Dr. Lee responds to Citron’s Letter of Aug 31
In Mr. Andrew Left’s “point-by-point” response dated August 31, 2012, he completely evaded Dr. Lee’s original seven criticisms, and chose to just mince words. Dr. Lee’s new response below restated the seven clear criticisms, and also pointed out the following new observations from Mr. Left’s letter dated August 31:
- Mr. Left’s unwillingness to engage on the direct accusation that he totally misunderstood Sogou’s product line should be taken as an admission of ignorance
- Mr. Left’s understanding of a company he recommends is at the level of an analyst who says : “Buy Microsoft because the Xbox+Office product will beat PlayStation”.
- Mr. Left made a new statement about market share that is off by a factor of 2-3X!
- Mr. Left admits that he used what he considered fraudulent data in his recommendation, without revealing the “fraud” to new readers.
- Mr. Left comically restates “a valuation of $697M” as “just an opinion that $200M is too low”.
- During a period where company’s market share went from 0% to 10%, while another stayed flat at 4.5%, Mr. Left concludes the two companies’ valuations should increase by exactly the same amount.
On August 31, 2012, Citron’s Andrew Left issued a response to my two letters and seven points. Below are my point-by-point rebuttal to him: Read more of this article »
August 30, 2012
Dear Mr. Left:
Thank you for responding to my letter. To remind you, the main points in my letter were:
- Citron lacked basic understanding of Chinese search market.
- Citron misunderstood Sogou products and combined two products into one.
- Citron compared apples to oranges in its web traffic analysis, and did so unfairly.
- Citron omitted critical data in its financial comparisons of Sohu and Qihoo.
- Citron did not understand search monetization and zeroed $98M of revenue.
- Citron’s video analysis was ludicrous, and missed obvious business issues.
- Citron’s adding market cap from one company to the next was wild and ridiculous.
In your response, you chose only to say that I “did not properly represent” your statements in (4), and for the other six points, you said you did not want to “go back and forth”, and respected my knowledge. Since you have implicitly acknowledged the other six points, I also agree it’s not necessary to “go back and forth” on point (4).
Interestingly, you chose to bring up several other issues which had NOTHING to do with my letter, so I see no need respond. Perhaps someone else will take you up on the 100K RMB offer, and if they do, I hope they will donate the money to an anti-fraud cause.
REFERENCE | Citron Research: Open letter to Kai-Fu Lee Aug 30 [PDF]
(This letter was originally posted on xueqiu.com)
by Kai-Fu Lee
Recently, several “China Short Sellers” have developed a scheme to make themselves rich. First, short a US-listed China stock. Then, write a negative report on that company. After the stock drops, cover the short, and pocket a huge profit. This practice itself is already questionable, but what is despicable is how these short sellers take advantage of the information asymmetry between China and the US, and write reports full of holes and lies, knowing that their American readers have no way of verifying them. This paper dissects one such example, Short Seller Citron Research’s report “Qihoo’s entry into search puts SOHU in play” (August 24). This paper will show that Citron lacks even the most basic understanding of the Chinese Internet/Search market, yet it fabricates and distorts information to deceive investors. It is not my intention to support or challenge Citron’s recommendations, but only to expose Citron’s ignorance and deception, and raise the question whether any investor should ever trust them.
Citron lacks basic understanding of search
The most ludicrous part of Citron’s report is its faulty analysis of search engines and basic misunderstanding search engine Sogou’s strategy and products.
First, some background for those unfamiliar with the Chinese market:
- Sogou is a company majority owned by Sohu, and produces three products:
- Sogou.com search, comparable to Google.com search.
- Sogou browser, comparable to IE or Chrome browser.
- Sogou Pinyin IME (input method editor). An IME is a “soft keyboard” that converts typed roman character input (like “beijing”) into Chinese characters (like “北京”). IMEs are installed in Windows/Mac and are general purpose text-entry tools (not just for search).
- Sogou IME is the leading IME in China, with about 74% penetration.
- Sogou browser is an emerging browser that has increased its user penetration from 5% in 2010 to over 20% recently.
- Sogou search has had about 1% market share until Sogou Browser became successful. As Sogou Browser increased its penetration to over 20%, Sogou search also increased its share to 3-4.5%.
- Browser market share can increase search market share, because many Chinese users have a habit of searching from the browser directly. Only about half of the search queries are entered on a search engine’s webpage.
- Pinyin IME is a software product basically detached from search, and has no direct relationship with search engines. (Note that a few IMEs including Sogou have experimented with a feature to encourage users to search directly from the IME, with disappointing results, as it is not natural.) Empirically, search market share and IME market share can be shown to be virtually uncorrelated.
The above points are validated by the following table, showing search market share (from iResearch), as well as Sogou Pinyin and Sogou Browser market penetration (from Sohu):
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