Citron Stands Corrected … QIHU is not MOBI … Is it more like China MediaExpress (CCME) ?

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For those of you who read part 1 of Citron’s analysis on Qihoo, (NASDAQ:QIHU), we compared the company to MOBI as operating a web 1.0 business that is presently misunderstood by the marketplace.  From the company's rebuttal, we conclude Qihoo is not so much like MOBI…. it might be a lot more like China MediaExpress (CCME). 

Our intended part 2 on QIHU was planned to focus on the naïve analyst commentary and the dubious history of management.  But all that has become a sideshow to what our research found, so hold on to your seat and call your class action attorney.

While Qihoo does in fact have penetration in the free anti-virus software business — that we do not question — the rest of the business seems to be nothing more than an illusion that defies validation by any third party source.  Either Qihoo has some magic pill that neither Citron nor the major players in the China internet space knows about, or this is a FRAUD.

There are a number of chilling parallels to CCME in QIHU's current business model.   Citron suggests that investors and analysts — especially those who are quick to proclaim "Citron doesn't get it" — read this report with an open mind.

   Foundation

The main criticism of the initial Citron report was that we did not understand  Qihoo's business model and therefore we could not draw a comparative valuation to any other business.  The analysts describe Qihoo as a "master aggregator".  We get that.  They say they generate a lot of web traffic. 

Business – n. dealings or transactions especially of an economic nature.

 

Giving away free software is not a business…lets call that a hobby.  A business generates revenue.  If you don’t believe us, just read QIHU's prospectus:

"In 2008 and 2009, we generated a substantial portion of our revenues from sales of third-party anti-virus software. In the second half of 2009, we started offering 360 Anti-Virus to users free of charge as we adopted the business model of offering free Internet and mobile security products to build up a large and loyal user base and generating revenues through providing Internet services, including online advertising and Internet value-added services."

So advertising is how they generate their revenues, and that is consistent with their revenue mix disclosure last quarter. 
 

  Revenues June 2011 Qtr

 

  Total

    $35.1 million  USD

   Online advertising

     $26.8 million

   Internet value add services (mostly 

  games authored by 3rd parties)

     $  8.1 million

 

The company states that they generate this advertising revenue by posting links through their portal site. 

   Undifferentiated Business Model

Qihu's homepage, shown below, resembles dozens or hundreds of other web directory / navigation sites which are very popular in China.   Here are just a few:

http://www.2345.com/

http://www.265.com/

http://www.1616.net/?www2

http://www.tao123.com/  (taobao)

http://www.wu123.com/

http://www.0460.com/

http://www.91913.cn/

http://www.44244.com/default.html

http://www.9991.com/

http://www.537.com/

http://www.5566.net/

http://www.zgwdq.com/

http://www.46.com/

http://www.176176.com/

http://www.155.com/

http://www.haokan123.com/

http://www.129139.com/

http://www.wndhw.com/

 

You can see they're all very similar, (English speakers can get a pretty good sense of these using Google translate)    In fact there's a fierce battle for domain-brand identity.  In Qihoo's case, their portal is hao.360.cn.  It is not hao360.com or hao360.cn, which appear to belong to others. 

These sites typically focus on link traffic, not brand (display) advertising.  Companies that pay for links on these are paying out of their advertising budgets … their online advertising budgets.  Qihoo classifies this as "advertising revenue".   Citron gets that … do you?

   Comparing to Baidu

Some analysts and commentators have been comparing Qihoo to Baidu.  This is fatally flawed logic.  Baidu also operates a directory / portal (hao123.com), but it is such a small part of the business that they don't break out its revenues or costs separately.  Baidu's primary business is search, which is proven to be a highly profitable business model — at least for the winner in a winner-take-all category. 

   Breaking Down The Top Line

Qihoo's pre-eminent revenue generator is their flagship portal and within that domain, their PSP's (users can personalize their own start page).   Linked to that are their vertical niche portal pages.   Together, these sites generate 100% of Qihoo's current revenue. 

Below is a screen shot of Qihoo's flagship revenue driver HAO.360.CN :

 

 

There are appx 200 links on this page.   But how much revenue is generated from this site, and who is paying what?  We are supposed to believe that this site is generating over $40 million revenues this quarter, and further, is growing at a rate that outstrips all the major players in the China internet space, raising serious questions about its credibility. 

