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Market Report Summary

Core Content

This document is a market report dated 11 February 2015, focusing on two main companies: Sun Art Retail Group Limited (6808.HK) and Qihoo 360 (QIHU.US). It provides analysis on their 2014 performance, 2015 outlook, financials, and valuation. The report also includes broader market and sector performance data.

Main Points

Sun Art Retail Group Limited (6808.HK)

• Market Valuation: The stock has been de-rated due to the market's bearish view on offline retailers, but the firm believes the disruption from e-commerce is cyclical and the trend will stabilize in 2015.
• 2014 Preview: Sales growth is expected to slow to 6.2% YoY, and earnings growth to 8.3% YoY, reflecting a further deceleration from the 9M14 results.
• 2015 Outlook: More positive, due to a lower base after 2014, expected improvement in food CPI, and macroeconomic consumption sentiment.
• Valuation: Trading at 15.1x FY15F P/E, a historical trough compared to 25.0x historical average and 28.8x international peers.
• Price Target: Revised to HK$10.3 from previous HK$11.3.
• Catalysts for Re-rating: FY14 operations updates and breakthroughs in feiniu.com.
• Risks: Aggressive price competition from e-commerce and deteriorated macroeconomic conditions.
• Rating: BUY.

Qihoo 360 (QIHU.US)

• Earnings Preview: Expected to announce 4Q14 earnings around mid-March 2015.
• Market Position: Dominant in the China internet industry, with strong user base and growth in mobile and search monetization.
• Performance Highlights:
  • PC-based MAU reached a record high of 496 million in 2Q14.
  • Mobile-based users increased significantly, with mobile search expected to take up 30% market share in 2016.
  • Search revenue is expected to reach US$300mn in 2014 and US$600mn in 2015, driven by monetization efforts.
• Revenue Growth: Mobile is expected to contribute over 30% of total revenue in 2015.
• Margin and Growth: Expected stable margins and double-digit growth in search revenue, 10%-15% in navigation ads, and significant growth in mobile and web games.
• Valuation: Trading at 16x FY15F PE, lower than the average 26x for Chinese internet/portal peers.
• Rating: BUY.

Key Market Performance

• HK Equities:
  • Hang Seng Index: 24,528 (0.0% change)
  • H-share Index: 11,695 (0.4% change)
  • Turnover: HK$64.0 billion (-4.8% from HSI)
• China Equities:
  • CSI 300 Index: 3,407 (1.8% change)
  • Sh Composite Index: 11,137 (2.5% change)
  • Sz Composite Index: 1,512 (1.6% change)
• Asian Equities:
  • Nikkei 225: 17,653 (-0.3% change)
  • Korea KOSPI: 1,936 (-0.6% change)
  • Taiwan TWSE: 9,394 (-0.3% change)
  • India Sensex 30: 28,356 (0.5% change)
• US/European Equities:
  • DJIA: 17,869 (0.8% change)
  • S&P500: 2,069 (1.1% change)
  • NASDAQ: 4,788 (1.3% change)
  • UK FTSE 100: 6,829 (-0.1% change)
  • Germany DAX: 10,754 (0.8% change)
  • France CAC40: 4,696 (1.0% change)

Key Indicators

• Oil (WTI): $50.0 (-5.4% change)
• Gold (USD/troy oz): $1,233.7 (-0.5% change)
• Copper (USD/metric ton): $5,673.0 (0.0% change)
• Aluminum (USD/metric ton): $1,876.0 (0.0% change)
• CRB Index: 223.7 (-1.9% change)
• Baltic Dry Index: 556.0 (0.4% change)
• UST 3m Yield: 0.01% (no change)
• UST 10y Yield: 2.00% (0.019% change)
• HIBOR 3m: 0.39% (-0.001% change)
• USD LIBOR 3m: 0.26% (no change)

Shareholding Structure

• Sun Art Retail Group Limited (6808.HK):

  • A-RT Retail Holdings: 51.00%
  • Auchanhyper SA: 9.71%
  • Concord Greater China Limited: 8.46%
  • Kofu International Limited: 7.85%
  • Free float: 22.98%

• Qihoo 360 (QIHU.US):

  • CAO SHU: 15.80%
  • TRUSTBRIDGE PARTNERS II LP: 7.38%
  • MANNING & NAPIER: 5.80%

Financial Highlights

Sun Art Retail Group Limited

• Income Statement:
  • Revenue: Expected to grow from Rmb 86,195 million in 2013 to Rmb 115,708 million in 2016.
  • Net income: Expected to grow from Rmb 2,775 million in 2014 to Rmb 4,045 million in 2016.
• Balance Sheet:
  • Total assets: Expected to increase from Rmb 49,910 million in 2013 to Rmb 67,559 million in 2016.
  • Total liabilities: Expected to increase from Rmb 30,529 million in 2013 to Rmb 41,230 million in 2016.
  • Total equity: Expected to increase from Rmb 18,748 million in 2013 to Rmb 25,081 million in 2016.
• Cash Flow:
  • Operating cash flow: Expected to be Rmb 5,523 million in 2013 and Rmb 9,210 million in 2016.
  • Investment cash flow: Negative, with capex expected to be Rmb 6,791 million in 2013 and Rmb 9,210 million in 2016.
  • Financing cash flow: Negative, with dividends expected to be Rmb 1,982 million in 2013 and Rmb 1,618 million in 2016.
• Ratio Analysis:
  • Revenue growth: Expected to be 10.7% in 2013 and 12.5% in 2016.
  • Gross profit margin: Expected to be 19.5% in 2013 and 24.1% in 2016.
  • EBITDA margin: Expected to be 7.2% in 2013 and 8.4% in 2016.
  • ROE: Expected to be 15.6% in 2013 and 16.9% in 2016.

Qihoo 360 (QIHU.US)

• Valuation Statistics:
  • Market Cap: Expected to increase from USD 7.70 billion in 2015 to USD 2056.8 million in 2015.
  • Net profit: Expected to increase from USD 217.9 million in 2014 to USD 385.9 million in 2015.
  • EPS: Expected to increase from USD 2.50 in 2014 to USD 3.92 in 2015.
  • PER: Expected to be 15.62x in 2015.
  • EV/EBITDA: Expected to be 11.38x in 2015.
• Key Operating Metrics:
  • PC-based MAU: 496 million in 2Q14, up 7.6% YoY.
  • User penetration: 93.9% in 2Q14.
  • Mobile-based users: 641 million in 2Q14.
  • PC browser MAU: 345 million in 2Q14, up 4.5% YoY.
  • Personal Page Unique Visitors: 128 million in 2Q14.
  • Personal Page Clicks: 749 million in 2Q14.

Peer Comparison

• Sun Art Retail Group Limited (6808.HK):
  • Compared to peers like Wumart, CRE, Lianhua, and others, Sun Art has a more favorable valuation and growth outlook.
• Qihoo 360 (QIHU.US):
  • Compared to peers like Baidu, Sohu, Sina, and Bitauto, Qihoo has a lower PE and a strong growth outlook in mobile and search monetization.

Conclusion

The report concludes that both Sun Art Retail Group Limited and Qihoo 360 are attractive investment opportunities. Sun Art's valuation is undervalued with potential for re-rating, while Qihoo is well-positioned for long-term growth in the China internet sector. The report recommends a BUY rating for both companies.