1、CompanyResearch/Media&InternetSector,12-01,12-03,12-05,12-07,12-09,12-11,29.00,27.00,25.00,23.00,21.00,19.00,17.00,15.00,Qihoo 500(可比),31.44,0.67,18,NC,11.50,Qihoo 360 (QIHU)An emerging internet platformbased on free security service,22 Jan 2013Investment HighlightsAn internet platform focusing on f
2、ree security service. Qihoo 360 isthe largest internet security service provider in China, and is also the 3rdlargest internet company in China by user base. The Company providesinternet security and platform services, and realizes its business valuethrough introduction of open platforms. It reporte
3、d revenue and net profit ofUS$168mn and US$15.6mn for 2011, up 191.1% and 83.4% YoY,respectively. We forecast that its revenue will increase 90% YoY toUS$319.5mn in 2012E.Attracting users with free services, enhancing value throughdiversified applications, investing for the future by establishing op
4、enplatforms. Qihoo 360 has a unique business model. It attracts users withfree services, and generates profit from data traffic on the numerous,BUY (Initiation)ADS price: US$31.93Target price: US$42.24CSI Research DepartmentHao WenTel: (8610) 6083 6709E-mail: Yi GuoTel: (8610) 6083 6739E-mail: Chunb
5、o LiTel: (8610) 6083 8203E-mail: Price Chart,value-added services and applications. History reminds us that user base is,Turnover (US$ mn),(US$),an internet companys core competency. In terms of user market share, theCompanys 360 anti-virus, 360 Mobile Safe and 360 Safe Browser areranked number 1 in
6、 China, and its web games and 360 Mobile Browser areranked 5th and 6th, respectively.13.00,By launching its search engine, Qihoo 360 will likely break themonopoly in search engine market, and thus benefit significantly fromlarge user traffic. In the search engine market, higher market share adds a,奇
7、虎360 S&P (Comparables)Source: Bloomberg, CSI,premium to revenue share. We believe that as Qihoo 360s user trafficgrows, it will be able to attract more advertising clients with its lowadvertising rate. Meanwhile, by adopting differentiation strategy, it can avoiddirect competition with Baidu. We for
8、ecast that its search engine businesswill contribute nearly 50% of its total revenue in 2013E, with user trafficmarket share reaching as high as 15%-20% in the future.As an internet platform, user base and user traffic are the key drivers ofQihoo 360s long-term value. We forecast that its online adv
9、ertisingrevenue will increase 80% YoY to US$222mn in 2012E. Web games are themain source of its internet value-added services revenue, which will likelysoar by 120% to US$97mn in 2012E. We believe that with the help of open,Latest Key DataS&P 500FF no of ADS (mn ADS)FF (%)FF market cap (US$ mn)52-we
10、ek high/low (US$)12M volatility (%)PEG 2012-14E (x)RoE avg 2012-14E (%)P/B 2012E (x)Net debt/equity 2012E (%),1485.9898.1882.533.13/13.8109.526.57,platforms, it will be able to direct user traffic to various internet value-addedservices. Currently, taking advantage of its large PC user base, the,Per
11、formance (%),1M,YTD,12M,Company is building up its presence in the mobile internet market.,Absolute,30.95,11.15 109.52,Potential risks: i) sluggish economy may impact the online advertising,Rel to S&P 500,3.54,3.84,14.48,market; ii) Qihoo 360 may fail to upgrade its technology and hardware; andiii)
12、Competition may dampen Qihoo 360s earnings.,Major Shareholders (%)Highland Management PartnersVI L P,CDH Net Technology, Ltd.AuditorDeloitteIMPORTANT DISCLOSURE AT THE END OF THIS REPORT,6.00,2,Qihoo 360 (QIHU): An emerging internet platform based on free security serviceEarnings forecast, valuation
13、 and rating. We forecast Qihoo 360s 2012-14E net profit at US$41mn/96mn/150mn,with diluted earnings per ADS of US$0.52/1.23/1.92, respectively. Its current ADS price of US$31.93 translates into2012/13/14E P/E of 61.24x/25.94x/16.60x. Using a blend of AVPU, PEG and DCF valuation methodology, we deriv
14、ea target price of US$42.24 for Qihoo 360s ADS. We initiate coverage on the company with a “BUY” rating.Investment Summary,FY-end DecTurnover (US$ mn)Chg (%)After-tax profit (US$ mn)Chg (%)Earnings per ADS (US$)Chg (%)PER (x)OCF/ADS (US$)P/OCF (x)EV/EBITDA (x),20105878.528102.700.11102.70293.050.261
15、02.34198.12,2011168191.081571.290.1971.29171.081.0625.0369.35,2012E32090.3541179.370.52179.3761.240.4459.8238.08,2013E59887.1496136.041.23136.0425.941.0724.7416.85,2014E96160.8015056.291.9256.2916.601.6815.6910.84,Source: Company announcements, CSI,Note: Closing price as of 18 Jan 2013,IMPORTANT DIS
