Sohu Hedging Costs Increase Versus Qihoo: China Overnight

Options traders are paying more to protect against swings in Inc. relative to rival Qihoo 360 Technology Co. for the first time since July on concern a merger will fail to boost its search engine market share.

Implied volatility, the key gauge of options prices, for one-month contracts closest to Sohu’s shares exceeded that for Qihoo last week for the first time since July 18, data compiled by Bloomberg show. Sohu shares have rallied 34 percent since Tencent Holdings Ltd. invested in Sohu’s search unit on Sept. 16. The Bloomberg China-US Equity Index of the most-traded Chinese shares in the U.S. rallied 2.6 percent last week.

Sohu, a Beijing-based Internet company, sold a 36.5 percent stake in its subsidiary Sogou to Tencent for $448 million in order to boost traffic for the third-biggest search engine in the country. Sogou accounted for 5.5 percent of online queries in China in the first quarter, lagging behind Baidu Inc’s 82 percent market share and Qihoo 360 Technology Co.’s 9 percent, according to data compiled by Bloomberg.

“It’ll take time for Sohu’s Sogou to strengthen its competitiveness versus bigger rivals like Qihoo even with the investment from Tencent,” Tian X Hou, the founder of T. H. Capital LLC, a research firm focusing on Chinese Internet companies, said in a telephone interview from New York Oct. 4. “The options indicated a bigger risk for Sohu’s share price to decline than Qihoo.”

Implied volatility for one-month options closest to Sohu’s shares has jumped 43 percent from a Aug. 26 low to 56.3 on Oct. 4, data compiled by Bloomberg show. During that time, implied volatility for Qihoo has dropped 3.8 percent to 56.2.

Data Sharing

Tencent and Sogou will jointly develop and integrate their services in areas including search and data sharing, the companies said in the Sept. 16 statement. Tencent will merge its own search unit with Sogou. Sohu Chief Executive Officer Charles Zhang said talks with Qihoo had ended and the company won’t seek additional investors for its search unit in the “near future.” In July, Qihoo said it was in talks to buy Sogou.

Qihoo’s share in the Internet search market rose to about 20 percent on Sept. 14 while that for Sogou was 11 percent by the end of August, 86Research Ltd. wrote in a note dated Sept. 17, citing Chinese data provider CNZZ.

Sohu surged 14 percent last week to $86.70 in New York, the highest since July 2011. The shares gained 83 percent this year. Qihoo’s American depositary receipts added 2.7 percent last week to $86.17, taking its rally in 2013 to 190 percent.

Sina, Renren

Chinese Internet companies from Sina Corp. to Renren Inc. drove rallies in the China-US gauge last week as Twitter Inc.’s planned initial public offering boosted social-media companies.

Twitter, which has more than 200 million monthly users, made public its S-1 prospectus on Oct. 3 saying it’s seeking to raise $1 billion in an IPO. The documents suggested a valuation of $12.8 billion.

Sina, based in Shanghai, jumped 10 percent last week to $90.48 in New York, the highest since October 2011. ADRs of Beijing-based Renren surged 20 percent in the week to a seven-week high of $4.04.

YY Inc., a social entertainment website, advanced to $49.72, bringing its weekly gain to 3.1 percent. It climbed to $50.47 on Oct. 2, the highest since its IPO in November.

Chinese ETF

The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., climbed 1 percent last week to $38.01. The Global X Social Media Index ETF, which tracks 27 social media companies including Facebook Inc. and Tencent, advanced 1.8 percent last week.

“Twitter’s IPO is a vote of confidence for the social-media industry,” Jay Jacobs, a research analyst at Global X Funds, a New York-based exchange-traded fund that manages $2.3 billion in assets, said by phone Oct. 4. “There’s a big appetite right now for a lot of these social media related names, including China’s Sina, Tencent.”

The Hang Seng China Enterprises Index advanced 0.2 percent last week to 10,517.28. Markets in mainland China will remain closed until Oct. 8 for a holiday.

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