First the "bad" news: China's economic growth slowed in the latest quarter to its most sluggish rate since 2009, according to data released by the Chinese government this week. The world's second-largest economy grew by 6.9% in the three months ended in September, down from the previous quarter's 7%.
Now the news that's arguably fraught with more significance: Alibaba Group (BABA) - Get Report announced last Friday that it offered to buy Chinese video site Youku Tudou (YOKU) for $3.6 billion, another indication that China's ascendant middle class poses a huge, long-term investment opportunity, regardless of the country's economic ups and downs.
If you thought the anemic numbers about China's economic growth, or even the Chinese stock market's collapse on "Black Monday," August 24, meant that it was "game over" for investing in China, you should think again.
China-based Alibaba, an online and mobile commerce company, probably isn't enticed by Youku Tudou's finances. The latter, often called the "YouTube of China," lost money in 2014 and in the first half of 2015. The real attraction is Youku Tudou's user base.
Youku Tudou, a combination of Google's YouTube and Netflix, draws more than 500 million people every month to the movies and television shows it licenses and produces, as well as to user-posted videos. The company's online platform allows users to search, view and share video content across different devices.
Youku Tudou is an early entrant in the field; the company only went public in November 2010. It remains a speculative Internet stock, but in the context of a changing television industry and China's exponentially expanding middle class, it faces enormous growth prospects.
China's annual economic growth may be slowing to "only" 6.9% (not that the state-issued numbers can be fully believed), but the country's total Internet population still rose by 31 million in 2014 to 649 million, according to Chinese government statistics. That means China now accounts for more than half of all online users in the world.
On-demand Internet TV is increasingly replacing the traditional channels of "linear TV." Over the coming years, remote controls will be supplanted by new applications, for use on tablets and smartphones with touch screens.
Alibaba on Friday said it had offered to pay $26.60 for each Youku Tudou share it did not already own, representing a 30% premium. Alibaba already owns a $1.2 billion (18%) stake in Youku Tudou.
The synergies of the deal are quite apparent. Already, the two companies are able to discern the detailed behavioral habits about their respective users by linking viewing patterns on Youku Tudou with shopping patterns on Alibaba. This cross-fertilization, in turn, would allow Alibaba to create more effective advertising formats.
Full ownership of Youku Tudou would also funnel a younger demographic to Alibaba. Youku's online programming is geared toward younger viewers, of which China is in plentiful supply. According to the World Bank, about 20 million people in China (roughly the population of Australia) turn 18 every year.
Youku Tudou is pursuing a three-pronged strategy for growth: 1) expand its advertiser base; 2) boost revenue per advertiser from existing clients; and 3) increase its footprint in second-tier cities in China, where the country shows particular room for growth. A giant segment of China's Internet potential still remains untapped, especially in rural areas and smaller urban areas.
These smaller but vibrant cities are home to younger, increasingly affluent consumers who clamor for Western-style programming, precisely the demographics that are in Youku Tudou's favor and which Alibaba covets.
With a market cap of $178 billion, Alibaba trades at a reasonable 12-month trailing price-to-earnings ratio of 27, compared to 28 for its peers in the specialty retail sector. Don't let China's ups-and-downs spook you; this vast country still offers many opportunities for profit and Alibaba is one of the most promising.
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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.