the future.
Qihoo was a late participant in the mobile search business. The company did not launch a dedicated mobile search app until mid-2014. The challenge Qihoo faces for its mobile search is much greater for its PC search. Qihoo's overall search brand recognition is not as strong as Baidu's. Compared to its own PC search, Qihoo's mobile search lacks a powerful platform, such as its Internet browser for its PC search to drive the mobile search traffic. Having said that, in reality, Qihoo has appeared more aggressive in promoting its mobile search app lately by way of cross selling through its popular PC and mobile products. The pre-installation efforts through the Coolpad JV should also contribute some installations to Qihoo's mobile search app
Growth Continued: Coolpad deal may bring positive surprise
On Dec 16th 2014, Qihoo had announced the investment of $409 million in cash to take a 45% stake in a JV with China-based smartphone manufacturer, Coolpad. According to the release, the JV’s business is primarily focusing on the sales of mobile devices under the brand Dazen through internet. Besides, the release said Qihoo will also become the default provider of key mobile services for Coolpad's smartphones, including mobile security, mobile app store, mobile search and etc.
Coolpad was the No. 5 best-selling smartphone brand in China with a 9% market share in FY14, based on IDC's statistics. Its total smartphone shipment was 50 million units in 2014 and Coolpad's management expects to grow this number to 60 million units by FY15, of which around 20 million are likely to be contributed by Dazen brand. The JV is now up and running. Qihoo's CEO, Zhou Hongyi, has been appointed as the CEO of the JV and oversees the operation by himself.
It is believed that this deal is positive for Qihoo's overall mobile businesses. The market has been concerned that Qihoo lacks a strong moat in the mobile internet business. It has done well so far in its mobile app store and security businesses. But both applications are facing more intensified competition from its competitor Tencent.
Smartphones in China are an important medium for app distribution through pre-installation. Therefore, Qihoo's partnership with a leading smartphone brand should increase the installation base for its mobile apps and thus the market shares of its app on mobile platform.
Growth Continued: Strong Mobile Games
Qihoo has been largely benefited from increasing mobile gamer players by its mobile games sector and increasing focus on the mobile game sector by the company will boost company’s profit.
For mobile games distribution business in China, mobile game developers are expected to focus more on elite games and launch more mid-core and hard-core mobile games to retain mobile game users. This trend will benefit mobile games distribution channels such as Qihoo with integrated resources such as app distribution stores, search engines and other online media. According to a GPC and CNG survey, Qihoo has been able to maintain its market share of the Android-based mobile games user base in China, despite increasing competition from Tencent. It is believed the company mainly aids by the integration of new recommendation-related features in Qihoo’s mobile distribution app, e.g., recommendations based on social networking and locations. As of end-March 2015, there were over 130m registered mobile game users on Qihoo’s app store and the company is working with over 1,400 mobile game developers to commercially operate around 1,600 mobile game titles. In addition, it is highly possible that Qihoo should be able to further benefit from the market potential through partnership with big game developers such as NetEase, Perfect World, and Changyou that are more capable of developing high-quality mid-to-high core games than start-up studios. These PC game developers are unlikely to license their games to Tencent, which is Qihoo's biggest competitor, because of grudge stemming from the battle on PC games. Having considered all above, it is not hard to conclude the company’s growth will be driven by its effort in mobile game sector.
Moneychimp Valuation:
By using CAPM valuation on Moneychimp, Qihoo’s stock current trading price of $70.68/share is undervalued as compared with the result of $253.65/share in stock value. In the calculations, current 20-year T-bills rate is used as the risk-free rate, annualized return on S&P index from 2000 to 2015 is used as the benchmark rate.
Privatization:
Another valuable information is that the company is in the process of its go-private plan which offers to pay considerable premiums over the current price and the plan is highly plausible to be completed in the near future.
