Those Who Fail to Learn From History, Part 729,842: YOKU

13 May

Another Chinese “advertising” company with U.S.-listed shares.  Gee, where have we seen this movie before…

Remember China MediaExpress Holdings?  CCME?  I’ve written at great, great length about the firm and the many, many red flags present in its regulatory filings going back to 2009, but one of the most telling, most glaringly obvious signs of possible trouble was the corporate structure, which I wrote about (among other places) here:

Compare this to YOKU’s, from Page 5 (FIVE!!!!) of their F-1 ADR registration statement:

In both cases, the PRC “operating” companies are controlled entirely by corporate insiders (and their families).  The only recourse the holding-company (and thereby shareholders) has (have) over the operating companies, their assets, and cash flows are spelled-out in “contractual obligations,” spelled-out in very-little detail on pages 5 and 6 of Yoku’s F-1  If corporate insiders and their families loot the bank accounts of the PRC entities, U.S. shareholders will very-likely end up with little, if anything, to show for their “investment.”

The filing does go into a bit more detail on these “contractual arrangments” and the risks thereof, specifically, on pages 30/31 (emphasis mine):

Our consolidated affiliated entities and their respective shareholders may fail to take certain actions required for our business or follow our instructions despite their contractual obligations to do so. If they fail to perform their obligations under their respective agreements with us, we may have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, which may not be effective.

Under the equity pledge agreements among 1Verge Internet and the respective shareholders of 1Verge Information and Jiaheyi, these shareholders pledged all of their equity interests in 1Verge Information and Jiaheyi to 1Verge Internet. Our PRC counsel, TransAsia Lawyers, has advised us that these pledges were duly created and effective given that such pledges have already been duly registered with the relevant local branch of the SAIC in accordance with the PRC Property Rights Law. As a result, if any of 1Verge Information, Jiaheyi or any of their respective shareholders breaches its obligations under the contractual arrangements, we may be able to successfully enforce the pledges.

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in certain other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our consolidated affiliated entities, and our ability to conduct our business may be adversely affected. See “—Risks Relating to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

While this is largely boiler-plate language, you should ignore it at your peril.  You should notice that the 2nd bolded section (and the preceding text) suggests that if the PRC opco shareholders (corporate insider & family) decide to renege on their “contractual obligations,”  the holdco (by way of an intermediate opco, still in PRC) can seize controlling interest in the operating subsidiaries.**  The purpose of this is to disincentivize the operating company shareholders from acting against the best interests of the end-shareholders in the holdco (read: you), but riddle me this:  If the managers/owners of the opco loot its bank accounts, what do they care if they lose their ownership interest in whatever’s left of it?  I’m not an expert in Chinese corporate law****, but considering how easy its been over the years for white collar criminals to perpetuate their frauds here in the U.S, how hard do you think it’d be to do in China, with all the horrific control and audit issues they have?

Surely there is a non-zero chance that YOKU is a legit (or at least more-legit) company relative to CCME; I don’t know it well enough yet to say yea or nay with any certainty, but the fact remains: if you insist on investing in co’s with obvious red flags, be prepared to lose your entire investment.


**This is an oversimplification of what would actually happen in practice.

**** In response to the 2nd comment below, I should clarify: I’m not particularly well-versed in legal proceedings involving corporate fraud/malfeasance in China, especially if/when the ultimate “victims” are outside PRC.  I’d appreciate any comments from those who are, as alwasy!


49 Responses to “Those Who Fail to Learn From History, Part 729,842: YOKU”

  1. Sean May 13, 2011 at 2:17 pm #

    Interesting. I wonder why no one else has noted that. I think I’ve seen it in other companies. You should also look into the filings of BIDU, SINA, SOHU, CTRP, LONG, NTES, FMCN, PWRD, GA, TUDO, RENN, DANG, MCOX, VISN, STV, CHRM, CMM, SNDA, GAME, CYOU, SFUN, JOBS, etc.

    • CJ May 13, 2011 at 3:50 pm #

      This author knew nothing about Chinese Company and legal framework. This is typical VIE structure for Chinese company to get listed overseas, which is the structure for everything single high tech company to get listed in US. If it is listed in Hong Kong, there will be a different structure called RedChip. This dude knows jack about China stock.

      • The Analyst May 13, 2011 at 3:53 pm #

        If you’d read anything I wrote about CCME you’d know I’m familiar with the VIE structure, which in and of itself is not necessarily a red flag, and frankly, a ADR is probably less risky than a reverse-merger like CCME.

        That being said, when a corporate insider and family effectively own the majority (if not all) of an operating company domiciled in China, of a company in a “hot” sector subject to bullshit audits and regulation, THAT, my friend, is a red flag.

        Enjoy being long the stock, hope for your sake its legit, and if not, you get out before its too late.

