Chinese br& advertising và online gaming company Sohu will be a major beneficiary of Sogou/Tencent (see SOGO write-up here) merger & will receive sầu $1.18bn for its 45% stake in SOGO. That should net SOHU $24/chia sẻ in cash after taxes vs its current price of $20/nói qua. Following this SOHU stochồng is likely to re-rate closer lớn its net cash ($29/share) position once it gets reflected in financials and the market starts lớn notice.

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Just today regulators have sầu approved the merger between Tencent and Sogou. Closing was expected by the over of July (unless amended).

Aside from the large expected cash infusion, SOHU also owns:

Around $6.46/tóm tắt in net cash on its balance sheet (restricted cash, liquid investments and less all long term và short term bank debts)Online games development business Changyou (ref. CYOU). The business is in decline and is still milking its old flagship franchise TLBB (launched in 2007), while all other new releases have basically failed. CYOU was re-acquired by SOHU in April’trăng tròn for a total valuation of around $582m (SOHU owned 68% before privatization). Prior to lớn that CYOU has been generating stable FCF cthảm bại to lớn $200m. In the last 2 quarters, the business saw a likely temporary revenue spike due to lớn a new TLBB version release (“TLBB Vintage”). This has put the whole company in a positive cashflow position. Even with a gradually shrinking topline, the business should be able to lớn generate substantial FCF for several more quarters (or even years). Peging CYOU valuation at $15 per SOHU nội dung (same as reacquisition at covid lows), can easily be argued as being conservative sầu, given the historical cash flows và recent positive sầu developments.Legacy operating business assets – SOHU Video (streaming), SOHU Media (news aggregator) và Focus (real estate information and services). These businesses are struggling heavily due lớn competition from large players và have sầu been burning cash big time historically. On a quiông xã glance, legacy assets together with corporate overhead generated operating losses of $240m in 2019 và $150m in 20trăng tròn. Assuming management will continue pouring cash into these businesses and create no value (management argues the opposite) I deduct a further $800m or $đôi mươi per SOHU nội dung for expected future cash burn.

So at the current price, SOHU trades at 30% discount to lớn net cash including the merger proceeds and 1/2 discount to this conservative sầu baông chồng on the envelope sum of the parts valuation of c. $40/giới thiệu (keep in mind that this assumes a negative sầu $20/nói qua for the operating businesses outside of CYOU due to lớn current cash burn)

This discount seems too wide. At the moment the price is likely depressed as the expected cash infusion has not yet been reflected on the balance sheet và due khổng lồ market overhang due khổng lồ the prolonged timeline of the merger. But this is in the past with today’s announcement.

Another risk is that management could waste cash – so far the company has not clarified how it intends khổng lồ use the proceeds:

Unidentified Analyst

Yes. Thank you. I was referring more to the incoming cash with a potential merger the $1 billion plus in cash.

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Charles Zhang

Okay. So that as we said, we don’t talk about this because it’s still – I mean, we don’t speculate what we’ll vì with more cash because the khuyến mãi is still not done.

Charles Zhang, founder và CEO, owns 26% of the stoông xã. Zhang is regarded as one of China’s mạng internet pioneers and at one time used to be one of the richest people in Trung Quốc. His track record is quite fragmented – aside from the very poor dives in saturated streaming and news markets, he has managed to launch two large & successful “billion-dollar” businesses (CYOU & SOGO) inside SOHU. The cheap and timely reacquisition of CYOU last year was also a pretty good move in my opinion. So far, not many details were given for the capital allocation plans, except that some of the cash will clearly go towards the growth of SOHU Media và SOHU đoạn Clip (Q1’đôi mươi conf. call):

So that’s why as I said that I would need to lớn explore and to lớn vị it, especially lớn build this social network platsize to lớn the distribute content và khổng lồ develop social networks with our current APPs – apps and to grow user base to lớn a much larger scale in a matter of fact, larger user base. So that we can get more market share of advertising brvà, advertising market chia sẻ & also to market our own products like market our TV, our dramas, right. And also even, if Sohu build our own platsize with large – much larger user base. I think Changyou can also benefit because we will sell Changyou and promote Changyou winning our own matrix using the costs

So on until we approve that we can build our social network successfully & have sầu its exponential growth. Social networks are basically grows exponentially. But it’s like a building a chain reaction và also kind of giving a atomic bomb neither chain reaction. So until we bởi that và then grow our user base exponentially, we are – so our growth financial will remain at the current pace. So that events are not excited. So in other word, basically the score of our stochồng price, we need khổng lồ demonstrate a hyper growth, right. And then the stoông chồng price will improve.

Despite that, I still don’ believe that management will just waste $1bn+ in cash with no positive sầu results on the business. A substantial portion of Zhang’s net worth & reputation is in SOHU, so shareholder interests seem to be well aligned here (albeit that didn’t help that much in the past).