Initiation
China: Internet Software & Services
13 December, 2013
Action
What’s new?
Our view
BUY (Initiation)
► We initiate coverage of Qihoo
► Qihoo has established a leading
TP upside (downside) 43.9%
position in China’s antivirus
43.9% upside.
and app distribution segments
price of US$115, which implies
Close 11 December, 2013
Price
12M Target
Previous Target
NASDAQ
with a BUY rating and a target
US$79.91
US$115.00
N.A.
4,003.8
software, website navigation,
via several popular mobile apps.
►
We believe PC/mobile internet
monetization is on track.
Company profile: Primarily known for its antivirus software, Qihoo is the largest website navigation/mobile assistant
supplier and second largest search engine player in China.
Share price performance relative to NASDAQ
101
Share Price (US$)
Performance relative to NASDAQ (%)
200
91
81
150
71
61
100
51
41
50
31
21
Nov-12
0
Feb-13
May-13
Market cap
6M avg. daily turnover
Outstanding shares
Free float
Aug-13
US$10,176.6 mn
US$202.3 mn
122.8 mn
52.4%
Hongyi Zhou,
17.7%
Net cash
US$6.10
13.1x
Major shareholders
Net debt/equity
BVPS (2013F)
P/B (2013F)
Financial outlook (US$ mn)
Year to
Dec
2013F
2014F
2015F
Sales
329
664
1,054
1,423
Op. profit
233
487
802
1,033
Net profit
47
174
262
401
EPS (US$)
0.40
1.45
2.20
3.36
EPS growth
(%)
197.9
267.2
50.9
53.1
DPS (US$)
0.00
0.00
0.00
0.00
P/E (X)
201.7
54.9
36.4
23.8
Div. yield
(%)
0.0
0.0
0.0
0.0
ROE (%)
11.0
28.8
30.3
33.0
Initiate with BUY: Qihoo has leveraged its leading position in antivirus
software to promote its search engine and 360 Mobile Assistant, as it
looks to establish its products as a gateway for the internet. The
company is among the top three PC/mobile internet traffic distributors
in China, but is still in the early stages of monetizing this traffic. We
expect mobile games to be a significant revenue driver for the
company going forward, with the market expanding at a 37.0% CAGR
from 2012-15F.
► Well positioned in both PC and mobile: Its dominant share of
PC/mobile antivirus products in China and promotions via these
products are helping the company establish a leading position in
app distribution. Qihoo has subsequently become a challenger to
► Still at the early stage of monetization: Qihoo had a 21.7% share of
search traffic in China in October, but just a 1.6% share of search
revenue in 3Q13. However, mobile games have seen fast growth in
2013 and will continue to gain momentum in the years ahead. We
expect net profit to expand at a 48.8% CAGR from 2013-16F.
► More innovative products: Its focus on user experience and
innovation has helped Qihoo define user needs and quickly launch
related products. We expect the company to launch a mobile search
app and more wearable devices in 2014F.
► Valuation: The stock is currently trading 36.4x 2014F EPS. Our TP
of US$115 is derived from the average of DCF and PEG valuations.
Primary Analyst:
Nice Wang
Nice.Wang521@yuanta.com
With significant contribution from:
Nice Wang
+86 21 6187 3824
Search and mobile games driving rapid
growth
more established names in the PC search market.
2012
+86 21 6187 3821
Qihoo (QIHU US)
andy.wang201@yuanta.com
► Risks: If Qihoo fails to form an alliance with another internet giant,
its monetization may be slower than we expect.
ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ARE
LOCATED IN APPENDIX A.
Yuanta does and seeks to do business with companies covered in its
research reports. As a result, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in
making their investment decision.
Investment thesis
Its business model is to
acquire a vast user base via
free popular products and
make money from other
avenues
Quickly reaching internet users
Qihoo has established a number of gateways to the internet, such as its PC/mobile
antivirus products, its search engine, mobile app distribution platform, and internet
browsers. Its business model is to acquire a vast user base via free popular
products and make money from other avenues.
Qihoo is the dominant internet antivirus product supplier in China with 465 mn PC
users and 408 mobile users in 3Q13. It has no powerful competitors in China
thanks to its strategy of giving its products away for free, and new competitors will
not threaten its dominant market position, in our view.
Antivirus products are Qihoo’s key channel to promote its other products, such as
360 Mobile Assistant has more
than 300 mn users, and is the
largest third-party Android app
distribution platform in China
360 Browser, 360 Search, 360 Website Navigation, and 360 Mobile Assistant. Unlike
other software or apps, antivirus products are always running and always monitor
users’ operations, and we view this platform as ideal to promote products to
PC/mobile internet users. Furthermore, Qihoo’s 360 Browsers had a 26.09% market
share in November in China, second only to Internet Explorer, while 360 Mobile
Assistant has more than 300 mn users, and is the largest third-party Android app
distribution platform in China.
The company is also focused on start-ups because of CEO Hongyi Zhou’s angel
investor background, and has invested in some successful companies such as PP
Assistant, which was just acquired by UCweb. Qihoo has good relationships with
lots of venture capital firms, which can help it keep in touch with new internet
development trends.
Figure 1: Qihoo has already well positioned in both PC and mobile internet market
Source: Yuanta Research
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 2 of 27
Figure 2: Qihoo’s PC user base
PC safe products users
500
Figure 3: Top 10 antivirus products in China
1H12
product penetration
100%
mn
Ranking
Software
Monthly Unique User
Chg %
1
360 Security Guard
369.4
10.7%
2
360 Antivirus
360.8
20.9%
3
QQ Computer Guard
84.1
22.1%
4
Kingsoft Antivirus
82
4.1%
5
360 Safebox
80.8
-9.4%
6
Rising Antivirus
46.3
-4.1%
7
Kingsoft PC Doctor
41.5
-3.7%
8
Rising Personal
Firewall
17
N.A.
9
360 First-aid Kit
10
N.A.
10
Kingsoft Web Shield
9.7
-52.5%
450
400
80%
350
300
60%
250
200
40%
150
100
20%
50
0
0%
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13
Source: Company Data, Yuanta Research
Source: iResearch (1H12), Yuanta Research
Figure 4: Qihoo’s smartphone user base
Figure 5: 71.7% of smartphone users prefer Qihoo for
450
mobile antivirus products
mn
80%
400
71.7%
70%
350
60%
300
50%
250
36.7%
40%
200
150
30%
100
20%
50
10%
8.3%
7.2%
9.1%
Kingsoft
NQ
Others
0%
0
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
Source: Company Data, Yuanta Research
Qihoo
Tencent
Source: iiMedia, Yuanta Research
Monetization of search and mobile games will accelerate in 2014F
After the company’s channel PC/mobile antivirus products helped its platform
products (search engine and app distribution platforms) establish their positions in
the search engine and app distribution platform markets, Qihoo began to monetize
them in 1Q13.
