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Sohu to Focus on Online, Search Ads After Spinoff (Update1)
Bloomberg
By Allen Wan
April 2, 2009

April 3 (Bloomberg) -- Sohu.com Inc., China’s second- biggest Internet portal, will build up its online and search advertising businesses after spinning off its games unit in the first U.S. initial share sale by a Chinese company since August.

“We will focus on monetizing our business such as online advertising, search advertising, video and may even charge for content,” Chief Executive Officer Charles Zhang said in an interview in New York. “Growth will also come from Pinyin messaging based on search-engine technology.”

Changyou.com Ltd., an online game developer and operator, jumped as much as 50 percent in Nasdaq Stock Market trading after raising $60 million in its initial public offering. The American depositary receipts were sold at $16 each, the top end of its estimate. They gained 33 percent to $21.27 at 2:47 p.m. in New York.

Sohu will retain a 71 percent stake in Changyou after the IPO. The Beijing-based company has posted profit increases for six consecutive quarters since introducing the “Tian Long Ba Bu” online game in May 2007 to help boost revenue that had come mostly from ad sales on Sohu’s Web site.

Game Sales

Tian Long Ba Bu, based on the kung-fu novel written by Louis Cha, will be operated by Changyou. Sales from the online game reached $189 million last year, accounting for about 94 percent of total 2008 online game revenue and more than a third of total revenue of $429 million, according to Sohu.

“We decided to operate Changyou as a standalone in order to create strong incentives and to have greater accountability,” Zhang said. “It will allow us to have better access to capital and to compete in the game business.”

Sohu ADRs fell 1.4 percent to $43.04 and earlier slumped as much as 6.3 percent, the most in two weeks.

“Some investors don’t like the fact that Changyou will be an independent company,” said Jiawen Zhou, an analyst who covers Sohu at Birmingham, Alabama-based Sterne Agee & Leach Inc. “They feel there would be more synergies between the online gaming and advertising.”

Shanda Interactive Entertainment Ltd., China’s biggest Internet games company, said in February sales from its role- playing titles rose 46 percent to 2.98 billion yuan ($436 million) in 2008. NetEase.com Inc., the second-largest, posted a 32 percent increase in online game revenue to 2.5 billion yuan last year.

China Economy

Sohu ADRs have fallen 9.5 percent this year, hurt by concerns the slowing Chinese economy will reduce advertising spending. China’s 4 trillion yuan economic stimulus plan has increased optimism the government will reach its economic growth forecast of 8 percent, spurring a rally in mainland stocks. Shanghai’s benchmark index rose to a seven-month high yesterday.

“If the government says the economy will grow 8 percent, then they are going to do it,” said Sohu’s Zhang.

He said Sohu will report first-quarter earnings “in line” with forecasts as online advertising in China remains stable.

“We’ve definitely seen some effects from the China slowdown but the crisis has been an opportunity for Sohu,” Zhang said. “The crisis has helped Sohu and other companies by getting rid of weaker competitors and allowing stronger Chinese companies to emerge.”

The worst financial crisis since the Great Depression drove the MSCI All-World Index of 46 nations down 44 percent last year, leading more than 300 companies to cancel or delay IPOs since the beginning of 2008, Bloomberg data show.