JPMorgan's Chinese Internet Pair Trade Says Short Sohu
JPMorgan's Vivian Hao initiated coverage of Weibo Corp (ADR) (NASDAQ: WB) with an Overweight rating and a price target of $18, while downgrading the rating for Sohu.com Inc (NASDAQ: SOHU) from Neutral to Underweight and reducing the price target from $75 to $50.
Against the backdrop of a “relatively benign” competitive landscape in China’s social media segment, Weibo’s margins are expected to expand significantly from FY15 onwards. Analyst Vivian Hao forecasted the operating margins of 18.5 percent in FY16, of 23.6 percent for FY17 and of 24.5 percent for FY18.
The company would be able to achieve these as it reaches “the critical monetization threshold with a unique value proposition to advertisers,” Hao said.
Weibo is China’s second largest social platform, having reached 222m MAUs in September 2015. The company offers “irreplaceable ‘media value’ with a Twitter-like open social graph for advertisers that seek maximum exposure through event-driven campaigns,” the analyst said.
He added that SME clientele, which is estimated to contribute 59 percent of total ad revenues in FY16, could ramp up quickly due to enriched product formats developed around Fensitong.
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The JPMorgan report noted, however, that there could be pressure on near-term financials as the company re-negotiates its deal with Alibaba, and there could be potential downside risk to consensus numbers for 1Q16.
The company faces challenges in its major incumbent business segments, Hao mentioned. These include:
- The decline of the online games business [CYOU], with its single hit title TLBB aging and the lack of a pipeline related to CYOU
- Weakness in brand ads due to the macro impact and a conservative video content strategy
- A substantial moderation in Sogou search growth by 4Q15
“We expect few fundamental catalysts to drive share outperformance unless there is a management buyout event (CEO Charles Zhang proposed a non-binding offer at no more than $50 per share up to a total value of $600mn, or 30% of market valuation by end-2015),” Hao wrote.
Latest Ratings for WB
|Aug 2016||JP Morgan||Assumes||Overweight|
|Aug 2016||Goldman Sachs||Maintains||Neutral|
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