Qihoo’s search engine contributed sales of US$5/15/27.7 mn in 1Q13/2Q13/3Q13,
accounting for 4.6%/9/9%/14.8% of total revenue. However, monetization of its
search engine is still at an early stage. According to CNZZ, Qihoo had a 21.7% share
of search traffic in November 2013, but accounted for just 1.6% of total search
We expect the company to
account for 30% of search
traffic in 2015 and 5.2% of
search engine revenue
engine revenue in 3Q13 based on iResearch’s estimate, as its keyword system is
not yet mature and it still needs to establish its advertising network. Taking the US
search market as an example, Yahoo and Bing had around of 22% search traffic and
19.4% of search engine revenue in 4Q12, and we expect Qihoo to achieve a similar
share of search traffic and search engine revenue when its technology, keyword
system and sales network mature. Management said their keyword system and
sales network will be improved by 2H14. We expect the company to account for
30% of search traffic in 2015 and 5.2% of search engine revenue.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 3 of 27
Figure 6: PC search traffic in China
Baidu
90%
Qihoo
Figure 7: Search revenue market share
Sogou & Soso
Qihoo
others
Sogou & Soso
Google
Baidu
100%
80%
90%
70%
63.6%
80%
60%
70%
50%
60%
40%
80.6%
81.4%
81.4%
4.7%
0.3%
4.6%
0.8%
4.5%
1.6%
1Q13
2Q13
3Q13
50%
21.8%
30%
40%
20%
30%
10%
20%
0%
10%
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
0%
Source: CNZZ, Yuanta Research
Source: iResearch, Yuanta Research
Figure 8: Page view market share in US
Figure 9: Search ad market share in the US
%
90
Google
Google
Yahoo!
bing
Others
Bing & Yahoo
100%
80
90%
70
80%
18.0%
18.6%
18.1%
18.5%
19.4%
82.0%
81.4%
81.9%
81.5%
80.6%
4Q11
1Q12
2Q12
3Q12
4Q12
70%
60
60%
50
50%
40
40%
30
30%
20
20%
10
10%
0%
0
-1008-07 09-03
09-11
10-07 11-03
11-11
12-07 13-03
Source: State Counter, Yuanta Research
Source: eMarketer, Yuanta Research
According to iResearch, China’s mobile game market revenue will increase at a
37.0% CAGR from 2012-15F, and we expect the market size of mobile games will
exceed PC based games in 2017 given more potential users and as they are more
attractive to female players. Qihoo has the leading app distribution platform in
China with around 25% market share in September, and is one of the most
important mobile game publishers in China. We expect the company to continue to
be the second largest mobile game distributor in China behind Tencent’s (700 HK;
HOLD-OPF) Weixin, and will continue to benefit from the fast growth of mobile
games in the years to come.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 4 of 27
Figure 10: Mobile app distribution platform time spent
Figure 11: Mobile games market size forecast
23
RMB bn
Feature phone
Smartphone
21
Qihoo
25%
Others
34%
19
17
CAGR: 37.0%
15
12.4
13
8.2
11
Baidu
21%
MIUI
3%
Wandoujia
17%
7
5
Source: iResearch (September 2013), Yuanta Research
4.7
9
1.9
6.8
7.6
7.9
6
2012
2013F
2014F
2015F
Source: iResearch, Yuanta Research estimates
Focus on user experience and product innovation
CEO Hongyi Zhou has always been focused on user experience and product
innovation. Qihoo’s business model is to acquire a vast user base via free popular
products, and make money from online advertising clients and cooperation of
mobile game companies. The company pays attention to user experience in order
to be the dominant player in antivirus products. It also develops lots of simple
products/apps to make users’ PC/handset operate smoothly and quickly get
information from users on their PC/mobile internet habits.
Figure 12: Qihoo’s innovative products
Innovative products
Function
Desktop Search Box
Users do not need to open a browser to search, just press the “Ctrl” button twice
then can search information.
360 Keyboard
Qihoo’s customized keyboard to promote its desktop search box.
360 Mobile Safe
Intercept crank calls and junk SMS.
360 Mobile Assistant
Grants smartphone users the right to uninstall pre-installed apps.
Yingshi Daquan
Users can search mobile videos from different video platforms.
Children Guard
Lets parents can monitor their children.
Source: Yuanta Research
Figure 13: Qihoo’s desktop search box
Figure 14: Yingshi Daquan
Source: Yuanta Research
Source: Yuanta Research
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 5 of 27
Figure 15: Qihoo’s customized keyboard to promote
Figure 16: Qihoo’s wearable products for children
the desktop search box
Source: Yuanta Research
Source: Yuanta Research
Management efficiency
Qihoo has a relatively “flat” management structure, with more than 400 small teams
Qihoo has a relatively “flat”
management structure
reporting to the CEO directly if they have good business ideas. This has helped the
company develop many popular products such as Leidian, Yingshi Daquan, its
desktop search box with a workforce of less than 5,000. Its employees are also well
rewarded, with a positive working environment.
We view the management structure as efficient, which can be seen in examples
such as the 360 Mobile Assistant, which although it launched four years after 91
Wireless, surpassed 91 Wireless to be the number one Android app distribution
platform within two years thanks to the favorable user experience and strong
channel advantage via its 360 Mobile Safe product. Qihoo launched its search
engine in August 2012 and already has a 21.7% share of search traffic in November
2013, thanks to its popular internet browsers.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 6 of 27
Valuation
Our 12-month target price of US$115 is derived from the average of our DCF
valuation and our PEG-derived fair value estimates. We believe our valuation
captures both the short-term and long-term earnings potential of the company, as
well as the stock’s relative valuation. Our target price implies 52.4x 2014F P/E.
DCF analysis
Our forward DCF estimate is
US$121.8
We derive a forward DCF estimate of US$121.8. Our valuation is based on the
assumptions of a cost of equity of 14.5%, and a terminal growth rate of 3% for the
period after 2030. Our forward DCF estimate implies a P/E of 55.5x.
Our DCF assumes China’s online advertising market will develop in a similar fashion
to the US market, where paid searches account for the bulk of the online advertising
market. We expect paid searches to be driven by further penetration of search
marketing among Chinese SMEs, and continued increases in the number of Chinese
consumers adopting e-commerce. We assume Qihoo will take some of Baidu’s
share, and China’s mobile game market is still at an early stage and Qihoo will be
the second largest mobile game operators in the coming years.
Relative valuation analysis
For relative valuation analysis, our PEG-derived value estimate is US$107.1, based
on 1.0x PEG, implying a P/E of 48.8x derived from our 2014F EPS estimate. Qihoo’s
Our PEG-derived value
estimate is US$107.1
P/E ratio is much higher than its peers because in our view Qihoo is only at its early
stage of its monetization and is doing well in the search engine and mobile game
markets.
Figure 17: Qihoo’s 12-month forward P/E
250
Figure 18: Qihoo’s PEG ratio
1.6
US$
1.4
200
1.2
1.0
150
0.8
100
0.6
0.4
50
0.2
0
Source: Bloomberg, Yuanta Research
13-10
13-07
13-04
13-01
12-10
12-07
12-04
12-01
11-10
11-07
Source: Bloomberg, Yuanta Research
Yuanta
China: Internet Software & Services
11-04
13-10
13-07
13-04
13-01
12-10
12-07
12-04
12-01
11-10
11-07
11-04
0.0
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 7 of 27
Figure 19: EPS CAGR for 2013-15F
Figure 20: P/E vs. EPS CAGR for 2013-15F
120%
4.5
104.7%
Amazon
4.0
100%
3.5
80%
3.0
2.5
Tencent
60%
2.0
40%
1.5
33.1%
25.3%
19.60%
20.1%
20%
12.7%
15.5%
eBay
1.0
13.4%
Facebook
Baidu
Google
NetEase
Qihoo
0.5
0.0
0%
0%
Qihoo
Tencent
Baidu
NetEase
Google
Facebook
eBay
20%
40%
60%
80%
100%
120%
Amazon
Source: Bloomberg, Yuanta Research
Source: Bloomberg, Yuanta Research
Figure 21: Peer valuation comparison table
P/E
Name
Qihoo
Ticker
QIHU US
Rating
Share price
ROE
Mkt Cap (mn)
PEG
2013F
2014F
2013F
2014F
BUY
79.9
10,176
54.9x
36.4x
0.7
24%
30%
700 HK
HOLD-OPF
474.6
882,557
40.8x
35.7x
2.1
33%
28%
Baidu
BIDU US
HOLD-UPF
173.2
59,038
33.2x
25.6x
1.7
35%
30%
Sina
SINA US
Not rated
78.5
5,232
82.3x
38.2x
2.3
4%
9%
NetEase
NTES US
Not rated
69.8
9,116
12.3x
11.0x
0.9
25%
23%
Youku
YOKU US
Not rated
29.6
4,912
-66.9x
149.6x
N.A.
