Morgan Stanley Downgrades Cheetah Mobile, Says 'Weakness Aboard'

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Morgan Stanley’s Robert Lin expects increased competition and tightening advertising policy to results in revenue downside for Cheetah Mobile Inc (ADR) CMCM in the near term.

Lin downgraded the rating on the company from Overweight to Equal-weight, while lowering the price target from $18.30 to $15.30.

Revenue Expectations

The analyst pointed out that overseas revenue accounted for 50 percent of Cheetah Mobile’s overall revenue in 2015 and 54 percent in 4Q15.

Although the company was likely to report in-line 1Q16 revenue, Lin expects management to provide a weaker than expected guidance.

“In March, the company provided 1Q16 revenue guidance of Rmb1.08-1.1 bn, weaker than consensus estimates at that time, due mainly to seasonally weaker demand in mobile advertising globally, but it gave bottom-line guidance of Rmb1bn, thanks to cost savings in sales & marketing,” Lin mentioned.

Overseas Outlook

Lin also pointed out that among Cheetah Mobile’s major overseas partners, Facebook Inc FB was the largest revenue source, with Cheetah Mobile selling advertising inventories of its key apps through Facebook Audience Network (FAN).

Cheetah Mobile also enables its customers to advertise on Facebook.

However, Lin stated, “Based on our checks and feedback from our US internet team, eCPM (effective cost per thousand impression) is trending flat on FAN in the recent months, due to: (1) increased third-party ad inventories potentially heightening competition for CMCM, and (2) seasonal pricing weakness.”

Cheetah Mobile’s agency business has also been adversely affected by Facebook tightening its advertising policy.

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Posted In: Analyst ColorDowngradesPrice TargetAnalyst RatingsMorgan StanleyRobert Lin
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