Below is a screenshot of the same site 21 months ago when it was generating less than $10 million per qtr in revenues: 

Feb 12, 2010 (QIHU revs of $9 million in that quarter) – http://web.archive.org/web/20100212202913/http://hao.360.cn/

 

 

 

And lastly the same page from early 2009, when it was generating only $3 mil a quarter in online revenues.   http://web.archive.org/web/20090210050039/http://hao.360.cn/

 

 

A few less links, but essentially identical in structure and function.  So exactly how did revenues increase 400% from last year and 1200% from two years ago?  The quantity of links certainly hasn’t increased 400%.  We have no verification that the traffic has increased anything near 400%.  Have the ad rates gone up 400%? 

   Or is this just a fraud??

For that matter, are there even verifiable ad rates for this page?   Below is a list of advertisers on the front page of HAO.360 that we believe do not pay QIHOO one dime.

  • Yahoo Mail
  • NBA
  • Hotmail (Microsoft)
  • Amazon
  • Vogue (Conde Nast magazine)
  • Self  (Conde Nast magazine)

Further, of these well-known Chinese brands, some of whom directly compete with Qihoo for games or traffic, isn't there a serious business issue requiring disclosure as to how much they are paying for links?    

  • Ctrip
  • QQ Mail
  • Baidu
  • China Mobile
  • Sina (8 links)
  • Sohu  (6 links)
  • Todou
  • Netease
  • Taobao  (2 links)
  • Youku (2 links)
  • Tencent
  • CNTV
  • Dangdang

Our favorite of the "advertisers" is West Point Military Academy ( Look in the "Military academies" section, left column, 4th row …  http://translate.google.com/translate?hl=en&ie=UTF8&prev=_t&rurl=translate.google.com&sl=zh-CN&tl=en&twu=1&u=http://hao.360.cn/junshiguofang.html

… Yep, that's it, … right next to the link to the "U. S. National Defense University".

   E-commerce aggregator

Qihoo recently launched an "e-commerce aggregator page" which sounds exciting. 

OK, so let's look under the hood at this page :  http://mall.360.cn/

It is filled with logos of global companies you will recognize :

Nokia, Samsung, Motorola, Sony, Sharp, Giordano, Reebok, Converse, Puma, Nike, Lee and many others.   Ask on the conference call how much revenue this page generates for the company.   We did.

Despite the lack of revenue, here's a selection of logos displayed on Qihoo's "mall" page: 

The creepy thing is this is exactly what CCME's strategy was.  In order to convince investors that it was a huge advertising channel, it produced a small number of copies of a very glossy catalog filled with logos from top-name brands like Coach, Lexus, and Coca-Cola. 

 

Here are some screen shots from Citron's 3 favorite pages out of CCME's "Investor Presentation, October 2010":

 

 

  

 

Qihoo’s other sites are the following 4 vertical portals, for group buying, video, games, mini games, and literature.  They are merely aggregators and the company has told us that none of them except games represents more than 3% of revenues:

Wan.360.cn –  Games

Tuan.360.cn –  Group Buying

Xiaoyouxi.360.cn – Minigames

Xiaoshou.360.cn – Literature

   Competition

An early sign to Citron that China Media Express was a fraud was simply the incredible pace that they were growing revenues and profits compared to their well-known competition.

During the trailing twelve months, both SINA and SOHU have grown their top line revenue around 23%.  Both companies have diversified revenue streams and a PROVEN internet footprint.  During the same trailing twelve months we are supposed to believe that Qihoo has grown their revenue 400%?

Yet, just like China Media Express… none of their pre-eminent competitors even consider them competition.  Qihoo fancies themselves as competition for BIDU.  Yet in its own filings, BIDU describes their competition as:

" Google and Microsoft, and China-based Internet companies, such as Netease, Sohu, Tencent and Alibaba"

SOHU, who recently launched a popular browser and who also sells games and lists their competition this way.