-5%
3%
GOOG US
Not rated
1,077.3
359,909
24.5x
20.6x
1.4
18%
18%
FB US
Not rated
49.4
123,048
59.6x
44.2x
2.0
14%
14%
eBay
EBAY US
Not rated
51.4
66,503
19.3x
16.6x
1.3
15%
15%
Amazon
AMZN US
Not rated
382.2
174,941
155.4x
82.9x
4.2
8%
8%
China's internet peers
Tencent
Global peers
Google
Facebook
Source: Company data, Bloomberg, Yuanta Research
Note: Figure s are denominated in local currency, latest update on December 12, 2013; Qihoo, Baidu and Tencent’s figures are
from our estimates, while other companies’ data are from Bloomberg consensus.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 8 of 27
Earnings outlook
Qihoo’s monetization of its traffic is still at an early stage, especially for its search
engine and mobile games. We expect its leading position in PC/mobile antivirus
products will continue, and its search engine market share will grow from 1.6% in
3Q13 to 5.2% in 2015. In terms of app distribution platform, competition with Baidu
will intensify, but we believe Qihoo will maintain its leading edge in the coming
years. However, Tencent’s Weixin will compete in mobile games, and we see Weixin
as more competitive than Qihoo’s 360 Mobile Assistant. Overall, we estimate
revenue of US$664/1,053/1,423 mn in 2013-15F, implying a CAGR of 62.9%, while
we expect net profit of US$174/262/401 mn, implying a CAGR of 104.7%.
Figure 22: Qihoo’s revenue breakdown
Online advertising
1,600,000
IVAS
Others
Figure 23: EPS assumptions
EPS （L）
YoY （R）
250%
US$ k
2.5
YoY （R）
300%
US$
2.3
200%
1,200,000
250%
2.0
1.8
150%
200%
1.5
1.3
800,000
100%
150%
1.0
100%
0.8
400,000
50%
0.5
50%
0.3
0
0%
2011
2012
2013F
2014F
2015F
Source: Company Data, Yuanta Research estimate
Yuanta
China: Internet Software & Services
0.0
0%
2011
2012
2013F
2014F
2015F
Source: Company Data, Yuanta Research estimate
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 9 of 27
Revenue breakdown
Rapidly growing internet user base
China’s search market will benefit from a growing internet user base, while
increasing user sophistication and internet content volume should also boost
search demand. According to the CNNIC, total China internet users have grown at a
CAGR of 21.8% over the past five years to 564 mn at the end of 2012. Nevertheless,
the Chinese internet penetration rate of 42.1% at the end of 2012 was still much
lower than the 70% and above in many developed economies.
Figure 24: China’s Internet population and penetration
Internet user(L)
mn
140%
Internet penetration(R)
800
700
60%
120%
50%
100%
600
40%
500
Figure 25: Global Internet penetration rate (2012)
126%
115%
86%
82%
80%
78%
78%
75%
60%
400
30%
38%
40%
300
20%
20%
200
10%
100
0
0%
HongKong South
Korea
2015F
2014F
2013F
2012
2011
2010
2009
2008
2007
2006
2005
0%
Source: CNNIC, Yuanta Research estimates
France
UK
Japan
US
Germany
China
Source: International Telecommunications Union
We see room for further growth in the internet user base in China in the coming
years, driven by rising PC penetration and continued upgrades in broadband
infrastructure. Based on our estimates, internet users will likely grow at a CAGR of
6.6% to 684 mn by the end of 2015 with an internet penetration rate of 49.6%,
which is at the lower end of internet penetration rates for developed economies.
Search engine business
Search user base and search advertising customers will continue to grow
Driven by rising internet users and more internet content, the search user base has
been growing in tandem with China’s internet market. Search remains the second
most popular internet application among all Chinese internet users. The number of
search users increased from 407 mn in 2011 to 470 mn in 1H13, and we expect
this number to rise further to 659.5 mn by the end of 2015. More SMEs will
increase budgets for online advertising, especially for search advertising. According
to CNNIC, 23% of SMEs would have liked to place internet adverts in 2012, while
53.2% prefer search advertising.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 10 of 27
Figure 26: China’s internet users and search users
800
mn
Search users (L)
60%
YoY （R）
700
50%
600
40%
500
400
30%
300
20%
200
10%
100
0
0%
2004
2006
2008
2010
2012
2014F
2016F
Source: CNNIC, Yuanta Research estimates
Figure 27: SMEs favor internet adverts most (2012)
Figure 28: SMEs prefer search & IM advertising (2012)
0.5%
Others
3.4%
Others
Handset
Radio
4.1%
4.1%
Online v ideo
16.3%
Forum/BBS
16.4%
Internet ads Union
16.4%
SNS
8.3%
Magazine
10.8%
Outdoor
17.9%
20.2%
Weibo
23.0%
Internet
Display
44.3%
Email
44.5%
50.0%
E-commerce
11.5%
New s paper
51.6%
IM
6.4%
TV
0%
5%
53.2%
Search
10%
15%
20%
25%
Source: CNNIC
0%
10%
20%
30%
40%
50%
60%
Source: CNNIC
Search usage still relatively low
While the search user base is growing rapidly, search usage in China is still
relatively low. According to comScore, China’s monthly average searches per user
was only 66.8 in 2011, much lower than in developed countries and also lower than
some developing countries such as Vietnam and Indonesia. We expect search
demand will continue to grow along with increases in internet content and rising
numbers of internet users going forward.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 11 of 27
Figure 29: Monthly average searches per user by area
Figure 30: Monthly average searches per user by
(2011)
country (2011)
160
160
144.7
140
113.4
109.5
120
96.9
89
100
136.9
140
126.2
126.2
125.6 122.7
120
100
80
91.4
85.8
79.2
80
72.1
66.8
60
60
40
40
20
20
0
Worldw ide
Asia
Pacific
Europe
North
America
Latin
America
MidEastAfrica
Source: comScore, Yuanta Research
0
China
Japan
India
Korea
Taiwan Vietnam Indonesia
HK
Singapore
Source: comScore, Yuanta Research
Online marketing will be more popular going forward, due to rising internet users
and marketing demand from SMEs. Since search advertising has higher ROI and
lower fund entry barriers, we expect paid advertising as a proportion of total
internet advertising will increase from 49.8% in 2012 to 56.7% in 2015F. We
estimate paid search revenue will be RMB38.8/50.7/63.4 bn, implying a CAGR of
31.2% over 2012-15F.
Figure 31: China’s online advertising proportion is on
Figure 32: China’s online advertising revenues
the rise
RMB bn
500
450
Online adverts (L)
China adverts (L)
As % of China adverts market （R）
400
350
300
250
Internet adverts market size （L)
YoY （R)
40%
RMB bn
200
90%
35%
180
80%
30%
160
70%
25%
140
20%
60%
120
50%
100
200
15%
150
40%
80
30%
10%
60
50
5%
40
20%
0
0%
20
10%
100
2007
2009
2011
2013F
2015F
0
0%
2006
Source: iResearch, Yuanta Research estimates
Yuanta
China: Internet Software & Services
2008
2010
2012
2014F
Source: iResearch, Yuanta Research estimate
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 12 of 27
Figure 33: China’s online advertising breakdown
Others
Paid search revenue （L）
RMB bn
70
100%
73.4%
38.8
38.4%
40
50%
30%
30.6%
11.0
25.0%
20%
10%
0%
0
2010
29.5% 29.7% 33.1%
56.5% 56.7%
49.8% 55.0%
7.0
2009
10%
40.9%
5.0
2008
30%
38.3%
18.9
20
10
40%
28.1
30
40%
50%
0%
2015F
50.5%
60%
48.5%
2014F
60% 61.4% 61.1% 58.7%
20%
50.7
2011
70%
43.0% 36.1% 35.0% 35.3%
80%
70%
58.6%
50
80%
63.4
71.1%
60
90%
YoY (R）
2013F
Display
2012
Paid search
Figure 34: China’s paid search revenue forecast
2008 2009 2010 2011 2012 2013F 2014F 2015F
Source: iResearch, Yuanta Research estimate
Source: iResearch, Yuanta Research estimate
Search engine market share to continue to rise
Qihoo entered the search engine market in August 2012, and accounted for 21.7%
of total China search traffic in November 2013, supported by its popular
browser/navigation site and desktop search box. Baidu (BIDU US; HOLD-UPF)
continues to have advantages over Qihoo, with better technology, a keyword system,
its Baidu Union platform, and greater sales capability. We believe Qihoo will need
around two more years to perfect its search engine, but expect it to take some
market share from Baidu in the years to come.
