Late last year, the Securities and Exchange Commission allowed Youku (NYSE:YOKU), which operates a Chinese YouTube-like site, to sell American Depository Shares — each of which “represents 18 Class A ordinary shares” with a third the level of voting control as the Class B shares — to U.S. investors.
And despite a pop in Chinese Internet stocks on Tuesday – sending Youku shares up 14% — those shares have lost 13% of their value this year. The so-called lock-up period, that keeps insiders from selling, has expired. And this may mean that insiders are dumping shares. Do they have further to fall or is Tuesday’s pop the beginning of a long upward streak?
Youku describes itself as “an Internet television company in People’s Republic of China.” It generates revenue by selling advertising to companies seeking to reach viewers of its 2,200 movie titles, 1,250 television serial drama titles and “231,000 hours of other professionally produced content, including 194 variety shows.” Those viewers include 203 million monthly visitors from homes and offices and 61 million monthly visitors from Internet cafes.
And Youku has a unique corporate structure: It’s a holding company based in the Cayman Islands but headquartered in Beijing. That holding company owns Youku, which changed its name from iVerge Internet in Nov. 2005, and Brilliant Jet, an advertising agency. This structure makes it hard for U.S. entities to sue, it doesn’t pay income taxes to Chinese or Cayman Islands authorities, and is not subject to U.S. taxes (although there’s a risk it could be).
Last week, the lock-up period on Youku’s ADSs expired — making 19.6 million shares available from insiders, which will add to its 30 million-share float. Despite that increase in supply and a plunging price, the company sold 12.31 million shares at $48.18 each in late May.
Is there any link between Youku’s ability to sell shares and its financial performance?
An examination of its form 20-F, which looks like a standard 10-K, reveals a company that’s growing — and losing lots of money. That’s because the cost of the bandwidth to stream its videos and the cost of licensing that content — a cost that grew at more than 200% in 2009 and more than 100% in 2010 — eats up all its advertising revenue (which grew 364% in 2009 and 151% in 2010. And Youko’s capital expenditures further siphon cash out of the company.
Its financial reports reveal that without its ability to sell stock — led by Goldman Sachs — it would be burning through cash fast. That’s because it reported $59 million in sales and a $31 million loss. Without the $217 million in proceeds from its IPO, this company would be gasping for cash.
I am not sure whether anyone who bought Youku shares actually read Youku’s financial filings. But it looks like this company’s stock is floating on a thick cloud of hype. Tuesday’s pop could give the company further to fall once investors take a close look at Youku’s financial performance and prospects.
Peter Cohan has no financial interest in the securities mentioned.