16、CLOSURE AT THE END OF THIS REPORT,3,Qihoo 360 (QIHU): An emerging internet platform based on free security serviceOverview: An integrated internet platform focusing on “free securityservices”Founded in Sep 2005, Qihoo 360 successfully entered the internet market byproviding internet security service
17、s and has become the largest internetsecurity service provider in China. It is also the 3rd largest internet company inChina by user base. It has launched 360 Safe Guard, 360 Anti-virus, 360Firewall, 360 Mobile Safe and other internet security products thus far.It started expanding into the internet
18、 market by unveiling a safe browser in 2008.Currently, its product lines include 360 browser, website navigation and asearch engine. It further launched open platforms and started building up itspresence in the mobile market in 2011. By offering internet security servicesand platform services, it re
19、alizes its business value from introduction of openplatforms. The Company was listed on the NYSE on 30 Mar 2011.Fig. 1: Qihoo 360s history and product linesInternet applicationsOpen platforms,安全浏览器,急速浏览器,PAD浏览器,手机浏览器,游戏浏览器,安全桌面,手机桌面,Security software,安全卫士,企业版,手机卫士,保险箱,网盾,网购保镖,超强杀毒,360杀毒,急救箱,2006.08-
20、10 Promotedthe Anti-Malware”movement and drewofficial attention2006.12 Embedded agreen softwaredownload platform in360 Safeguard,2007.06 Added Trojandetecting and removingfunction to 360Safeguard 2007.09360 Safeguard beatRising and Kingsoftsproducts in terms ofusers to become thetop security softwar
21、e inChina,2008.07 Launched thefree anti-virus software,360 anti-virus 2008.12After the Windows BlackScreen event, 360anti-virus became usersfirst choice,2009.12 360 Anti-virusbecame the first domesticanti-virus software thatpassed VB100 test2009.12.27 360 SafeBrowser beat Maxthonand TT in terms of m
22、arketshare to become the topbrowser in China,2010.6 360 Anti-virususers exceeded 200mn,market share surpassed50% 2010.11 Launchedthe 3rd generationanti-virus engine,360QVM AI,2011.9 Launched mobileinternet products such asMobile Desktop, MobileAssistant and MobileBrowser 2011.10Unveiled the safe gro
23、uppurchase platform,2012.8 In the first collection ofanti-virus software available inWin8 app store, 360 Anti-viruswas the only domestic anti-virussoftware 2012.8 Launched 360search engine 2012.9announced an independentdomain name for 360 searchengine,2005.09 Qihoo 360was founded 2006.07360 Safeguar
24、d wasunveiled,2007.02 Solicitedinternet users opinionson 360 Safeguard2007.04 Customizedversion of 360Safeguard waslaunched,2008.03 Changed 360Safeguards domainname to www. and transformed it froma security product to asecurity platform2008.05 Launched 360Safe Browser,2009.09 Cut into mobilesecurity
25、 market bylaunching 360 MobileSafe 2009.10 Announcedthat 360 Anti-virusVersion1.0 would bepermanent free,2010.1 360 Anti-virus 2011.2 Launched 360 2012.3 Secured the rightusers exceeded 100mn group purchase platform, in China for the initial2010.3 360 Mobile Safe and carried out the open launch of R
26、ovios Angrybecame free, with market platform strategy Birds Space. 2012.5share exceeding 50% 2011.3.30 Went public Unveiled 360 specialon NYSE under the phonesticker “QIHU”,Source: http:/ CSIIts 3Q12 revenue came in at US$84mn, up 77% YoY, and its 3Q12 net profitreached US$12.9mn, up 18% YoY, or 15.
27、5% QoQ. On the back of thecontinuous rise in user base and user traffic, its online advertising and internetvalue-added service revenue saw robust growth in 2012. Driven by furtherpenetration of its key products, its online advertising revenue grew by 66.5%YoY, or 14.8% QoQ in 3Q12 to US$58.4mn, but
28、 the growth was partlyundermined by the sluggish economy. Meanwhile, due to the increase in paidusers, its internet value-added service revenue climbed 110.8% YoY, or 17.8%QoQ in 3Q12 to US$25.5mn.IMPORTANT DISCLOSURE AT THE END OF THIS REPORT,84.04,90,Online,Internet,Third-party,Growth, YoY,Growth,
29、 QoQ,US$ mn,Revenue,Revenue growth,Net profit,Net profit growth,Online,Other services,Internet value-added,Sale of third-party anti-virus,4,Qihoo 360 (QIHU): An emerging internet platform based on free security service,Fig. 2: Revenue and revenue growth (1Q10-3Q12),US$1,000/%,网络广告advertising,网络增值业务v
30、alue-addedservices,第三方杀毒软件anti-virus software,同比增长率,环比增长率350%,80,300%,706050403020100,25.558.4077.0%15.5%,250%200%150%100%50%0%,10Q1,10Q2,10Q3,10Q4,11Q1,11Q2,11Q3,11Q4,12Q1,12Q2,12Q3,Source: Company financial reports, CSISince 2008, Qihoo 360 has progressively transformed itself into an internetplat
31、form company from being a security software manufacturer. Hence, itsrevenue mix has changed significantly. On one hand, the contribution ofanti-virus software to its total revenue decreased constantly to almost zero in2011 from 66% in 2008. On the other, by offering internet applications and openpla