Qihoo accounted for 1.6% of total paid search revenue in China in 3Q13, with only
Baidu will remain the leader in
the Chinese search market, but
Qihoo may gain market share
12-13% of advertisers willing to place adverts on its searches, according to Adsage.
Similar to the situation in the US, where Google remains the search engine leader
despite Bing taking some market share, we expect Baidu will remain the leader in
the Chinese search market, but Qihoo may gain market share.
Figure 35: Search engine industry chain
Typing URL
Brand
Paid links
Paid links
Favorites
Paid links
Searcher
Browser
Organic results
Organic results
Advertiser
Organic results
Organic results
Navigation Site
Organic results
Channel
App/software/
Desktop
search/toolbar
Source: iResearch, Yuanta Research
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 13 of 27
Figure 36: PC search traffic in China
Baidu
90%
Qihoo
Figure 37: Search revenue market share
Sogou & Soso
Qihoo
others
Sogou & Soso
Google
Baidu
100%
80%
90%
70%
63.6%
80%
60%
70%
50%
60%
40%
80.6%
81.4%
81.4%
4.7%
0.3%
4.6%
0.8%
4.5%
1.6%
1Q13
2Q13
3Q13
50%
21.8%
30%
40%
20%
30%
10%
20%
0%
10%
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Source: CNZZ, Yuanta Research
0%
Source: iResearch, Yuanta Research
We believe Qihoo’s keyword system, sales network and technology will mature
going forward, and as such expect its search traffic will increase, rising to 30% of
China’s total traffic by 2015F. Given an increased search traffic market share, the
company is likely to attract more online advertisers, and as a result its click through
rate (CTR) and cost per click (CPC) should increase. We estimate search engine
revenue of US$88.3/279.7/536.9 mn in 2013/14/15F.
Figure 38: Search engine business forecast
1Q13
2Q13
3Q13
4Q13F
1Q14F
2Q14F
3Q14F
4Q14F
2013F
2014F
2015F
Search users from PC (mn)
451
470
489
508
527
546
565
584
508
565
659
average monthly search times per user from PC
68.0
68.5
69.0
69.5
70.0
70.6
71.1
71.6
69.5
71.6
72.0
Qihoo's market share (%)
13.5%
15.3%
18.2%
23.0%
24.5%
26.0%
27.0%
28.0%
23.0%
28.0%
30.0%
Qihoo's queries (mn)
10,758
13,609
16,609
21,418
25,822
28,668
31,378
33,918
62,393
119,785
155,822
0.5
0.9
1.1
1.2
1.2
1.2
1.3
1.3
0.9
1.2
1.5
1.00%
1.00%
1.05%
1.05%
1.07%
1.09%
1.11%
1.14%
1.03%
1.10%
1.19%
Paid clicks (mn)
50.0
125.2
192.5
260.7
330.2
385.1
442.9
502.9
628
1,661
2,762.3
Cost per click (US$)
0.10
0.12
0.14
0.16
0.16
0.16
0.17
0.18
0.14
0.17
0.19
Revenue from PC search traffic (US$ k)
5,000
15,000
27,724
40,542
52,893
63,544
75,263
88,035
88,266
279,735
536,899
958%
324%
172%
117%
217%
92%
Average advertisements per query
Click through rate
YoY
Source: Company Data, Yuanta Research estimate
Website navigation business
Qihoo launched its website navigation page at the end of 2009 in order to leverage
its significant traffic and user base. The service surpassed Baidu’s Hao123, the
leader in China’s website navigation segment for ten years, to become the largest
website navigation operator in China from 2011, thanks for its popular browsers
(25.3% market share as of October 2013) and better user experience.
The company provides key outside internet traffic for a lot of major internet players,
such as Taobao, Youku, and Sina. The business model for website navigation is to
charge advertisers a monthly fee to provide paid links for clients, and also guide
users to clients.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 14 of 27
Figure 39: Browser market share (October 2013)
Figure 40: Mkt share for website navigation in China
Others
2%
2345
12%
Chrome
5%
Others
11%
Qihoo
38%
Safari
7%
Sogou
Browser
6%
Microsoft
IE
46%
Sogou
17%
360
Browser
25%
Hao123
31%
Source: CNZZ, Yuanta Research
Source: CNNIC(Nov. 2013), Yuanta Research
The website navigation market is already mature, with the competitive landscape
likely to remain stable in the years to come. We expect Qihoo’s website navigation
business will continue to grow, and estimate website navigation revenue of
US$329.8/408.7/415.9 mn in 2013/14/15F, a CAGR of 23.4%.
Figure 41: Website navigation business forecast
1Q13 2Q13 3Q13 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F
Average daily clicks on the 360 Personal-Start-up Page (mn)
Days of this quarter
Total clicks of this quarter (mn)
489
590
681
744
778
796
806
810
90
91
92
92
90
91
92
92
44,010 53,690 62,652 68,450 70,060 72,478 74,122 74,550
ASP per k click
1.33
1.41
1.48
1.50
1.30
1.38
1.45
1.47
Website navigation(US$ k)
58,400 75,600 92,976 102,868 91,109 100,014 107,797 109,796
YoY
28.6% 48.8% 59.2% 53.8% 56.0% 32.3%
15.9%
6.7%
2013F
2014F
2015F
626
798
816
365
365
365
228,802 291,210 298,005
1.44
1.40
1.40
329,845 408,715 415,902
48.9%
23.9%
1.8%
Source: Company Data, Yuanta Research estimates
Gaming business
Qihoo charges users for web and mobile games. We believe the webgame business
Qihoo was the number two
webgame operator in China in
3Q13
has already entered a mature stage, and estimate the market size CAGR will fall to
23% in 2012-15F, down from 63% in 2009-12. Some webgame developers
transformed into mobile game developers in 2013, such as IGG (8002 HK; NR),
Kingsoft (3888 HK; NR). The webgame business model is positive for operators, as
they can retain around 70% of game revenue.
Qihoo was the number two webgame operator in China in 3Q13 with 12% market
share. We believe it will maintain its advantages as competitors enter the mobile
game segment.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 15 of 27
Figure 42: Webgame market size
Webgame market size (L)
16
Figure 43: Webgame operation and payment model
YoY （R)
Webgame developers
Around 30% webgame revenue
35%
RMB bn
14
30%
12
25%
10
Revenue sharing
Game content & update
20%
8
Webgame operators
Around 70% webgame revenue
15%
6
10%
4
2
5%
0
0%
Game content & update
Payment
Other player services
2012
2013F
2014F
2015F
Webgame players
Source: iResearch, Yuanta Research
Source: Yuanta Research
Figure 44: Webgame market share in 3Q13
Yaowan Xunlei
4%
7K7K4%
4%
91Wan
5%
Tencent
38%
Baidu
5%
YY
5%
4399
11%
Qihoo
12%
37Wan
12%
Source: Source: iResearch
Figure 45: Top 10 web games in China by daily search
Ranking
Game
Operator
No. of Searches (k)
1
Pindldea
Qihoo/4399 Game/37Wan/51Game/91
88
2
Arcade in Three Kingdoms
Qihoo/4399 Game/Baidu/7K7K/37WAN
/91Wan/51Game
85
3
Tribal Guards Battle
Tencent
80
4
DDtank
Qihoo/4399 Game/Baidu/7K7K/51Game
66
5
Killers of the Three Kingdoms
4399Game/Baidu/Shanda
52
6
Genesis Soul
4399 Game/7K7K
40
7
Blood King Someday
Qihoo/4399 Game/7K7K/91Wan/37Wan
40
8
Qiang Hun
Qihoo/4399 Game/7K7K/91Wan/37Wan
34
9
Ao Jiang
7711/Juu/Zhengwu
33
10
Qi Xiong Zheng Ba
Tencent
32
Source: Baidu Index of Dec 9 2013, Yuanta Research
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 16 of 27
Mobile game segment to continue to see fast growth
The mobile game market has grown significantly in China since 2013, with an
increasing number of users accessing the internet via mobile devices, such as
We expect time spent on
mobile apps to exceed time
spent on websites on PC by
2Q14F
smartphones and tablets. According to iResearch, a research firm focused on the
internet market, time spent on mobile apps has increased at a fast pace, with
internet users spending 35.3% of their time online using mobile apps as of March
2013. We expect time spent on mobile apps to exceed time spent on websites on
PC by 2Q14F.
