We have seen a barrage of new F-1 filings with the Securities and Exchange Commission in the last couple of weeks for new Chinese-based IPOs which should hit our shores within the next month.
On Monday in RealMoney , I discussed a recent one Bitauto ( BITA), which went public last week and is still clinging to its offer price. That stock is positioning itself as the leader of automotive information on the Web in China. I've also recently spoken about one of China's versions of YouTube, Tudou (TUDO), which filed earlier this month to go public. Last week, we saw Tudou's top competitor, Youku(YOKU), also file papers with the SEC to go public soon. The more you follow Chinese companies, the more you see how American investors demand to understand a potential investment in simple comparisons to names they know stateside. Dangdang (DANG), which also filed for an IPO in the last few days, is called China's version of Amazon ( AMZN). Baidu ( BIDU) used to be called China's Google ( GOOG) -- until Google retreated from the country earlier this year. Now, with Tudou and Youku, we get the comparisons of both services to YouTube. Actually, both online video sites are more like China's version of YouTube and Hulu (because a majority of their content is licensed), if the U.S. had a much more fragmented online video market. YouTube (owned by Google) commands 43% of the U.S, online video content market as of June. This is far ahead of Hulu at 3%, Microsoft ( MSFT) at 2% and Viacom ( VIA) at 1%. In China, where remember that YouTube and Facebook are blocked by the Great Firewall, Youku is the online video leader with a 20% market share. Tudou has a 16% share. There are many other small players, including ku6.com which is 51% owned by Shanda Interactive ( SNDA) , with much a smaller share of the market. (Youku prefers to state in its IPO document that it holds a 40% market share for the time users spend viewing online videos, with Tudou at 23%.) Some are concerned about these online video sites wondering if there will be sufficient demand for two similar companies which are not profitable. After all, remember the constant criticism Google took from Wall Street analysts about when YouTube was going to be profitable? Imagine if YouTube had gone public and had to face that criticism on its own. Isn't it natural to expect Youku to face withering criticism, resulting in a lackluster stock price? I don't think so.
The size of the Chinese online video market is still miniscule. iResearch said the market grew from $78 million in 2006 to $413 million last year. This is a CAGR of 74%. Between now and 2013, iResearch expects the online video market in China to quadruple, with revenues from it growing at an even faster pace. Youku has grown its advertising-based revenues from $272,000 in 2007 (its first full year of operation) to $35 million in the first nine months of this year. The company plans to roll out wireless and Web-based subscription services to supplement that core revenue stream. China is planning on instituting policies that allow for TV/video viewing over all mobile networks by 2013, which will be a boon for Youku and Tudou. Although the Chinese government can always step into an industry and change the rules -- and indeed they have done this before in the online video space -- it's very unlikely that they will do anything that will stop either Youku or Tudou from being the leaders. Therefore, the network effects of being the top dog in this space means that Youku will likely continue to be for the foreseeable future as the space ramps up in size and profitability. Additionally, the company is being brought public by Goldman Sachs ( GS) which has a good reputation both in China and the U.S. for Internet deals it brings out. Some observers have complained that the company will continue to have to spend money acquiring content and it will also have to continue to shell out for necessary back-end infrastructure to keep up with demand. However, just in the last year, Youku increased its revenues by 130%, while its total operating expenses went up by 77%. Those are eye-catching increased operating expenses, sure, but the point is that this is company that's growing its top-line faster. And, of course, as the quarters and years roll by, these operating expenses will drop off significantly as a percentage of the size of the business. Although the recent IPO filing failed to disclose specific streaming stats for Youku, we know that Google is getting 2 billion monetized views of YouTube each week per its last earnings call. We don't know how much it's getting for each ad run next to or before these streams (although it did say total display ad revenues which include DoubleClick and YouTube were now providing $2.5 billion on an annual run rate). It's obvious that these numbers are large -- and growing. They're also completely ad-supported, without subscription revenues, unlike what Youku plans.
Given China's overall Internet penetration and its large population, it's very clear that Youku is in a sweet position. For this reason, I will be a buyer of its stock when it does go public.