From 3234.68 points recoded on Dec 31th 2014 (Point A) to 5166.35 points recorded on Jun 12th 15 (Point B), SSE had soared by 59.71% in only half year. It was expected that the enterprise in Qihoo 360 made the decision of privatization in order to be relisted in Chinses market for higher valuation and greater payoff.
However, shortly before the announcement of go-private, Chinese market started to take a massive dip. On the Jun 12th, SSE index at 5166.35 points (Point B) started to fall. Until Aug 26th (Point C), the index had incredibly dropped by 43.34%, wiping out more than $3 trillion in paper wealth.
The incident was later described as the biggest Chinese stock disaster in the history since its first open in 1990. The unprecedented meltdown in Chinse equity market simply paused the process of the buyout for obvious reason. In order to control the situation, Chinese market regulator claimed to stop all the processing and IPOs. As a result of increasing uncertainty of QIHU’s delisting plan and the worries about Chinese market, investors were pulling money out
Effected by the crash of the Chinese stock market, from Jun 18th shortly after which Qihoo made the announcement, Qihoo’s stock price had fallen from its peak of $71.05/share (Point A) to its lowest of $42.72/share (Point B) until Sep 14th or 39.85% in merely 3 month-time. The systemetic harzad of Chinese stock market negatively effected almost all the US-listed Chinese companies’ stocks and indefinete gate close for new IPOs had contributed to deminish confidences of investors who expects the buyout will sucessfully go through.
The government and stock regulators had taken immediate action including financially supporting the market and issuing some very strict rules and laws. Specific actions are: (1) Short selling was limited (2) Large mutual funds and pension funds pledged to buy more stocks (3) The government provided large amount of cash to brokers to buy shares. The effort by the government and the market to stable the market seems to be successful. After Aug 26th (Point C)
Chinese market has been experiencing slow and stable rebound till now. And for Qihoo, prospects have been brightened as a frantic effort by Beijing halted the decline and regulators reopened the domestic initial public offering market after a freeze on new listings in July
As the Chinese market is steadily recovering, Qihoo’s enterprise, not frightened by the crash, determined to continue the plan of privatization. Good news came in on Dec 1st. According to Wall Street Journal, the buyout is still in process and is close to following through with the same price offer of $9 billion or $77 for each ADs.
The buyout is highly possible to go through in the coming year. First of all, the main obstacle of Chinese market’s instability is largely reduced for the market has received a huge government’s financial support, and new sophisticatedly rules and laws to protect the market are issued to prevent massive volatility movement. Also the reopen of the new IPOs on Nov 5th essentially makes the relisting possible. In addition, the IT industry’s high valuation given by the Chinese market after the crash is still compelling. As of now, IT industry PE ratio in China is around 122 times which is about 6 times the same PE ratio of around 20 times in US. Even after the terrible crash of Chinese market in mid-June, the PE ratio for IT industry has stayed quite high as compared to that of US market. Much higher valuation at home has encouraged many Chinese IT companies such as Baidu, Changyou, and, of course, Qihoo to go back home and many of them have made announcement about their own go-private plans. Plus the fact that it is easier for those companies to raise funds back home because they are better recognized in China, enterprises’ determinations of the privatization are largely strengthened. As of Dec 2nd, the closing price is $70.68/share which essentially marks potential $6.32 or 9 percent in gain if the process is successfully going through.
Conclusion:
Qihoo has been performing very well on both its business and stock. Revenues are expected to continue growing in a fast speed for the estimated growth in the primary sectors such as advertisement and games. Its go-private plan is also a lightspot for investors. Based on all those above, the recommendation is BUY.
Market Shares for Major Smartphone brands in China by Shipment in 2014 Others Xiaomi Samsung Lenovo Huawei Coolpad 45.0 13.0 12.0 11.0 10.0 9.0
Mobile Game User (in millions) 2012.0 2013.0 2014.0 89.1 262.3999999999999 347.2
Revenue by Segment Onlie advertising Internet Value Added Services Other Services 54.0 44.0 2.0