Figure 46: China‘s smartphone population to be 500
Figure 47: China’s mobile internet penetration to
mn in 2013F
increase to 40.7% in 2013
mn
800
700
Smartphone population(L)
YoY （R）
710
640
150%
140%
570
600
500
500
400
360
300
80%
160%
120%
500
100%
400
80%
200
40%
80
14%
12%
11%
0
20%
0%
2010
2,011
2012F
2013F
mn
Mobile Internet User(L)
Penetration（R）
37.8%
45%
40.7%
40%
420.0
35%
30%
25%
300
20%
60%
39%
200
100
600
2014F
2015F
2016F
15%
200
10%
100
5%
0
0%
2H06
2H07
2H08
2H09
2H10
2H11
2H12 2H13F
Source: iResearch, Yuanta Research
Source: CNNIC, Yuanta Research estimate
Figure 48: Increasing numbers of people access the
Figure 49: Time spent on mobile applications vs. PC
internet by handset
websites
600
Desktop
Notebook
Handset
Mobile APP
500
100%
400
90%
80%
300
55.7%
70%
64.7% 59.7%
72.7%
60% 78.7%
200
50%
40%
100
30%
20%
0
2H09
1H10
2H10
1H11
2H11
1H12
2H12 1H13F 2H13F
Source: CNNIC, Yuanta Research
35.3% 40.3%
27.3%
10% 21.3%
0%
3Q12
1Q13
PC w ebsite
52.7% 50.2% 47.7%
44.3% 47.3% 49.8%
3Q13F
1Q14F
45.7% 43.7%
52.3% 54.3% 56.3%
3Q14F
Source: iResearch, Yuanta Research
Since more and more users will access internet via mobile devices, we expect
mobile game market size will exceed the client-based game market eventually. Key
trends which benefit the development of mobile games include: 1) the 1.22 bn
mobile users in China as of October 2013, vs only 591 mn internet users in 1H13,
according to CNNIC and MIIT; 2) only 27% of PC game users are female, but there
are 33.8% female mobile users, while 18.8% of female game users would pay for
games, vs. 17.5% of male game users, according to iiMedia; 3) young people prefer
to play online games on their PC, while older people prefer to play mobile games,
but older people have higher payment ability.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 17 of 27
Figure 50: PC-end gamers by gender
Figure 51: Mobile gamers by gender
Female, 27%
Female,
33.80%
Male, 66.20%
Male, 73%
Source: Analysys international, Yuanta Research
Source: iiMedia, Yuanta Research
Figure 52: PC-end gamers by age
Figure 53: Mobile gamers by age
>36, 2.0%
>40, 11.5%
31-35, 13.2%
<15, 14.1%
<18, 37.0%
36-40, 7.0%
31-35, 8.6%
16-20, 20.0%
26-30, 18.3%
25-30, 11.5%
21-25, 32.4%
18-24, 24.4%
Source: iResearch, Yuanta Research
Source: iiMedia, Yuanta Research
Based on our channel checks, there are more than 1000 mobile game developers in
China and more than 8000 mobile games will have been launched by the end of
2013, with more developers and mobile games to be added in 2014. According to
iResearch, China’s mobile game market size will be RMB20.3bn by 2015, implying a
2012-15F CAGR of 37.0%.
Figure 54: Mobile game market size
23
RMB bn
Feature phone
Figure 55: Online game market breakdown
Smartphone
Client-based games
90%
19
CAGR: 37.0%
Social games
12%
14%
16%
18%
2012
2013F
2014F
2015F
70%
15
12.4
13
60%
50%
8.2
11
40%
4.7
9
5
Mobile games
80%
17
7
Webgames
100%
21
1.9
30%
6
6.8
7.6
2012
2013F
2014F
7.9
20%
10%
2015F
Source: iResearch, Yuanta Research
Source: iResearch, Yuanta Research
Yuanta
China: Internet Software & Services
0%
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 18 of 27
Similar to client-based and webgames, mobile game developers need to cooperate
with publishers/operators with channels to access mobile users. There are three
major channels, pre-installation, app distribution platforms and Weixin; the latter
two are popular mobile game channels. Tencent (700 HK; HOLD-OPF) selects
mobile games to operate in its Weixin and mobile QQ channels, while most mobile
game developers are willing to cooperate with app distribution platforms.
Qihoo has the largest China android app distribution platform, with android devices
accounting for 65.98% of China’s total smartphones in 3Q13. According to
iResearch, Qihoo accounted for 25% of time spent on mobile app distribution
platforms in September 2013.
Figure 56: Competition landscape of app distribution platform
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Qihoo
38.4
39.1
42.7
44.2
46.4
46.7
47.7
48.2
52.8
Baidu
37.5
36.5
39.9
37.4
39.4
41.7
44.0
45.3
41.9
Wandoujia
27.2
28.8
29.2
26.7
29.3
27.1
29.4
29.2
31.1
MIUI
10.0
10.1
11.5
10.3
10.6
10.7
11.8
13.7
13.8
Qihoo
13.9
11.7
16.5
12.1
12.7
12.0
14.0
12.4
12.6
Baidu
8.8
8.8
8.4
8.8
8.5
8.7
10.2
12.0
10.4
Wandoujia
3.7
4.1
4.9
4.9
5.3
4.4
4.3
6.5
8.5
MIUI
1.2
1.0
1.2
1.4
1.4
1.1
2.0
1.5
1.7
Total
38.9
40.8
46.5
46.6
46.4
44.6
47.8
50.1
50.5
Qihoo
35.7%
28.7%
35.5%
26.0%
27.4%
26.9%
29.3%
24.8%
25.0%
Baidu
22.6%
21.6%
18.1%
18.9%
18.3%
19.5%
21.3%
24.0%
20.6%
Wandoujia
9.5%
10.0%
10.5%
10.5%
11.4%
9.9%
9.0%
13.0%
16.8%
MIUI
3.1%
2.5%
2.6%
3.0%
3.0%
2.5%
4.2%
3.0%
3.4%
Mobile app distribution platform monthly unique visitors (mn)
Mobile app distribution platform monthly time spent (mn hours)
Mobile app distribution platform monthly time spent market share
Source: iResearch, Yuanta Research
Since there is a debate whether Qihoo or Baidu is the largest mobile game operator
via app distribution platform, we have checked four popular games launched on
both Qihoo and Baidu’s platform. We found that Qihoo contributed more than 30%
of revenue of the four mobile games total revenue, while Baidu contributes around
20%, which leads us to believe Qihoo still has some advantage over Baidu on mobile
game distribution.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 19 of 27
Figure 57: Revenue source of “I am MT”
Others,
30%
Figure 58: Revenue source of “The legend of King”
Qihoo,
30%
Others,
33%
Xiaomi,
10%
UCweb,
8%
Qihoo,
36%
Xiaomi,
7% UCweb,
Baidu,
22%
Baidu,
18%
6%
Source: Game to look (up to June)
Source: Game to look (up to June)
Figure 59: Revenue source of “Fishing Joy”
Figure 60: Revenue source of ”Plants & Zombies”
Qihoo,
30%
Qihoo,
30%
Others,
40%
,
,
UCw eb,
6%
,
Others,
70%
Baidu,
19%
Wandoujia
, 5%
Source: Game to look (up to June)
Source: Game to look (up to Sept)
Qihoo operated more than 500 games (including webgames and mobile games) in
3Q13, increasing by 230 games QoQ, of which we estimate most were mobile
games. The company acquired 590 k paying users in 3Q13, and we expect it to
have 1.07 mn paying users by the end of 2015. We estimate Qihoo’s game business
revenue will be US$197.4/292.3/382.8mn in 2013-15F, and estimate a CAGR of
65.7% for 2012-15F.
