China’s Sohu Climbs to Record After Earnings Exceed Estimates

Sohu.com Inc. (SOHU), the owner of China’s fourth-most visited website, rose to a record in U.S. trading after reporting a 48 percent increase in first-quarter profit, beating analysts’ estimates.

The shares surged 8.8 percent to $104.14 at 4 p.m. in New York, and earlier climbed as much as 12 percent. The Beijing- based company reported first-quarter net income of $44.8 million, or $1.01 a share, compared with $30.2 million, or 73 cents, last year. Profit exceeded the $41.8 million average estimate of seven analysts surveyed by Bloomberg.

Sales rose 35 percent to $174.4 million as online advertising revenue increased 45 percent from a year ago. Sohu also said its online games unit Changyou.com Ltd. (CYOU) will unveil a new game, Duke of Mount Deer. The unit will pay as much as $101 million to buy a majority stake in Shenzhen 7Road Technology Co., a website game developer, according to Sohu’s release.

“Shares are likely benefiting from continued market share gains within the online video segment, where investors are willing to speculate on accelerated growth potential,” said Mike Hickey, an equity analyst at Janco Partners Inc. in Greenwood Village, Colorado, in an e-mailed reply to questions. “Near-term performance shows considerable strength from their legacy portal advertising segment and online games.”

Changyou’s first-quarter profit rose 33 percent to $52.8 million, according to a separate statement today. The American depositary receipts of Changyou jumped 9 percent to $43.36, the highest since July 2009. It rose as much as 11 percent earlier in the day.

Looking Forward

“Changyou’s revenue and earnings are consolidated into Sohu’s financial statement,” said Andy Yeung, an equity analyst at Oppenheimer & Co. in New York. “So whatever benefits Changyou would benefit Sohu as well.”

Sohu forecast second-quarter revenue between $188 million and $193 million, compared with the $183.2 million average of 11 analyst estimates compiled by Bloomberg. The shares have risen 64 percent this year.

Profit margin is likely to narrow in the second quarter because of marketing costs for the new game, according to Yeung. “Investors are looking beyond the second-quarter performance, more into the third and fourth quarter on potential upsides coming from the new game launch,” he said.

Sohu ranks behind Baidu, China’s biggest search-engine, Tencent Holdings Ltd.’s QQ.com, Sina Corp., and Alibaba’s Taobao.com in user traffic in China, according to China Websites Ranking, a site run by the Internet Society of China, which compiles Web traffic information.

To contact the reporter responsible for this story: Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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