Morningstar | Sohu's growth largely depends on its Sogou business and the launch of the new hit games.
Sohu is one of the earliest Internet services providers in China with three key businesses: media, search, and online games. With the trend of Internet traffic shifting to mobile devices, we think Sohu has lagged behind, and its media services are facing a tough time. Sogou, Sohu’s paid search joint venture with Tencent, is the bright spot; it has made significant progress in terms of both traffic growth and monetization. The successful release of Legacy TLBB Mobile in mid-May 2017 was a boost for Sohu’s online gaming business, but we think there is still uncertainty about the life cycle of this hit mobile game, as well as when Sohu can launch another one. The market for massive multiplayer online role-playing games, or MMORPGs, for smart devices has been crowded in China. Sohu’s brand advertising business has been facing difficulty, given increased competition. The Sohu Media Portal and Sohu News App are competing with various digital media outlets. Sohu Video has been losing market share to top-tier players, such as Tencent Video, iQiyi, and Youku-Tudou. Heavy spending on premium video content has significantly dragged down the margins of brand advertising. Sohu has shifted its video strategy from competing in head content to professionally generated content to increase the number of subscribers. However, as the top-tier players are still investing aggressively in content, video viewers have been attracted by Tier 1 video platforms, and Sohu Video’s revenue has seen consecutive decreases. We believe Sohu Video will still need restructuring or outside financing to support its operation; Sohu Media has already entered into a loan agreement with Changyou to borrow up to CNY 1 billion, or $149 million, within two years of October 2016. By the end of December 2016, stand-alone Sohu, excluding Sogou and Changyou, had cash and cash equivalents of $168 million, which could fund its operation for just one to two years if Sohu continues to invest in video content. A professionally produced drama costs about CNY 20 million-CNY 30 million, or $2.9 million-$4.4 million, and premium video content costs much more.
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