Figure 61: Qihoo’s game business forecasts
Paying users of Qihoo's game platform (k)
1Q13
2Q13
3Q13
4Q13F
1Q14F
281
440
560
590
670
2Q14F 3Q14F 4Q14F
2013F
2014F
2015F
710
780
870
590
870
1,066
YoY
102.2% 197.3% 207.7% 147.9% 138.4%
61.4%
39.3%
47.5%
147.9%
47.5%
22.5%
QoQ
18.1%
56.6%
27.3%
5.4%
13.6%
6.0%
9.9%
11.5%
ARPU (US$)
131.0
110.7
96.8
97.8
98.7
93.8
95.7
97.6
477
400
395
YoY
5.2%
-14.2%
-14.1%
-14.5%
-24.6%
-15.3%
-1.2%
-0.2%
-1.6%
-16.0%
-1.2%
QoQ
14.6%
-15.5%
-12.6%
1.0%
1.0%
-5.0%
2.0%
2.0%
Revenue (US$ k)
36,800
48,700
54,200
57,675
66,150
66,594 74,623 84,898
197,375 292,265 382,791
YoY
112.7% 155.0% 164.4% 112.0%
79.8%
36.7%
37.7%
47.2%
134.7%
QoQ
35.3%
14.7%
0.7%
12.1%
13.8%
32.3%
11.3%
6.4%
48.1%
31.0%
Source: Company Data, Yuanta Research estimate note: mobile game ARPU began to decline in 2Q13 because Qihoo just started to
calculate mobile paying users in 2Q13
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 20 of 27
Company structure
Qihoo was founded in June 2005, and the listed company was incorporated in the
Cayman Islands and operates its onshore entities via wholly-owned subsidiaries
and affiliated entities. The company is based in Beijing, China.
Figure 62: Corporate structure
Qihoo 360 Technology
(Cayman Islands)
100%
100%
100%
360 International
Development Co.
(Hong Kong)
Qihu 360 Software
Co. Limited
(Hong Kong)
100%
Qiji International
Development
(Hong Kong)
100%
Qifei International
Development
(Hong Kong)
100%
Qizhi Software
(Beijing) Co.Ltd
100%
Tianjin Qisi Technology
Co. Ltd.
30%
Qifei Xiangyi
(Beijing) Co.Ltd
70%
Beijing Qichuang Yousheng
Keji Co. Ltd
Beijing Star World
Technology Co.
Ltd. (PRC)
Beijing Qihu Technology
Co. Ltd. (PRC)
Eleven Other VIEs (PRC)
Source: Yuanta Research
Qihoo’s mgmt has around a 39.3% stake in the company, as it offers employees
stock. Venture capitalists hold a 37.1% stake. Some profit taking by venture
capitalists may be the reason that Qihoo’s share price has fluctuated recently.
We believe core management is stable. Hongyi Zhou, Xiangdong Qi and Shu Cao,
have cooperated for many years which should help strengthen Qihoo’s execution.
Figure 63: Qihoo’s shareholding structure
Others
23.6%
Hongyi Zhou
17.7%
Xiangdong Qi
9.5%
Trustbridge
Partners
5.4%
Shu Cao
4.9%
Sequoia Capital
China
5.4%
Neil Nanpeng
Shen
5.4%
Young Vision
Group
8.6%
Global Village
17.7%
Other
management
1.8%
Source: Company data, Yuanta
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 21 of 27
Figure 64: Executive Directors a brief introduction
Name
Hongyi Zhou
Age
43
Xiangdong Qi 49
Position
Brief-introduction
CEO
Mr. Zhou is a co-founder of Qihoo 360 and has served as chairman and CEO since 2006. Mr. Zhou has over ten years of
managerial and operational experience and China's Internet industry. Prior to founding Qihoo 360, Mr. Zhou was a partner at
IDG Ventures Capital from September of 2005. Mr. Zhou was CEO of Yahoo! China from January 2004 to August 2005. In 1998,
Mr. Zhou founded www.3721.com, a company engaged in internet search and online marketing business in China, and served
as chairman and CEO until www.3721.com was acquired by Yahoo! China in January 2004.
President
Mr. Qi is a co-founder of Qihoo 360 and has served as director and president since inception. prior to founding Qihoo 360, Mr. Qi
served as vice president of Yahoo! China from January 2004 to August 2005, where he was responsible for Yahoo! China's
operations and marketing. From August 2003 to January 2004, Mr. Qi was the general manager of www.3721.com, responsible
for its overall operations and strategic planning. Mr. Qi worked at Xinhua News Agency from 1986 to March 2004.
Shu Cao
Mr. Cao has been the director of Qihoo 360 since 2006 and served as chief engineer since October 2005. Prior to joining Qihoo
360, Mr. Cao served as the chief engineer of Yahoo! China from November 2003 to September 2005 and was responsible for
38 Chief Engineer system operation and maintenance. Mr. Cao has extensive experiences in software engineering, information and technology
infrastructure and system operation. Mr. Cao was the co-founder of www.3721.com and served as its head of operations from
January 1999 to August 2003.
Jue Yao
40
Alex Zuoli Xu
Xiaosong Shi
45
43
Co-CFO
Ms. Jue Yao has been Qihoo 360's co-CFO since 2012 and VP of finance since 2008. Ms. Yao served as financial director from
2006 to 2008. Prior to joining Qihoo in 2006, Ms. Yao held various positions at Sohu.com from 1999 to 2006, including financial
director, where she was responsible for its strategic planning, budgeting and finance of wireless value-added and gaming
business units. From 1996 to 1999, Ms. Yao was a senior auditor at KPMG.
Co-CFO
Mr. Xu has been CFO since February 2011. Mr. Xu has extensive experience in investment research and business
management. Prior to joining Qihoo, Mr. Xu was a managing director at Cowen & Company, LLC, and investment banking
service provider, from August 2010 to February 2011. From March 2010 to August 2010, he served as the CFO of Yeecare
Holdings, a private health care product distributor in China, and from May 2008 to march 201, as the chief strategy office of
China Finance Online Co, Ltd., a Chinese Nasdaq-listed online financial information/service company. Prior to that, Mr. Xu was a
senior VP at Brean Murray, Carret & Co, a research-driven investment and merchant bank. He was part of a top-ranked
research team at Bank of American Securities, LLC from 2003 to 2007, and was an equity research associate at BUS from 2002
to 2003.
VP
Mr. Shi has been our vice president of Technology since 2006. From January 2004 to August 2005, Mr. Shi was the chief
technology officer of Yahoo! China, where he was responsible for technology research and development. From 1999 to 2003,
Mr. Shi was the chief technology officers of www.3721.com, a company engaged in Internet search and online marketing
business in China. From November 1998 to August 1999, Mr. Shi was a project manager at Founder Group, a leading Chinese
information technology company. Mr. Shi received his Ph.D. and Master's degrees in computer science from Xi'an Jiaotong
University in 1998 and 1995, respectively.
Source: Company Data, Yuanta Research
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 22 of 27
Risks to our recommendation
► Changes in the PC and mobile internet industries happen very fast, there is the
possibility that Qihoo may miss the next big trend.
► Large internet names are eager to form alliances to compete in the mobile
internet era. Qihoo has some strong competitors, and it will be hard for it to
become a first-tier internet player (such as Baidu, Tencent and Alibaba) without
strong partners.