        • CJ May 13, 2011 at 4:05 pm #

          This is typical a outsider skepticism. There is nothing wrong for insider/family own majority of the operating cos. I used to work in Asia Investment banking, you will be surprised how stringent on audits and IB due diligent. At the end of the day, all audits are down by big 4. Are you questioning the quality of their job? For online video regulation, come on, there is no real regulation anywhere, not even in the States! Look, instead of looking at such nitty gritty bullshits and being carp, i would rather focus more on macro, industry and fundamentals of the company itself.

          • The Analyst May 13, 2011 at 7:24 pm #

            1. Why is there nothing wrong for the family to own the vast, vast majority of the operating companies? Sure, the CEO owns a large % of the holdco shares (ie his interests are aligned with YOKU shareholders), but when the entire shebang is so closely-held, that creates vast opportunity for funny business. I”m not accusing anyone of anything, merely making a general point.

            2. How’d the audits on RINO and CCME go? Yes, I am questioning the auditors, you should be, too. There is ample incentive for management to pressure auditors so they can keep reporting explosive growth.

            3. I’m not talking about regulation of online videos (where’d you get that from?), I’m talking about financial regulation. Its crap here in the U.S, and its even crappier (x100) in China.

    • Sean May 14, 2011 at 1:53 am #

      Yes, basically my point was to list every major US-listed company which has ownership in restricted areas. Those companies all have the same type of structure. I thought the humor would show after the 3rd or 4th company.

  2. AH May 13, 2011 at 5:37 pm #

    This company of course is legitmate. The author definitely is a shorter and he wants to survive by writing this article so he doesn’t want to cover from his short position. Most of the asian companies have this type of structure, it is very normal to have family owning the business. This stock will prove to be another NETFLIX stock as the quality of the movies are pretty much the same.

    • The Analyst May 13, 2011 at 7:26 pm #

      I have never had any position in YOKU, long or short. Nice try, though.

      Instead of responding to the merits of the article, I like how you’ve just jumped to accusatory remarks and ad hominem attacks.

      I hope for your sake the long trade works out, and if not, you get out before its too late.

      • CJ May 13, 2011 at 9:06 pm #

        Coz what you said is really non-sense and full of bias.

    • The Analyst May 14, 2011 at 11:24 am #

      btw, please enlighten me, upon what information can you make the claim “This company of course is legitimate?” Have you personally conducted an exhaustive audit? Did you design and enforce the firm’s internal controls? I highly doubt it.

      I’m not saying it is NOT legitimate, all I am trying to point out is that I don’t like the VIE structure as an end-investor.

      If you want to bet everything is on the up and up that’s fine, all I’m trying to do is bring some caution to the discussion.

      • CJ May 14, 2011 at 11:38 am #

        Look, again, VIE is the proven structure purely due to legal framework in that country. The risk factors include it because prospectus is a legal doc and has to be prudent. It should never be a concern for you. I would rather think about the competition on Yoku from Tudou, Qiyi (backed by Hulu‘s PE investor Providence) and some other SNS such as weibo that shall take internet users’ time spent online and online ad market itself.

        Stop spreading biased opinion and discriminated view on ADRs. Yes, there are some problematic companies of Chinese ADR but which country doesn’t have such cos? Look at Enron in US. Be opened minded, Chinese Cos are rising. Feel free to stay out of it enjoying typical american self-indulgence and watching other investors making profit.

        • The Analyst May 14, 2011 at 11:43 am #

          That is a straw-man argument. Nowhere did I discuss YOKU’s business prospects, nor did I mention industry dynamics. You and your fellow YOKU defenders are still – hilariously – missing the point. As you said, the VIE structure is a legal requirement (for now), and because there are legitimate concerns inherent with it, it is disclosed in the “risk factors” section of the F-1.

          I strongly disagree with your assertion that “it should not be a concern.” Prudent investors always try to poke holes in seemingly-obvious theses, such as YOKU’s (play on growth of online video in China). If you accept what the company says prima facie, you’re setting yourself up to get steamrolled, perhaps not with YOKU, but eventually.

          Ask CV Starr how they feel about their seemingly “sure thing” investment in CCME if you doubt my skepticism…

          • CJ May 14, 2011 at 11:46 am #

            I know your logic now. So you are saying this is one Enron in US historical so investors shall always be carp on US companies and stop investing in US stocks….emmm good logic

        • The Analyst May 14, 2011 at 11:53 am #

          “know your logic now. So you are saying this is one Enron in US historical so investors shall always be carp on US companies and stop investing in US stocks….emmm good logic”

          Again, you’re horribly missing the point and ascribing words to me which I have not said.

