Chinese stocks have been lackluster performers, at best, as China's economic growth has slowed from its breakneck pace in the past two years. But at least one is signaling a recovery: Sohu.com (SOHU), China's second-largest Internet portal and a well-known brand both in that country and the U.S.
Sohu, which trades on Nasdaq, has edged up from 37 a share on Jan. 15 to 46 on Feb. 10. The stock is still well below its 52-week high of 91.26, reached on June 5, 2008. But over the next six months Sohu could hit 64, says analyst Ian Gibson of Zacks Investment Research, who rates Sohu a buy based on its better-than-expected fourth-quarter earnings and its lineup of new online games. These games will "drive meaningful growth in late 2009 and 2010," says Gibson. In addition to games, media and search portal Soho provides an array of other online offerings, primarily in China, including brand ads, news, search, e-mail, and wireless messaging, as well as paid listings in its own search directory.
Gibson is encouraged by Sohu's growing cash hoard, which totaled $315.4 million at the end of the fourth quarter, up from $279 million in the third quarter, as well as its debt-free balance sheet. The company also impressed investors when it posted strong margins and record profits and revenues in the fourth quarter for the sixth consecutive quarter.Boost from Olympics
Sohu's current stock price doesn't reflect the company's full intrinsic value, says Gibson. He concedes that concerns remain over weak advertising spending and China's sluggish macroeconomic outlook in 2009. But the stock already reflects those worries, he adds.
The 2008 Beijing Olympics enhanced Sohu's Internet portal position and attracted new users along with major advertisers, notes Gibson. Overall, Internet usage in China has kept booming even after the Olympics. "We expect such increased Internet usage to drive strongly its profit growth over the next few years," says the analyst.
Sohu has increased its revenues at a yearly growth rate of 38.8% since 2003, notes Gibson. Revenues are helped by the popularity of Sohu's online games, especially its "Tian Long Ba Bu" and "Blade Online." The company's pipeline of new online games, he says, remains robust and is expected to drive sales and earnings growth significantly through 2010.
For the first quarter of 2009, Sohu expects sales to climb to a range of $111.5 million to $115.5 million, up from $89 million in the first period of 2008. For all of 2009, Gibson expects revenues to advance to $567 million, up from 2008's $429.1 million. He forecasts earnings of $5.50 a share and $6.24 in 2009, up from 2008's $4.29.
There was a "wow" factor in the company's projected 21% jump in brand ads for the first quarter of 2009, says analyst James Lee of investment firm Sterne, Agee & Leach , who rates the stock a buy. That's in contrast to Sterne Agee's estimate of a 15% to 20% jump in such ads. Specifically, Sohu seems encouraged by developments in the auto sector, says Lee, where estimates call for a 30% rise in revenues thanks in part to the Chinese government's stimulus program. Another plus for Sohu, says Lee, is China's $3 billion online gaming industry, which spends most of its ad budget online.Big Investors Load Up
Investing in Chinese stocks could be a risky experience for individual investors, especially in small-cap or little-known companies. It is much less so for companies like Sohu, which provides information to investors on a regular basis because it trades in the U.S.
U.S. institutional advertisers haven't been shy in loading up on Sohu shares. Fidelity Management , for one, has accumulated a stake of 10% as of Dec. 31, 2008, and Ziff Asset Management holds a 7.46% interest as of the same date. Vanguard Group owns a 3.64% position.
U.S.-based analysts who track Sohu also have been upbeat on the stock. Of the 18 Wall Street analysts who follow Sohu, 13 rate it a buy and five peg it a hold. None recommend selling the stock.
While the global economic slowdown plays out, American investors may not rush back into the Chinese stock market. But right now, Sohu is one of the more undervalued and attractive plays among U.S.-traded Chinese stocks.
Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.