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Sohu Declines as Easing Growth Curbs Profits: China Overnight

Chinese stocks traded in the U.S. dropped, pulling the benchmark index down from a one-month high, on concern slower economic growth is dragging on company sales and squeezing profits.

The Bloomberg China-US Equity Index of the most-traded Chinese stocks listed in the U.S. slipped 0.7 percent to 103.48, the first decline in four days. Sohu.com Inc. (SOHU), the owner of China’s third-biggest online search engine, fell 7.5 percent, the biggest drop since February, after forecasting second-quarter sales that missed analysts’ estimates. The Shanghai Stock Exchange and the Hong Kong bourse are closed today.

The world’s second-largest economy grew in the first quarter at the slowest pace in almost three years, after export growth fell and the housing market cooled as Europe’s debt crisis capped demand. The average profit margin of companies in the China-US gauge fell to 15 percent in the first quarter from 20 percent a year earlier, data compiled by Bloomberg show.

Sohu’s “growth is slowing down quite a bit,” Andy Yeung, a New York-based analyst for Oppenheimer & Co., said in a phone interview yesterday. “The implied earnings continue to show margin pressure. The Chinese advertising market will be relatively weak until the economy picks up in the second half.”

The IShares FTSE China 25 Index Fund (FXI), the biggest Chinese exchange-traded fund in the U.S., rose 0.2 percent to $37.93 yesterday. The ETF gained 3.4 percent in April, extending its advance this year to 8.8 percent.

Falling Short

The Bloomberg China-US index rose 0.5 percent in April, after slipping 0.6 percent in March. The Shanghai Composite Index of domestic Chinese stocks was up 5.9 percent last month and has added 9 percent this year.

Of the 17 companies in the China-US index that have reported earnings since April 10, nine fell short of analysts’ forecasts, including Yanzhou Coal Mining Co. (YZC) and China Telecom Corp. (CHA) according to data compiled by Bloomberg.

Spreadtrum Communications Inc., a Shanghai-based chip designer, is scheduled to release its first-quarter earnings after the market closes on May 3. Youku Inc. (YOKU), the biggest online video operator in China, and Seaspan Corp., a Hong Kong-based container ship operator, are expected to report earnings the following day, according to data compiled by Bloomberg.

Sohu lost more than $4 to $51.57 in New York after the company said it expects revenue between $244 million and $250 million in the second quarter, trailing the average $253 million of nine analysts’ estimates compiled by Bloomberg.

‘Challenging’ Market

Revenue increased 30 percent from a year earlier in the first quarter to $227 million, the Beijing-based Internet company said on April 30.

Net income declined to 53 cents per share in the first quarter from $1.01 a year earlier, as the company faced a “challenging” market in sales of online display advertising, and as operating expenses rose 48 percent, according to Sohu. The earnings beat the 46 cents per-share average prediction of analysts surveyed by Bloomberg.

Baidu Inc., (BIDU) owner of China’s dominant Internet search engine, said on April 24 that its second-quarter sales may rise to between 5.34 billion yuan ($850 million) and 5.46 billion yuan, below the 5.48-billion-yuan average of analysts’ estimates compiled by Bloomberg. The projected growth rate of as much as 60 percent from a year earlier would be the slowest pace in more than two years.

American depositary receipts of Beijing-based Baidu fell 1.3 percent to $132.70 yesterday. It dropped 9 percent in April, trimming its gain this year to 14 percent.

Lower Valuations

Chinese Premier Wen Jiabao pared this year’s economic growth target to 7.5 percent, from the 8 percent goal that had been in place since 2005.

Wen has said the government will fine-tune its economic policy as the economy slows. The government plans to lower tariffs on some products to encourage imports as the nation seeks to alleviate pressures on domestic resources and reduce trade conflicts, the State Council said in a statement on April 30.

The Shanghai Composite trades for 10.2 times estimated earnings for member companies, after reaching a record-low valuation of 8.8 times in January. It compares with a multiple of 13 times for the Standard & Poor’s 500 Index and 11 times for the MSCI Emerging Market Index. The gauge for the Hang Seng China Enterprises Index, which tracks Chinese stocks trading in Hong Kong, has declined to 8.4 times from 10.6 a year earlier.

‘Positive’ Outlook

The outlook for the Chinese stocks trading in Hong Kong is “positive” because the valuation has become attractive after investors turned “overly negative” on the economy, according to Steven Bell, who manages $600 million in assets as principal portfolio manager at the GLC Ltd., a London-based hedge fund.

“Chinese equities have become very cheap,” Bell said in a phone interview from London. “While the economy may grow a little less strongly, the outlook for inflation is positive and that will improve consumer incomes.”

A government report may show today that the country’s manufacturing sector, tracked by the Purchasing Managers’ Index, probably rose to the strongest level in April since December 2010, according to the median estimate of economists surveyed by Bloomberg.

LDK, Sina

LDK Solar Co., based in Xinyu in China’s central Jiangxi province, reversed an earlier decline to gain 7.4 percent to $3.18 in New York, the biggest one-day advance since Feb. 17.

Xingxue Tong, chief operations officer of the world’s second-largest maker of solar wafers, said the company cut 5,554 workers, or about 22 percent, this year as falling prices reduced margins to record lows.

Sina Corp. (SINA) fell 1.2 percent to $58.51 after the company said it could face “severe punishment” for not verifying all users of its Twitter-like Weibo service, as required by the government following a crackdown at the beginning of April.

The Shanghai-based company said in a filing on April 27 that should the government enforce compliance of its request for micro-blogging sites to ensure all users are identified, traffic may be “severely reduced” and certain features and operations may be deactivated.

Sina lost 10 percent in April, reducing its gain this year to 13 percent.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Leon Lazaroff in New York at llazaroff@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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