SOHU/CYOU:4Q16-Legacy TLBB increasingly crucial to business turnaround

Mixed 4Q16 results; still waiting for structural business triggers

    Mixed 4Q16 results between SOHU and Changyou (CYOU) and lower-thanconsensus1Q17 guidance would typically be a cause for near-term pullback inthe stock, but we think near-term earnings is less relevant to the stocks alreadytrading at depressed valuations. We do not detect signs of turnaround inSOHU’s operations, so we await launch of CYOU’s new mobile titles in 2017including Legacy TLBB as key earnings driver for 2017. Close beta testing forLegacy TLBB in 1Q17 will dictate whether the game will launch in 2Q17timetable and bring CYOU’s major catalyst within near-term horizon. Wereiterate our Buy stance on both SOHU/CYOU given the significant impliedupside to CYOU achieving a turnaround in gaming market share with LegacyTLBB and other games in the pipeline.

    CYOU 4Q16 ahead of expectation; Legacy TLBB in the last leg of R&D

    CYOU’s reported US$131m in revenue was slightly higher than our US$127mmostly due to higher revenue contribution from its cinema-related advertisingwhile online gaming revenue was in-line with expectation. Company managedto keep cost reigned in, resulting in a slight beat on non-GAAP operating profitof US$37m versus our US$34m expectation, and a higher beat of non-GAAPEPADS of U$0.75 versus our US$0.6 expectation. CYOU management believedimprovements being made to TLBB PC should allow it to be more stable in2017 than in prior years, which may be the basis for its 10%-20% yoy declinein 1Q17 versus 38% yoy decline CYOU reported for 2016 for existing onlinegame business. CYOU management claims the game is ready, but that theyare laser focused on maximizing Legacy TLBB’s potential success.

    SOHU reports revenue miss as both search and brand ad is weak

    SOHU’s 4Q16 revenue of US$412m was materially below our US$437m asbrand and search advertising was weaker than expected. Search advertisingonly managed to grow 1% yoy. Despite it, managed S&M cost helped bufferthe revenue miss and non-GAAP OP of