Date
23 October 2017
Sohu's earnings report has been largely met with indifference
Sohu's earnings report has been largely met with indifference

Market yawns at Sohu, Soufun as saturation looms

The latest earnings season for US-listed Chinese Internet firms has begun with a big yawn, hinting at a looming wave of investor fatigue after a surge in positive sentiment at the end of 2013. I’ve been writing about these companies for quite a while now, and can truthfully say it’s quite common to see their stocks rise or fall by 3 percent or more after they announce their quarterly results. It’s much rarer for shares to remain unchanged after such announcements, though that’s largely what has happened after web portal Sohu (Nasdaq: SOHU) and online real estate services firm Soufun (NYSE: SFUN) kicked off the latest earnings season with release of their fourth-quarter results.

The surprising lack of movement in shares of both Sohu and Soufun comes as a separate report says that a wave of Chinese Internet firms is suddenly clamoring to make IPOs in New York, with up to 30 companies planning such listings. All of this leads me to predict the market could quickly become saturated, leading to a period of stagnation for both new listings and also currently listed players that saw their shares surge last year. The story could be even worse for neglected players like faded social networking site Renren (NYSE: RENN), which could see their shares languish or sink further.

All that said, let’s take a closer look at the latest results from Sohu and Soufun, which have kicked off the latest earnings season with mixed reports. Sohu’s revenue rose 29 percent to US$385 million, though its profit was down sharply as it continued to invest heavily in its newer online video and search businesses. Sohu predicted more strong growth for its search and core advertising business in the current quarter, though it also forecast a big loss for the period. Investors greeted the mixed news largely with indifference, with Sohu shares inching up just 0.04 percent after the results came out.

Meantime, Soufun announced its own results that also showed relatively strong revenue growth of 47 percent to US$217 million, with net income approximately doubling. The company gave a more tempered outlook for 2014, saying it expects revenue to grow at a more modest rate of about 24 percent for the year. Investors also reacted with relative indifference to the report, with Soufun’s shares rising a scant 0.4 percent after the announcement. Of course it’s also worth noting that Soufun’s shares more than tripled last year and Sohu’s nearly doubled, amid a broader rally for Chinese Internet stocks.

Meantime, a separate media report is saying that Chinese Internet firms are suddenly lining for New York IPOs to take advantage of a hugely bullish market that emerged in the last two months of 2014. That positive turn has fueled huge gains in newly listed shares of companies like online classified advertising site 58.com (NYSE: WUBA) and car information site Autohome (NYSE: ATHM). The rally was also notable because it came after more than two years of negative sentiment towards the sector, following a string of accounting scandals dating from early 2011.

This latest report cites unnamed investment banking sources as saying that as many as 30 Chinese companies could list in the US this year, including e-commerce giant JD.com, which has already made its first public filing for an offer expected to raise more than US$1 billion. That could translate to US$10-20 billion worth of new shares flooding into the market if the new listing wave really happens — a huge volume for a sector whose current float is probably less than US$50 billion.

More importantly, the flood of so many new names into the market could also quickly lead to confusion and investor fatigue, since many of the companies have similar names and overlapping businesses. We’ll have to see what happens to other companies’ shares as they announce their earnings, to determine if early signs of investor fatigue are already setting in. But more indifference to future earnings reports could indeed indicate that investors are quickly losing interest in the space, which could mean a lackluster year for Chinese Internet stocks following the big rally in 2013.

Bottom line: Investor indifference to new earnings reports from Sohu and Soufun indicate US investors may be tiring of Chinese Internet stocks, boding poorly for the sector and an upcoming wave of new IPOs.

RC

A commentator on China company news and associate professor in the journalism department of Fudan University in Shanghai. Follow him on his blog at www.youngchinabiz.com.

EJI Weekly Newsletter

Please click here to unsubscribe