Downgrading SOHU to Hold    At US$58.3share price, our analysis suggests that a continued Buy rating onSOHU NAV crystallization story needs a >US$5bn valuation call on Sogou, whichwe do not feel adequately equipped to make at this time. Downgrade to Hold.We recommend Changyou (CYOU) instead. In a companion report, we upgradeCYOU to Buy.    Key driver of SOHU valuation    There are two key drivers to SOHU NAV story: 1) Sogou, which has disclosed ofits plans to IPO, and 2) conclusion to CYOU privatization offer. Our NAV analysisvalues Sogou at ~US$3bn and assesses the outcome from potential CYOU stakesale. Our Sogou valuation is lower than the implied valuation of US$3.8bn~US$4.5bn in the offered deal size announced on Oct 28. Our Sogou valuation uses15x 2018E P/E, a discount to 20x we're using for some global leading searchplayers and a premium to 10x we applied to #2players in the past. If CYOU stakeis kept, our NAV yields US$60in per share value. If CYOU stake is sold, our NAVyields US$54/share. Only at a Sogou valuation of >US$5bn does our analysisindicate that there is material enough upside to SOHU share price to justify a Buy.    What is the right value for Sogou?    After growing revenue 16% yoy in 1H17and reporting a 55% yoy growth in3Q17revenue, Sogou is re-accelerating growth. However, magnitude of operatingleverage remains unclear as do the benefits from enhanced Tencent partnership.Ultimately, limited disclosure keeps us from making a fundamentally sound callon Sogou at the moment. As cross reference, we have looked at the valuationsfor Yahoo Inc's transaction to Verizon in the US in 2016and Daum's merger withKakao in Korea in 2013as a proxy for how #2player in other markets have beenvalued. Detailed discussion is in the body of the report.    Valuation and key risk    We keep our SOTP based approach, but ascribe 50%/50% probability to whetherCYOU stake is kept or sold, yielding an economic weighted target price of US$57. Key upside risk is if Sogou valuation is significantly higher than our currentanalysis. Turnaround in core media/video operations is also upside risk. Downsiderisk is meaningful earnings deterioration in Sogou and/or Changyou.

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