“not limited to Sina Corporation (or Sina), Tencent Holdings Ltd. (or Tencent) and NetEase.com, Inc. (or NetEase), and vertical sites, such as YouKu.com Inc. (or Youku), Tudou, Inc. (or Tudou), Ku6 Media CO., Ltd (or Ku6), Pacific Online Limited (or PConline), SouFun.com Limited (or SouFun), China Real Estate Information Corporation (or CRIC), and Bitauto Holdings Limited (or BitAuto).  In addition, we compete with operators of leading global websites and Internet service providers, including Yahoo! Inc. (or Yahoo!), Microsoft Corporation (or Microsoft) and AOL Inc. "

SINA, who describes themselves AS AN INTERNET PORTAL and fights for ad dollars as well, voluminously defines their competition as:

Our competitors include existing or emerging PRC Internet portals as well as vertical websites competing in a specific niche such as automobile, finance and IT information. Our competitors in these areas include Baidu.com, Inc. (“Baidu”), Tencent Holdings Limited (“Tencent”), Netease.com, Inc. (“Netease”), TOM Online, Inc. (“TOM Online”), Sohu.com Inc. (“Sohu”), ifeng.com, Hexun, East Money, China Finance Online, PCAuto, Auto Home and PCOnline.      outdoor media, more directly compete with traditional media, such as television, they ultimately compete with us to convert advertisers from traditional media to new media. These competitors include Focus Media Holding Limited (“Focus”), Air Media Group Inc., Vision China Media Inc. and other China-based private or public new media advertising companies…There issignificant competition among MVAS providers. A large number of independent MVAS providers, such as Kongzhong Corporation (“Kongzhong”), Tencent, TOM Online, Hurray! Holding Co., Ltd. (“Hurray”), Sohu and Linktone Ltd. (“Linktone”), compete against us. We may be unable to continue to grow our revenues from these services in this competitive environment. In addition, the major operators in China, including China Mobile and China Unicom, have entered the business of content development. Any of our present or future competitors may offer MVAS that provide significant technology, performance, price, creativity or other advantages over those offered by us, and therefore achieve greater market acceptance than us.

     Our other areas of focus for future growth include WAP portal, search, online video and Web 2.0 services. We also face intense competition from domestic and international companies in these areas. The main competitors for our WAP portal include Tencent, Kongzhong and WAP portals operated by mobile telecom operators such as China Mobile’s Monternet. The main competitors for our search service include Baidu, Yahoo!/Alibaba, Google, Microsoft (Bing), Tencent (Soso) and Netease (Youdao). The main competitors for our instant messaging service include Tencent (QQ), Microsoft (MSN Messenger) and Yahoo! China (Yahoo Messenger)/Alibaba. Web 2.0 companies are defined as those that offer tools to: companies such as Baidu, Tencent, Netease, Sohu, Youku, Renren.com Microsoft (MSN), Shanda (Shanda Literature), and Giant (51.com) as well as private companies such as 56.com, Tudou, Ku6, PP Live, PP Stream, Bokee, Blogbus, Poco, Blogcn, Hexun, Kaixin001.com and hainei.com in China and international players such as YouTube, MySpace, Twitter and Facebook."

What sticks out like a sore thumb is that Qihoo says they are the #3 internet company in China by active user base, the #1 provider of internet and mobile security solutions by active user base, and sport a user penetration rate of 92% … yet the aforementioned companies list everyone as their competition except … Qihoo, of course.

So we are supposed to believe that the 3rd largest internet company in China with revenues growing at 400% a year has just been forgotten about by their competition?   Sounds very CCME- like to us.

    Mainstream Media Attention:

Exposing CCME was difficult because nowhere online was there ever a compilation or ranking of their competitive sector (video advertisers on intercity buses in China).   

In the case of Qihoo, there are plenty. 

Citron scoured the internet to try to find just one list that would have hao.360.cn or any Qihoo site in their top rankings of internet traffic. …. to no avail.  Here look for yourself.

http://www.chinarank.org.cn/

http://www.edu.cn/20010101/22272.shtml

http://371.li/cn/

http://top.chinaz.com/

In Qihoo's rebuttal, we learn that we cannot use Alexa or Google Doubleclick to judge Qihoo's traffic, because their toolbar is incompatible with Alexa …  Then who are we supposed to use?   We challenge anyone to find one independent piece of research that would rank HAO.360 as a significant player.  Citron cannot, and neither can their “competition”.  Besides the commissioned iResearch report, prepared for Qihoo's IPO, are there any other lists that rank Qihoo's sites in the top 5 in China in terms of traffic?

What makes all of this even more ludicrous is just like CCME, Qihoo doesn’t even have an online media kit.  Sina and Sohu both have online media kits to be explored by potential advertisers, but Qihoo’s link tells potentials to just “send them an email”  … Very CCME like.