32、tforms such as browsers, website navigation and search engine, it boostedonline advertising revenues. Meanwhile, it started to cooperate with third-partydevelopers through open platforms in 2010, so that it could direct its user trafficto third-party applications and share third-party developers inc
33、ome.The Company reported revenue and net profit of US$168mn and US$15.6mnfor 2011, up 191.1% and 83.4% YoY, respectively. Its online advertisingrevenue went up by 216.9% YoY to US$123mn, and its internet value-addedservice revenue climbed up by 194.9% YoY to US$43.57mn.,Fig. 3: Revenue and net profi
34、t (2008-2011),Fig. 4: Breakdown of Qihoo 360s revenue (2008-2011)US$ mn,营业收入营收增长率,净利润净利润增长率,网络广告advertising其他服务,互联网增值服务 services第三方杀毒软件销售software,200150100500,16.9-2.7,32.3,4.2,57.78.5,167.915.6,250%200%150%100%50%,100%80%60%40%20%,11.10.25.6,16.32.113.9,3.914.838.8,0.943.6123.1,-50,0%,0%,2008,2009,
35、2010,2011,2008,2009,2010,2011,Source: Company financial reports, CSIIMPORTANT DISCLOSURE AT THE END OF THIS REPORT,Source: Company financial reports, CSI,Gross,Net margin,Sales expense,Administrative,R&D expense,5,Qihoo 360 (QIHU): An emerging internet platform based on free security serviceThe Comp
36、any posted gross margins of 74.0%, 88.3% and 88.7% for 2009,2010 and 2011 respectively, demonstrating an upward trend. Its net marginswere 13.0% and 14.8% for 2009 and 2010, respectively, but slipped to 9.3% in2011 due to the surge in selling expenses. Its selling, administrative and R&Dexpenses as
37、a percentage of total revenue for 2011 were 27.9%, 11.4% and38.8%, respectively, remaining flat from 2010.,Fig. 5: Qihoo 360s gross margin and net margin (2009-2011),Fig. 6: Qihoo 360s expense ratios (2009-2011),毛利率margin,净利率,销售费用率ratio,管理费用率expense ratio,研发费用率ratio,100%80%60%40%20%,74.0%13.0%,88.3%
38、14.8%,88.7%9.3%,50%40%30%20%10%,33.0%19.4%7.8%,40.8%21.9%8.8%,38.8%27.9%11.4%,0%,0%,2009,2010,2011,2009,2010,2011,Source: Company annual reports, CSIIMPORTANT DISCLOSURE AT THE END OF THIS REPORT,Source: Company annual reports, CSI,Directing,usertraffic,Directing,usertraffic,Directing,usertraffic,Re
39、venue,sharing,6,Qihoo 360 (QIHU): An emerging internet platform based on free security serviceBusiness model and position in the market: seizing the red ocean ofinternet access services and battling the blue ocean of platformsBusiness model: Attracting users with free services,enhancing value with d
40、iversified applications, investingfor the future by establishing open platformsQihoo 360 has a unique business model. Unlike Baidu and Tencent whichentered into the internet market by providing search services and IM software,Qihoo 360 provides users with free security and anti-virus services, which
41、attract a large number of users and enhance users loyalty. After acquiring alarge user base, it generates profit from users by providing them with richinternet value-added services and applications, as what the Company is doingat present. Overall, in order to make good use of its large user base and
42、generate more profit from users, the Company will enhance its internetvalue-added services in the future.Fig. 7: Qihoo 360s business model,Acquire numerous usersPC-based entry points360 Safeguard360 Anti-virusMobile based entry pointsMobile SafeMobile AssistantAdvertising,Internet entry pointMobile
43、internet entry pointInternet entry pointSafe BrowserSafe DesktopMobile internet entry pointMobile BrowserMobile DesktopAdvertising,Open platformsPlatform entry points360 application platform360 software platformSafe browser platformE-commerce platform360 mobile platform360 game platformExtreme explo
44、rer platformAdvertising,Third partiesNumerous game developersNumerous applicationdevelopersNumerous online shops,Advertisers and advertising agenciesSource: CSIAfter acquiring a sizeable user base and stable user traffic, the Company triesto convert the traffic into profit by offering diversified in
45、ternet applications andservices. Currently, Qihoo 360 is using the below four measures to generateprofit from its large user base: i) it sets 360 Personal Start-up Page as thedefault homepage for 360 browsers, and charges advertisers for theadvertisements they place on the website; ii) It embeds a s
46、earch box in 360browser. As long as users conduct search via the search box, it will receive apre-determined fee from search engine companies; iii) by offering third-partyonline games, such as “Farm Thief”, it can share the income from gamedevelopers; and iv) by providing access to products such as 360 ApplicationStore, the Company is able to charge software promotion fees.IMPORTANT DISCLOSURE AT THE END OF THIS REPORT,
