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China Online Winners & Losers: Sohu.com

The Associated Press

In a note to investors, Keung said Sohu is in a better position than most of its Internet and new media rivals entering 2009 "due to its strength in online games, capable management team and solid market position." High margins and steady growth in the company's gaming division, the analyst added, should offset any cyclical weakness in advertising.

Shares of Beijing-based Sohu fell $1.60, or 3.93%, to $39.10 as the broader market sank amid disappointing retail sales and worries about the banking sector.

Keung assumed coverage of Baidu.com (BIDU), China's leading search engine, with a perform rating, saying deteriorating economic conditions in China may lead to increased churn rates, or customer turnover, and lower spending per advertiser.

"That said, [Baidu] remains the dominant market leader in China's search industry, and in our view, is well positioned to generate consistent above-average returns on invested capital," the analyst wrote.

Beijing-based Baidu's American depositary shares fell $5.75, or 4.98%, to $109.75. The stock has traded between $100.50 and $382.90 in the past year.

Keung kept an outperform rating on Sina (SINA), a popular Web portal, but lowered his target price to $25 from $32 "to reflect tougher market conditions." The company's advertising revenue, Keung said, will likely be hurt more than expected from the effects of the economic slowdown.

"The automobile, real estate and financial service, which combined account for [more than 50%] of revenue, have shown a significant contraction in growth," the analyst wrote.

Shanghai-based Sina's shares rose 62 cents, or 3.01%, to $21.25. The stock has traded between $20.10 and $58.60 in the past year.

On Tuesday, a Chinese government-sanctioned research group said the country's fast-growing population of Internet users has risen to 298 million, having passed the U.S. last year to become the world's largest.