► Qihoo has been affected by lawsuits with other internet players, such as Tencent
and Baidu. There is the possibility Qihoo could lose one of these lawsuits, which
may slow the monetization of its search engine and mobile games.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 23 of 27
Balance Sheet
Year as of Dec
(US$ mn)
Cash & ST investment
Profit and Loss
2011
2012
2013F
2014F
Year to Dec
(US$ mn)
2015F
344
383
1,198
1,539
2,021
0
0
0
0
0
17
24
48
76
102
Inventories
Accounts receivable
Others
Sales
Cost of goods sold
Gross profit
2011
2012
2013F
2014F
2015F
168
329
664
1,054
(19)
(33)
(84)
(124)
1,423
(161)
149
296
580
930
1,262
14
29
56
88
118
(18)
(66)
(94)
(128)
(230)
374
435
1,302
1,702
2,241
Operating profit
131
233
487
802
1,033
LT investments
16
101
101
101
101
Interest income
3
7
5
4
4
Net fixed assets
17
126
132
148
174
Interest expense
0
0
0
0
0
Others
4
Current assets
17
27
43
60
76
Other assets
50
254
276
309
351
Total assets
424
690
1,577
2,012
2,592
Accounts payable
6
7
11
18
23
ST borrowings
0
0
0
0
0
Others
Operating expenses
Net interest
Net Invst.Inc/(loss)
Net oth non-op.Inc/(loss)
Pretax income
40
197
224
370
508
Income taxes
47
204
236
388
531
Net profit
Long-term debts
0
0
600
600
600
Others
6
8
14
22
30
6
8
614
622
630
Total liabilities
52
211
850
1,011
1,161
Paid-in capital
179
180
182
182
182
Capital surplus
186
274
348
360
390
Retained earnings
6
24
198
460
861
Capital adjustment
0
0
0
0
0
371
478
728
1,002
1,433
Shareholders' equity
7
5
4
(2)
(1)
0
0
(107)
(174)
(291)
(478)
(534)
Net extraordinaries
Current liabilities
Long-term liabilities
3
(1)
0
(5)
0
0
0
25
58
200
327
502
(11)
(11)
(27)
(66)
(101)
16
47
174
262
401
1,080
EBITDA
136
249
515
839
EPS (US$)
0.13
0.40
1.45
2.20
3.36
EPS (US$) Bonus Adj.
0.13
0.40
1.45
2.20
3.36
Source: Company data, Yuanta
Key Ratios
Source: Company data, Yuanta
Year to Dec
2011
2012
2013F
2014F
2015F
Growth (% YoY)
Cash Flow
Year to Dec
(US$ mn)
Net profit
Depr & amortization
Change in working cap.
Others
Operating cash flow
Capex
Change in LT inv.
Change in other assets
Investment cash flow
Change in share capital
Net change in debt
Other adjustments
2011
2012
2013F
2014F
Sales
191.1
96.0
101.9
58.7
Op profit
211.9
77.1
109.0
64.7
28.8
EBITDA
212.0
83.9
106.4
62.9
28.8
Net profit
2015F
EPS
35.0
83.4
199.6
271.9
50.7
53.1
(63.7)
197.9
267.2
50.9
53.1
16
47
174
262
401
4
17
28
37
47
Profitability (%)
15
135
(19)
93
86
Gross margin
88.7
90.0
87.4
88.2
88.7
Operating margin
78.3
70.8
73.3
76.1
72.6
EBITDA margin
80.8
75.8
77.5
79.6
75.9
Net profit margin
9.3
14.2
26.2
24.9
28.2
47
(81)
74
(6)
12
82
118
257
386
546
(18)
(69)
(28)
(48)
(66)
(1)
1
0
0
0
ROA
5.7
8.3
15.3
14.5
17.4
(16)
(15)
(12)
(12)
(13)
ROE
8.3
11.0
28.8
30.3
33.0
(35)
(84)
(40)
(60)
(79)
Stability
233
0
0
0
0
0
2
600
15
15
Gross debt/equity (%)
0.1
0.0
82.5
59.9
41.9
Net cash (debt)/equity (%)
92.4
80.0
82.2
93.7
99.2
0
0
0
0
0
Int. coverage (X)
N.A.
N.A.
N.A.
N.A.
N.A.
Financing cash flow
233
2
600
15
15
Int. & ST debt cover (X)
55.3
N.A.
N.A.
N.A.
N.A.
Net cash flow
281
36
817
341
482
Cash flow int. cover (X)
N.A.
N.A.
N.A.
N.A.
N.A.
467
Cash flow/int. & ST debt (X)
178.9
N.A.
N.A.
N.A.
N.A.
Free cash flow
47
34
217
326
Source: Company data, Yuanta
Current ratio (X)
8.0
2.1
5.5
4.4
4.2
Quick ratio (X)
8.0
2.1
5.5
4.4
4.2
(343.5)
(382.7)
(598.0)
(938.5)
(1,420.8)
3.16
4.05
6.10
8.40
12.01
P/E
600.9
201.7
54.9
36.4
23.8
P/FCF
197.4
278.5
44.0
29.3
20.4
P/B
25.3
19.7
13.1
9.5
6.7
P/EBITDA
69.1
37.8
18.6
11.4
8.8
P/S
55.9
28.7
14.4
9.0
6.7
Net debt (US$ mn)
BVPS (US$)
Valuation Metrics (x)
Source: Company data, Yuanta
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 24 of 27
Appendix A: Important Disclosures
Analyst Certification
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to
each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal
views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related
to the specific recommendations or views expressed by that research analyst in the research report.
Qihoo (QIHU US) – Three-year recommendation and target price history
103
103
93
93
83
83
Share Price US$
73
73
63
63
53
53
43
43
33
33
23
23
13
13
Mar-11
No.
Sep-11
Date
Mar-12
Closing Price (A)
Sep-12
Target Price (B)
Adjusted Target Price
(C)
Mar-13
Rating
Sep-13
Analyst
Source: Bloomberg, Yuanta Research
Notes: A = price adjusted for stock & cash dividends; B = unadjusted target price; C = target price adjusted for stock & cash
dividends. Employee bonus dilution is not reflected in A, B or C.
Current distribution of Yuanta ratings
Rating
Buy
HOLD-OPF
HOLD-UPF
Sell
Under Review
Restricted
Total:
# of stocks
144
80
60
12
44
6
346
%
42%
23%
17%
3%
13%
2%
100%
Source: Yuanta Research
Ratings Definitions
BUY: We have a positive outlook on the stock based on our expected absolute or relative return over the investment period. Our
thesis is based on our analysis of the company’s outlook, financial performance, catalysts, valuation and risk profile. We
recommend investors add to their position.
HOLD-Outperform: In our view, the stock’s fundamentals are relatively more attractive than peers at the current price. Our thesis
is based on our analysis of the company’s outlook, financial performance, catalysts, valuation and risk profile.
HOLD-Underperform: In our view, the stock’s fundamentals are relatively less attractive than peers at the current price. Our thesis
is based on our analysis of the company’s outlook, financial performance, catalysts, valuation and risk profile.
SELL: We have a negative outlook on the stock based on our expected absolute or relative return over the investment period. Our
thesis is based on our analysis of the company’s outlook, financial performance, catalysts, valuation and risk profile. We
recommend investors reduce their position.
Under Review: We actively follow the company, although our estimates, rating and target price are under review.
Restricted: The rating and target price have been suspended temporarily to comply with applicable regulations and/or Yuanta
policies.
Note: Yuanta research coverage with a Target Price is based on an investment period of 12 months. Greater China Discovery
Series coverage does not have a formal 12 month Target Price and the recommendation is based on an investment period
specified by the analyst in the report.
Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 25 of 27
Global Disclaimer
© 2013 Yuanta. All rights reserved. The information in this report has been compiled from sources we believe to be reliable, but
we do not hold ourselves responsible for its completeness or accuracy. It is not an offer to sell or solicitation of an offer to buy any
securities. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change
without notice.
