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Sohu Looks to Profit on Rivals' Woes

As its rivals struggle with difficulties beyond the general malaise plaguing China's Internet portal sector, Sohu.com says it is becoming more attractive to online advertisers.

Chief executive Charles Zhang also said that as Sohu's revenue steadily grows, so does its allure as an acquisition target.

"As we continue to demonstrate the momentum of the results, we become increasingly ... a desirable target for any multinational company," Zhang said in an interview in his Beijing-based firm's Hong Kong office.

Not that selling itself is necessarily Sohu's end-game. Zhang said remaining independent as a leader in China's still-young Internet market also has the potential for boosting shareholder value.

"Great" quarter?

Although Zhang characterized the company's second quarter results released on Tuesday as "great", investors disagreed, knocking 11.5 percent from Sohu's battered shares, which closed on the Nasdaq at $1.46.

While revenue rose 17 percent from the previous quarter to US$2.88 million, the number fell at the low end of analyst forecasts. Non-advertising revenue accounted for 23 percent of revenue, from 15 percent in the first quarter, and Sohu expects non-ad revenue to top 30 percent in the third quarter.

But Sohu posted a pro forma net loss of US$3.3 million, and does not foresee breaking even until the final quarter of 2002.

Zhang said Sohu's revenue momentum and declining costs show that its "path to profitability is becoming ever clearer."

Still, investors have fled China's portal sector, with Sohu and its two domestic rivals Sina.com and NetEase Inc trading at tiny fractions of their 2000 IPO levels. Some investment banks no longer bother covering the sector.

Rough time for rivals

Both of Sohu's chief rivals, meanwhile, have been beset by internal problems.

This week NetEase revealed that it will be kicked-off Nasdaq on Friday morning -- unless it gets an appeal hearing -- for failing to file a 2000 annual report. NetEase has not filed the report as it continues an internal probe into possible misreporting of revenue, and warned that its reported results for 2000 should not be relied upon. Its shares were hammered, falling 24.4 percent on Tuesday to $0.62.

Meanwhile, Sina in June fired its CEO Wang Zhidong, who held a 70-percent stake in the China-based provider of Sina's mainland Internet content.

Wang's subsequent public battle with the company illustrated the perils of China's Internet regulations, which bar foreign-owned firms from controlling Internet content. Those laws have partly deterred what was once expected to have been an influx of overseas interest in the sector.

But Sohu's Zhang said America Online's planned US$200 million joint venture with top mainland PC maker Legend Holdings Ltd shows there is foreign interest in China's Internet market, which numbers roughly more than 20 million users but is expected to mushroom in coming years.

"What happened to NetEase shows how important reporting, transparency (and) financial discipline are to a newly emerged industry in China, and that's where the strength of Sohu is," Zhang said.

Zhang said the troubles of its rivals make Sohu more attractive to advertisers. He said Sohu has also been getting resumes from staff at its competitors.

Ad believer

Zhang espouses a stubborn belief in the viability of an online ad-driven model in China, even though International Data Corp predicts that a measly US$39 million will be spent on such ads this year in China.

"There is a sizeable market out there," Zhang said, noting that IDC expects the figure to bloom to US$215 million in 2004.

"There are not a lot of ways for Chinese people to get information, so the Internet becomes a very important media platform," he said, adding that advertisers in China don't have the many media choices they do in the United States.

"So we will get a large part of that advertising pie."

(Agencies 2001/07/26)

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