SOHU's:  http://ad.sohu.com/adprice/

SINA's:  http://emarketing.sina.com.cn/

But QIHU's is only this:  http://hao.360.cn/mkt.html   (eg.  "Send us an email")

   Meanwhile, Who is Counting The Beans??

Citron has made a strong case why the advertising revenue volume at Qihoo just does not add up – either to their competitors or us.  Yet, it is in an SEC filing so it has to be true … no?  In our last but most telling comparison to CCME we have the auditor.  

Qihoo is audited by none other than Deloitte Touche in China.  Deloitte was also the auditor of CCME and most notably, Citron exposed fraud Longtop Financial.  Anyone who follows the saga of Chinese stocks knows that Deloitte China recently refused to cooperate in an investigation by the SEC of Longtop and is being taken to federal court by the SEC.

http://www.reuters.com/article/2011/09/09/us-sec-deloitte-idUSTRE78768R20110909

Citron will follow through with Deloitte Touche and make sure their auditors are aware of the many "holes" in Qihoo's story.  

   What will happen when QIHU reports earnings??

Tomorrow, QIHU reports earnings.  We are confident that, despite the warnings and cautious guidance from the pre-eminent Chinese internet companies, whose revenues are largely dependent on advertising, they will put up a topline number that will beat analyst estimates.  This is reminiscent of CCME’s last Q in 2010 when they put up record numbers and raised guidance. 

http://www.businesswire.com/news/home/20101108006165/en/China-MediaExpress-Holdings-Announces-Quarter-Financial-Results

All this will be oblivious to the strong headwinds in the online advertising space in China.  No one questions that SINA's Weibo is among the “Hottest” internet properties in China.  But last week SINA CEO Charles Chao, was cautious on online ad spending as he said on a conference call, "Overall, the sentiment is good but not great based on our assessment … There may be some increase (in advertising spending), but not significant.”

http://www.reuters.com/article/2011/11/09/us-sina-idUSTRE7A81O120111109

So we are supposed to believe that SINA is not seeing significant increases in online ad spend yet Qihoo is able to grow their top line 30% per quarter….but no one in China seems to know about it….which leads us to our next point.

   Questions for the Conference Call

As investors, we are fortunate that QIHU will host a conference call tomorrow.  Here are some questions that must be addressed as the company needs to give more transparency to their “business model”:

 

  • Please explain what verifiable metrics besides revenue have increased 400% in the last year (as revenue has to be tied to another verifiable metric
  • Besides the commissioned iResearch report, what independent third party verification of Qihoo's reach and exposure can the investing public actually rely on?
  • Who are your five largest advertisers?  Where do they appear on your site, and what percentage of their revenue do they generate in aggregate and individually?
  • How many of the links on the HAO.360 site are free links?  What percentage of the total number of links on the site are free vs paid ?
  • What metrics does an advertiser use to evaluate how much to pay for a link?  Why would an advertiser pay for a static link if the party they compete with, or the party whose product they sell, receives a link for free ?
  • Please walk investors through your site and identify the specific links and the revenue generated by the ones that substantiate $40 million in quarterly revenue.
  • What is the catalyst for the next 300% increase in your revenues from here?   What barrier to entry prevents others from copying your model and topping your growth? 

In order to justify its current market cap, Qihoo must both make transparent its revenue growth to date, but also justify 300% — 400% revenue growth over the next year. 

  Conclusion

Citron acknowledges that Qihoo found a niche when it offered anti-virus software for free in China.  Its product was downloaded by a remarkable number of China's internet population.  But to become a business, it had to establish true cash flow out of something it gave away for free.  Qihoo's current efforts resemble more a hall of mirrors than a roadmap to the future.   Investors should be extremely wary of investing in a multi-billion dollar valuation to a story as thin as this one.  

Cautious investing to all.

Disclosure:  As of the date of publication, Citron is short QIHU, long SINA and SOHU.   Its positions can and do change at any time without further disclosure.