This report provides general information only. Neither the information nor any opinion expressed herein constitutes an offer or
invitation to make an offer to buy or sell securities or other investments. This material is prepared for general circulation to clients
and is not intended to provide tailored investment advice and does not take into account the individual financial situation and
objectives of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness
of investing in any securities, investments or investment strategies discussed or recommended in this report. The information
contained in this report has been compiled from sources believed to be reliable but no representation or warranty, express or
implied, is made as to its accuracy, completeness or correctness. This report is not (and should not be construed as) a solicitation
to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on such
business in that jurisdiction.
Yuanta research is distributed in the United States only to Major U.S. Institutional Investors (as defined in Rule 15a-6 under the
Securities Exchange Act of 1934, as amended and SEC staff interpretations thereof). All transactions by a US person in the
securities mentioned in this report must be effected through a registered broker-dealer under Section 15 of the Securities
Exchange Act of 1934, as amended. Yuanta research is distributed in Taiwan by Yuanta Securities Investment Consulting. Yuanta
research is distributed in Hong Kong by Yuanta Securities (Hong Kong) Co. Limited, which is licensed in Hong Kong by the
Securities and Futures Commission for regulated activities, including Type 4 regulated activity (advising on securities). In Hong
Kong, this research report may not be redistributed, retransmitted or disclosed, in whole or in part or and any form or manner,
without the express written consent of Yuanta Securities (Hong Kong) Co. Limited.
Taiwan persons wishing to obtain further information on any of the securities mentioned in this publication should contact:
Attn: Research
Yuanta Securities Investment Consulting
4F, 225,
Section 3 Nanking East Road, Taipei 104
Taiwan
Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact:
Attn: Research
Yuanta Securities (Hong Kong) Co. Ltd
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Yuanta
China: Internet Software & Services
Qihoo (QIHU US)
13 Dec, 2013
Initiation
Page 26 of 27
Yuanta Greater China Equities
Research - Taiwan
Vincent Chen
Head of Taiwan Research
+886 2 3518 7903
vincent.chen@yuanta.com
George Chang, CFA
Co-Head of Tech
+886 2 3518 7907
george.chang@yuanta.com
DC Wang
Co-Head of Tech
+886 2 3518 7962
dc.wang@yuanta.com
Bonnie Chang
Head of Non-Tech
+886 2 3518 7925
bonnie.chang@yuanta.com
Jeffrey Cheng
Head of Strategy
+886 2 3518 7902
jeffrey.cheng@yuanta.com
Andrew C Chen
IC Backend, IC Substrate, PCB
and LED
+886 2 3518 7940
andrew.chen@yuanta.com
Dennis Chan
PC Components, Handsets
+886 2 3518 7913
dennis.chan@yuanta.com
Steve Huang, CFA
Semiconductors & Display
+886 2 3518 7905
steve.huang@yuanta.com
Calvin Wei
PC/NB, Passive Components,
IPC
+886 2 3518 7971
calvin.wei@yuanta.com
SzuLiang Liu
PCB, Connectors, Auto
Electronics
+886 2 3518 7963
sl.liu@yuanta.com
Chuanchuan Chen
IC Design
+886 2 3518 7970
chuanchuan.chen@yuanta.com
Felix Hsu
Semiconductor, Solar
+886 2 3518 7946
felix.hsu@yuanta.com
John Chen
TFT
+886 2 3518 7933
john.lw.chen@yuanta.com
Chia-Wen Yeh
Conglomerates and Tourism,
Household Durables
+886 2 3518 7922
chiawen.yeh@yuanta.com
Yvonne Tsai
Petrochem/Textile/Medical
Devices/Shipping
+886 2 3518 7942
yvonne.tsai@yuanta.com
Peggy Shih
Taiwan Financials,
Environmental Eng
+886 2 3518 7901
peggy.shih@yuanta.com
Peggy Lee
Pharmaceuticals
+886 2 3518 7984
peggy.lee@yuanta.com
Leslie Kuo
Autos & Food Staples
+886 2 3518 7961
leslie.kuo@yuanta.com
Huiyi Chen
Property and Building Materials
+886 2 3518 7904
huiyi.chen@yuanta.com
Robbie Tseng
Petrochemicals & Chemicals
+886 2 3518 7945
robbie.tseng@yuanta.com
Maggie Chi
RA - Upstream Tech
+886 2 3518 7969
maggie.chi@yuanta.com
Sunny Chow
RA - Upstream Tech
+886 2 3518 7939
sunny.chow@yuanta.com
Edward Du
RA - Upstream Tech
+886 2 3518 7911
edward.du@yuanta.com
David Huang
RA – Non-tech
+886 2 3518 7948
david.sw.huang@yuanta.com
Ted Lai
RA – Non-tech
+886 2 3518 7909
ted.lai@yuanta.com
Frank Lin
RA – Downstream Tech
+886 2 3518 7915
franky.lin@yuanta.com
Rainy Wang
RA – Upstream Tech
+886 2 3518 7916
rainy.wang@yuanta.com
Sandy Weng
RA – Strategy, Downstream
Tech
+886 2 3518 7956
sandy.weng@yuanta.com
Livia Wu
RA – Strategy, Downstream
Tech
+886 2 3518 7920
livia.wu@yuanta.com
Yingyu Wu
RA – Strategy, Upstream Tech
+886 2 3518 7930
jessie.y.wu @yuanta.com
Kelvin Ng
Renewable Energy
+852 3969 9518
kelvin.kc.ng@yuanta.com
Benson Wan
Oil & Gas/Industrial
+852 3969 9529
benson.cf.wan@yuanta.com
Nice Wang
China Strategy
+86 21 6187 3821
nice.wang521@yuanta.com
Research - Hong Kong/Shanghai
Peter Chu, CFA
Head of HK Research
Consumer Research
+852 3969 9521
peter.kk.chu@yuanta.com
Samuel Kwok, CFA
Autos & Machinery
+852 3969 9527
samuel.kwok@yuanta.com
Sales and Trading
John Chang
Head of Taiwan Equities
+886 2 2175 8898
john.chang@yuanta.com
Juan Tseng
Head of Taiwan Sales
+886 2 2175 8962
juan.tseng@yuanta.com
Duncan Wun
Head of HK Cash Equities
+852 3969 9869
duncan.wun@yuanta.com
Tom Hsu
Head of Taiwan Sales
Trading
+886 2 2175 8800
tom.hsu@yuanta.com
Jenny Lo
Head of HK Sales Trading
+852 3969 9769
jenny.lo@yuanta.com
Kerry Chen - Sales
+886 2 2175 8922
kerrychen@yuanta.com
Philip Kong – Sales
+852 3969 9879
philip.kong@yuanta.com
Jason Lin - Sales
+886 2 2175-8998
jason.lin@yuanta.com
Michael Lin - Sales
+886 2 2175 8977
michael.lin@yuanta.com
Leslie Ling – Sales Trading
+886 2 2175 8855
leslie.ling@yuanta.com
Fiona Tan – Sales
+886 2 2175 8921
fiona.tan@yuanta.com
Kate Jackson – Sales
Trading
+852 3969 9767
kate.jackson@yuanta.com
Derek Tong – Sales Trading
+852 3969 9728
derek.tong@yuanta.com
Joyce Wan – Sales
+852 3969 9876
joyce.wan@yuanta.com
Jason Wang – Sales Trading
+886 2 2175 8888
jason.wang@yuanta.com
Paula Wong – Sales
+852 3969 9832
paula.wong@yuanta.com
Sales of Non-Taiwan Equities
Franker Lin
Head of Foreign Equity
Department
+886 2 2175 8720
laiochenlin@yuanta.com
Lunghui Chen
Co-Head of Sales, Foreign
Equity Department
+886 2 2175 8730
lunghuichen@yuanta.com
Oscar Yang
Co-Head of Sales, Foreign
Equity Department
+886 2 2175 8733
oscaryang@yuanta.com