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Youku is Buy at Chinavestor

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YOKU_201209_thumb September, 2012 (Chinavestor) For disclaimer and report with full financial data, download the pdf version: CV_YOKU_2012_Q2.pdf.
We recommend a buy rating on Youku Tudou Inc. (NYSE:YOKU) because of 2 main reasons the growing revenue and market consolidation. Youku’s revenue has been on a constant growth and is expected to continue, which means Youku’s advertisement business is expanding. Secondly, Youku’s took the first move in market consolidation by acquiring Tudou. This gives Youku’s market advantage by holding more than a third of the online video market share in China. With good management, this will eventually lead to further consolidation and increase in its advertisement business. Furthermore, Youku’s large cash stock ensures that it will not run into financial difficulty anytime in the near future. Also Youku’s increased investment in content and bandwidth to improve its online video service, which could lead to greater online traffics. Beside all those positive side of the company, one of Youku’s greatest threats come from the Chinese government and its censorship laws. These laws do affect some of Youku’s services, however; it is undeniable that online advertising is critical in today modern world. Therefore, Youku’s holding more than a third of the market shares are in a great position to expand its advertising business.

Strong Revenue growth

Youku Tudou Inc. (NYSE:YOKU) Q2 2012 results indicate a 96% revenue increase compared to the corresponding quarter in 2011. Revenues are expected to continue its accumulation in future quarters. Gross profits have also been showing slow but steady increase in past quarters.

Strong Cash flow

Youku Tudou Inc. (NYSE:YOKU) is in a strong financial position with over 2 billion (CNY) in cash. Youku’s also increased its investment to improve its online contents and bandwidth. Youku’s been financing these investment though issuance of stocks.

Market Consolidation and Risk

Youku Tudou Inc. (NYSE:YOKU) recent merger with Tudou, the second largest market share holder in China, has given Youku the market advantage by holding over a third of the market share.


Historical Net Loss

Even till today, Youku Tudou Inc. (NYSE:YOKU) has had a history of repeated net losses. However, there were signs of slowly declining yearly net loss within the past four years. Although, Youku’s is reporting net losses each year, there are position signs. Youku’s net revenue is constantly increasing with a 111% increase in net revenue compared to the corresponding first quarter in 2011. Similarly, gross profit have started to turn positive and increasing within the last four years.


From the graph above one can see that Youku’s revenue is on a constant raise in the past few quarters. This is mainly because of increase in its advertisement business and its growing business. Most recent quarter two revenue increase by 96% compared to the corresponding quarter in 2011 meeting the previously announced revenue guideline. According to a statement made in quarter two earning announcement, the company expects further growth in its revenue in the third quarter.

Cost of Revenue

Cost of revenue has been on the raise corresponding to the increase in the net revenue. Majority of Youku’s cost of revenue come majority from contents and bandwidths. According to a statement made in quarter one 2012’s earning announcement, with the consolidation of the online video industry there will be a decline in contents price. With fewer competitions within the industry fighting over limited amounts of online contents, the cost for contents will decline.

This is will allow Youku to turn a profit with declining contents cost and increasing revenue from their growing advertisement business over time. Within the short run keeping cost low and increasing revenue will help Youku yield a profit. Along with Youku growing business, long term investments and new business are the keys to Youku further growth and profitability in the long run. For example, Youku acquisitions of Tudou, is a long term investment to consolidation its market share which directly affects its advertisement business that makes up for most of Youku’s revenue income.

Too Much Cash

Over Stack in Cash

With a current ratio (MRQ) of 6.22, which is more than twice as large compared to the industry current ratio of 2.77, Youku is most definitely healthy financially. It would be safe to assume that Youku will not run into any financial difficulty anytime within the near future. Youku’s high current ratio also reflects the large amount of current assets, especially its large amount of cash on hand. It is a must to have certain amount of cash on hand, however, too much on hand will simply affect the company growth.



Cash Flow Analysis

From the chart above one can see that Youku’s cash flow from operating activities (CFO) had been in the negative borderline of zero. However, that started to change in Q4 2011 as shown on the chart; there was a positive cash flow in that quarter and the following quarter. Although, CFO decreased in Q1 of 2012 compared to Q4 of 2011; it’s still a positive cash flow. This change in Q4 of 2011 was mainly due to amortization and decrease in working capital. Youku’ CFO are generally stable throughout the past quarters. Youku also had cash inflow in the past 2 quarter, however; it was mainly caused by amortization and decrease in working capital which reflects Youku’s repeated net loss.