 

Citron Reports on QIHOO 360 (NASDAQ:QIHU)

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The most overvalued and misunderstood

Chinese Internet Stock:  

Target Price-$5

 

     Recent Market Cap:   $ 2.5 Billion USD

     Last Quarter Revenue:  $35.1 million

     Management: Disturbing Record of Deceit

     Outlook:  Destined for Single Digits

 

 

 

 

 

 

 

On May 2, 2011, Citron reported on Sky-Mobi (NASDAQ:MOBI) when the stock was $18.  Citron placed a price target of $3 on the stock, pointing out the company's outdated business model and documenting its gross representations of itself to Wall St.   Well, Sky-Mobi kicked and screamed.  They held a conference call to refute our critique, and multiple analysts upgraded their stock ratings and raised targets.  Not more than 4 months later, despite the protests, the MOBI traded at $3 — not because of Citron, but rather the inevitable fate of their business model's value.

Citron explores today a company with many similarities, Qihoo 360 (NASDAQ:QIHU).  We estimate that it is headed to $5 per share, more than 75% below its current trading range.  Sky-Mobi and Qihoo have both intentionally misrepresented their businesses to Wall St in the hope of sustaining exaggeratedly high market capitalizations, but in both cases Citron's analysis points decisively to the conclusion that their best days are behind them, not in front of them. 

Qihoo went public at the right time.  In the spring of 2011, all Chinese internet stocks were entering bubble territory.  SINA was approaching $150 per share and YOKU was over $50.  With scant revenues, Qihoo claimed some bold benchmarks in their prospectus and their most recent quarterly statement.  Once you have read our findings, you will see those claims in a different light. 

   Corporate History

QIHU publishes a browser that has gained considerable market share in China over the years because it is bundled with anti-virus software (In reality, this was simply a customized version of Google's Chrome, bundled with anti-virus technology mostly licensed from 3rd party providers, Qihoo's R&D has been historically minimal).  In fact, 2008-2009 the company had generated the bulk of their revenues selling anti-virus protection, a revenue stream that rapidly dwindled to zero.  After realizing that this was a dead-end business model, in the Q4 2009, QIHU began to give away its software, selling ads on its default home page and referring search requests to Google for a revenue share, as do thousands of other websites.

So this is where they are today, a web 1.0 brand with a web 1.0 business model that is hoping (and claiming) to be moving into mobile, cloud computing, and search — all businesses in which they are years behind and have zero present-day market share.

Before going into their revenues and business model, let's address those big market share numbers that are thrown in the face of the investment community on page 1 of their prospectus.  Those numbers are greatly exaggerated or misleading to say the best.   According to their prospectus and recent filings they claim : 

 

 

It sounds impressive, but the problem is that it is so far from the truth.

   The Numbers That Really Count

 

The company boasts they have "over 300 million active users", "80% penetration", and are "the 3rd largest Chinese internet company by active user base".  We find that, based on independent metrics, the truth shows no resemblance to that.

What does their biggest customer think?

More than 21% of QIHU's revenues are derived from Google, primarily be referring search queries.  According to Doubleclick ad planner as powered by Google, 360.cn is the 21st most visited site in China with a reach of only 10%.   http://www.google.com/adplanner/static/top100countries/cn.html

(Note:  There are many companies with higher rankings and dramatically lower valuations on this list. )
 

For the sake of comparison in this report, we will compare Qihoo to SOHU and FENG.  Two publically traded Chinese Internet Companies who have ad based models similar to Qihoo.

Doubleclick AdPlanner

SOHU  SOHU.com 

QIHU   360.cn

SOHU vs QIHU

FENG.com

Doubleclick rank

7th

21st

 

18th

Unique visitors

74 million

28 million

3  x more

34 million

Reach

26.3%

10%

2.6 x  larger

12.2%

Page views

4,800 million

710 million

6.7 x more

3,300 million

This 10% reach estimate would take 360.cn into only 30 to 40 million Chinese homes, not anywhere near the 300+ million they claim.

But Google's AdSense ranking for QIHU's site is actually high next to Alexa, which shows 360.cn as the as the 35th ranked site in China.   

http://www.alexa.com/topsites/countries/CN

( FYI…for those of you who might be confused, 360buy.com is not related to QIHU, they just have similar names. )

Alexa traffic statistics

SOHU  SOHU.com

QIHU   360.cn

FENG.com

Rank in China

9th  

35th

12th

Average time spent

53 seconds

36 seconds

Not stated

Pct of worldwide pageviews

.12%  

.012%

.2%

Further, SOHU also owns SOGOU.com (search dog), a site that also outranks QIHU's 360.cn on its own.  (13th on Doubleclick ad planner, ranked 25th on Alexa).  