Youku’s cash flow from investing activities (CFI) took a major change starting in Q2 of 2011. From the beginning of the year 2011 to the end of 2011 Youku significantly increased its investment activities. Youku invested nearly 2 billion (CNY) into content and bandwidth to improve its services. However, according to the chart in Q1 of 2012 Youku significantly reduced the amount of investment compared to the previous quarter. Ever since Q1 of 2012, Youku was working on the stock for stock acquisition deal with Tudou, which was completed recently. With the merger of Tudou, Youku gains an advantage by holding more than one third of the market share in China, the world largest amount of internet users.


The major increase in cash flow from financing activities (CFF) from Q2 of 2011 to Q4 of 2011 was mainly caused by issuance of stock. The cash generated from the stock issuance was used to finance Youku’s investments in content and bandwidth to improve its service. This is reflected through the significant increase in investment throughout 2011. With the increased in investment and merger with Tudou, Youku on track to expansion and consolidation of the market.

Balance Sheet Analysis

Since Youku’s IPO in 2010, it has been storing large amount of cash, Youku as of today has over 2 billion (CNY) in cash & equivalent. With such large amount of cash Youku will be able to provide cheap financing for other projects. Also with a Current Ratio of 6.55 (MRQ) means Youku will not run into any financial difficulty anytime in the near future. With the major increase in Youku wealth from its IPO in 2010, Youku started to increase in investments. Youku invested over 1 billion (CNY) in short-term investment. Youku’s investments include improving its online content and technology giving Youku a competitive advantage as it consolidated its market shares. Youku’s Additional paid-in Capital nearly double in 2011 compared to 2010. This was mainly due to the major increase in Youku’s stock price in during the early 2011 which went as high as over $60 per share. However, due to disappointing earnings reports Youku’s stock price fell greatly down to around $18 as of today.

Ratio analysis


Youku’s, ROA is negative because Youku still has not been able to make a positive net income. However, the small negative percentage of 3.29% in ROA only represents a small loss compare to the large amounts of asset and cash. Of cause this also means that Youku need to seek before usage of its large amount of cash to help boost return. Youku also has a negative ROI of .31% representing the loss it encountered in its investments. Youku have only started to increase its investment activity last year therefore there isn’t enough data to conclude that Youku’s makes poor investment decisions that lead to a loss. With a ROI of -0.31% Youku is not suffering any major loss, one can even say it is on track to breakeven or possibly turn a profit.

Market consolidation and Risks

Consolidation of China market

Youku is currently the leading market share holder in online entertainment industry in China with over 15% market share. Second in place is Tudou Hld. in the progress of being purchase by Youku Inc. in a stock for stock acquisition. Following this acquisition Youku Inc. will hold more than one third of the online video market share in China. According to a statement made in Youku’s 2012 quarter one earning announcement, the merger with Tudou Hld. will allow it to provide the most comprehensive video service and building a world class internet company in China.

As the market is consolidated, Youku taking the first-mover advantage, will increase its market share. With a bigger share of the market, it will also help increase its advertisement business and therefore increase the revenue. Also with decline in contents cost and growth of revenue could potential bring Youku out of its long history of net losses and yield a profit.

Regulatory Risks

The Chinese government has always been known for its practices in censorship of information within China. Recently in July the Chinese government announced its plans to crackdown on pornographic and violent contents online which led the stock prices of both Youku Inc and Tudou Hld. sinking. Youku was not affected as much as Tudou by the government actions because of its lack of users generated contents. However, Tudou which is in the progress of being acquired by Youku Inc. gets a large percentage of its revenue from these contents.



Although, Chinese government announcement has have a negative impact on the both companies stock prices, this does not change the fact that Youku’s holds more than a third of the market shares in China and its growing revenue due to increase in its advertisement business. Along with further consolidation in the online video industry, Youku Tudou Inc. has a great potential of growth.

Analyst Certification

I, Qiu Ming Kong, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Copyright, user agreement and other general information related to this report:

Copyright 2012 All rights reserved. This research report is prepared for the use of clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of

This research report provides general information only. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice. Past performance is not necessarily a guide to future performance.

Fundamental equity reports are produced on a regular basis as necessary to keep the investment recommendation current.

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