   Valuation Comparison QIHU and SOHU

 

Now look at the comparative valuations of SOHU and QIHU.  SOHU is widely acknowledged as direct competition to QIHU.  The below chart shows how ridiculous their comparative valuations are.   We'll also look at FENG, which outranks QIHU on every metric, but in the same ballpark. 

 

QIHU

FENG

SOHU *

Kingsoft

Shares Outstanding (m)

117

65.4

38.4

1167

Stock Price (USD)

20.5

5.14

61

0.45

Market Capitalization

2,398.5

336.2

2,342.4

525.2

Cash Balance

309

178

811

221

Enterprise Value

2089.5

158.2

1531.4

304.2

Value of Spun off Holdings

0

0

607.9

0

Enterprise Value ex Subs

2089.5

158.2

923.5

304.2

2011E Revenue ex Subs

146

141

408

138

2012E Revenue ex Subs

257

217

521

165

2011E Revenue Multiple

 14.3x 

1.1x

2.3x

2.2x

2012E Revenue Multiple

 8.1x 

 0.7x 

1.8x

1.8x

Revenue per $1000 invested

  69.87 

891.52

441.81

453.72

 

*  When comparing to SOHU, we have to credit SOHU's 67.1% ownership of CYOU, worth $600 to $885 million (enterprise value / market value times SOHU's percentage owned) in addition to SOHU's enterprise value for the balance of its business. 

CYOU's value to SOHU

 Recent Stock Price

25

Market Valuation (m)

1,320

Cash (m)

414

Sohu's Stake

67.10%

Enterprise Value (m)

906

Market % Ownership (m)

885.72

Enterprise % Ownership (m)

607.93

 

*   What makes comparing these 2 companies even more ridiculous is the mindshare perspective.  SOHU is number 7 on the Google Doubleclick ranking and number 9 on Alexa respectively.  From point of few of internet ranking, the gap from #7 to #21 is massive – about 3 to 7-fold in terms of overall web presence.  And in addition, SOHU owns 65% of SOGOU.com, a search site which on its own outranks QIHU in both Alexa and Doubleclick. 

Even the Mirae analyst admits when it comes to 360.cn growth:

       The share is still growing but it is not growing as fast as SOGOU  (SOHU)

So when these numbers are reduced to a bottom line, here's what you get when you invest $1000 in each of these companies' stock:

 

For those of you who want to bang the table and say that QIHU should be given premium because it is not just an ad seller but rather they have security products, we included their arch nemesis Kingsoft. 

http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=9274438

When comparing these companies, QIHU should be trading at $5 a share, if we are being generous .. very generous.

    In Management’s Own Words!

I am sure many of you are saying, "OK, Citron, that is the bear case, but what does management have to say about this?"  

Here is a link to an interview given by Zuoli Xu, CFO of QIHU along with Yu Yao, their VP, in which management admits their lack of a current compelling business model and describes their hopes for the future.  When Citron reads this interview, it seems more like the banter of an internet startup company knocking on doors to raise money  — not that of an established $2.5 billion dollar internet standard bearer.

http://news.ichinastock.com/2011/08/interview-with-qihoo-cfo-and-vp-big-potential-for-360-browser-homepage/

    Can you Trust Top Leadership ?  MUST READ

QIHU's CEO is a gentleman named Zhou Hongyi. 

Before he founded Qihoo, he founded a company called 3721 which became one of China's first search engines that he sold to Yahoo in 2003 for $120 million. " But 3721′s software had become popular by lodging itself in computers as spyware. It introducing pop-windows, bedeviling its users — and some would say it introduced spyware into China." 
 
 
Because of his "arrogance" and inability to hire English speaking workers and be trusted Zhou was forced out of Yahoo, which as you can imagined ended in a series of lawsuits.  Zhou Hongy's reputation to be trusted got so bad that in late 2010, before China internet mania struck, it was though that Qihoo would never be able to go public because of their CEO, and the possibility that they have not left their spyware roots behind them.  In something that we have never seen, Zhou's reputation got so soiled that Yahoo CEO encouraged western investors as recent as December 2010 "not to trust his old acquaintance from China".
 
 
If Qihoo was a US internet company, it could never have gone public because of its litigation history and questions surrounding its business model.  Citron's $5 is generous.  Qihoo should actually be trading at a considerable discount to any comparable valuation strictly on the questionable nature of management's judgment, as described by Citron, but rather by many internet business leaders in China as well as the courts.

http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20101222000107&cid=1102

As QIHU was preparing for its IPO, there corporate actions resembled those of a company fighting for its survival.  The browser was losing market share and they were becoming insignificant in the rapidly changing face of the Chinese internet market.  QIHU's choice of action was to try to muscle competitors off the desktop.  Its installations forced users to uninstall competitor’s products, sometimes with misleading prompts.   This led to a very ugly public squabble, with accusations of spying and leaking users private information, as well as deliberately releasing malware.  As the attached link shows, QIHU went to war with leading instant message platform QQ (Tencent), a major anti-virus competitor Kingsoft, and search leader BIDU.

Despite all of their public complaints, they wound up on the losing side of all three battles.

http://english.caixin.cn/2011-04-20/100250564.html

The one lawsuit that foretells the desperation of management is one in which the QIHU CEO was sanctioned by China's courts for defaming Kingsoft's CEO on his personal blog in over 45 entries.  The court ruling required him to pay damages and publish a letter apologizing and recanting his libelous claims.  

http://www.yiliaobk.com/first-case-of-microblogging-zhou-jinshan-public-apology-to-the-court-of-final-appeal-judgment-claims.htm

If these had been the actions of a US company, it would NEVER have been allowed to IPO! 

RE Management — The bottom line is this:  Given the utter lack of reach for US regulatory agency protection of shareholders interests against malicious and deceptive corporate actions in China, can this person be trusted as the basis of an investment at all ?

  Qihoo's “mobile” business

The only thing more disturbing than skewed numbers are boldfaced lies.  In both the prospectus and quarterly filing from the company refers to themselves as "the leading mobile security provider in China". 

Does anyone believe this?.  Qihoo is not even a current participant in the mobile security space, aside from a claim last month to have launched mobile internet browsers.  The fact is to date it has generated 0 revenue from mobile services.  This fact is indisputable from the company's most recent 10-Q. 

http://gs.statcounter.com/#mobile_browser-CN-monthly-201006-201106

We see no less than nine marketshare combatants in June 2011, with Qihoo nowhere to be seen.  Is this a picture of "leading China's nascent mobile device security market?

    So what is left here?

Once you get past all the rhetoric and “netspeak”, you are left with a web 1.0 company that publishes a browser that at one time was getting a lot of installs, but is now hustling to try and find its place in a brutally competitive and fast changing internet landscape, out-invested and out-gunned by larger competitors. 

With no disruptive technology and no fast growing properties (such as Weibo,  Yoku, or Q+)  Qihoo has …. a browser….that is it…plain and simple. 

For those of you who need a history lesson, a browser is not a business, it is a tool.  The grandfather of all browsers Netscape is now shut down, and a non-profit company now owns its browser. 

A browser is not a business in the US and it is not a business in China.  Dong Xu, a researcher with Analysys International, states:

"With the move from the wide-open web to semi-closed platforms in the digital world, web browsers, which don't tend to make money, are regarded by vendors largely as a means of making their main products available."

http://www.china.org.cn/business/2011-08/08/content_23164056.htm

Qihoo's problem is that it doesn't have "main products".  It simply tries to hustle sales of games and other links from its web traffic.   And 3rd party statistics cast substantial doubt on Qihoo's claims of anywhere near as much browser penetration as they claim.

And even for their one standing business being the browser, the bad news is that competition has come to town.  Baidu, a company with over 75% of the search market has recently launched their own browser that has a focus on internet security. 

http://www.pcworld.com/businesscenter/article/223453/chinas_baidu_testing_new_web_browser.html

BIDU's new browser is being released to cement its position as the unquestioned leader in search, much as Google developed Chrome to make sure it had a foothold with web surfers, not to generate a revenue stream, but to assure Google's hold on the search business.

    Conclusion

Citron plans to follow up this QIHU story with a part 2 that will focus on the plethora of misinformation presented to the pubic from the many investment banking firms covering QIHU.  Much like MOBI, we were amazed to read the many analysts reports that have simply repeated management's hopes for the future as though it were independent analysis. 

We look forward to their strident defense of this name, and hope they present some data more substantive than management's hopeful narrative.   We suggest independent investors seek out and give more weight to independent data points especially those that would verify the range of Qihu's real revenues, and less to company stated "future plans", expecially where those plans have generated no revenues. 

Cautious investing to all.