          I still look at US companies despite the many examples of fraud, but I look very carefully. I look at Chinese companies, especially those using the (as of now, necessary) VIE structure with an even more skeptical, careful eye.

          Why is this so hard for you to understand? Do you really think Chinese co’s are as safe investments as US ones, themselves constantly under-fire for questionable practices???

          If so, I want whatever you’re smoking, because its clearly amazing.

  3. bockwai May 14, 2011 at 12:54 am #

    CJ, you nailed it. Online media, ads, games, etc cannot be owned by a foreign entity in China. If you look at the structure of every one of the listed companies mentioned above you will see a similar structure as YOKU. It is the unfortunate nature of Chinese companies that list in overseas markets. This is the only way they can float these companies’ stock.

    • The Analyst May 14, 2011 at 11:19 am #

      As I’ve said at least a few times already, I know. You’re all missing the point that I think the VIE structure itself while a necessary evil, creates several opportunities for fraud, malfeasance, and other sorts of behaviors not in YOKU shareholders’ best interest, especially combined with what seems a very obviously inferior financial regulatory/enforcement and audit/control environment.

  4. Billy May 14, 2011 at 4:52 am #

    I bet the author is 100% short YOKU or he is paid by shorts to bash successful companies, specially Chinese companies because they can be easy targets.

    • CJ May 14, 2011 at 11:16 am #

      hahaha, Bingo~

      • The Analyst May 14, 2011 at 11:20 am #

        No position long or short. I have no position in YOKU or any other security.

        Keep digging though, whatever gets you to sleep at night.

        • CJ May 14, 2011 at 11:24 am #

          Yes, coz you are paid to do so. In Chinese, your type is called “shooter” spreading propaganda~~

          • The Analyst May 14, 2011 at 11:27 am #

            You’re hilarious. What’s it going to take to prove to you how wrong you are? My guess is nothing will convince you that I have no financial interest in YOKU, either through exposure to the company or otherwise.

            People like you crack me up. Every time someone questions your beliefs, instead of questioning them, like a reasonable person, you immediately lash-out and declare potentially contrary information to be suspect and obviously biased.

            That’s a pretty pathetic way to go through life if you ask me.

      • Billy May 14, 2011 at 11:27 am #

        It is sad to see how these shorts ruin good companies just to gain couple dollars. YOKU is gaining momentum very fast in China and is trying to compete with companies like BIDU, GOOG.

        • The Analyst May 14, 2011 at 11:36 am #

          You know what’s awesome? You guys are so convinced that because my views are contrary to your own, the obvious explanation is that I stand to gain from the stock price going down. Nothing, and I really at this point fully believe, nothing will change your mind here.

          In reality, I neither lose nor make money depending on the price of YOKU stock. I assure you, if you saw my bank account, it would be profoundly obvious that I have not been paid to write posts like this.

          The only way I can even remotely be said to gain is, ironically, when people visit my website and my pageview numbers increase. If its not apparent to you yet, let me spell it out to you: by blindly asserting that I’m a short/paid by them, you’re driving up my pageviews, which is THE ONLY WAY that I get any benefit out of writing posts such as this.

          Thanks for the numbers, appreciate it!

    • The Analyst May 14, 2011 at 11:21 am #

      I have no economic interest in YOKU, frankly I couldn’t care less if you or anyone else makes or loses money. I don’t do this for the money (notice the lack of ads on the site), as a matter of fact, running this site is a very serious loss-maker, and that’s not accounting for the tremendous amount of time/effort I invest in running it.

  5. Billy May 14, 2011 at 11:35 am #

    The author is ashamed of himself writing lies that’s why he has his face covered. Why don’t you show your face? if you think what you said it is true? hmmm…

    • Speero May 14, 2011 at 11:47 am #

      Says the guy with no picture and an anonymous name.

      • The Analyst May 14, 2011 at 11:49 am #


        If “Billy” went over to our “ABOUT” page he’d get an answer to his defensive question, imagine that…

      • CJ May 14, 2011 at 11:49 am #

        Says the guy with fake picture and comic name?

        • Speero May 14, 2011 at 11:54 am #

          It’s not hard to find me, “CJ”. Why are you trying to personally attack me, anyway? Is that what your argument has come to? Sad.

          • CJ May 14, 2011 at 11:57 am #

            Why you take it personal? I just followed what you said….

  6. Speero May 14, 2011 at 11:52 am #

    It’s funny to me how all the know-nothings commenting here keep blabbing about how biased this article is – when all he’s doing is pointing out some similarities to other reverse-mergers.

    If you asked me, the only people that have positions here are the YOKU bugs that are swarming this article. Gee, I wonder what would happen if you all margined your accounts 200% long in reverse chinese mergers and see where it’s at a year from now.

    And of course, once one retard with vested interest in a stock that’s being bad mouthed gets butthurt, his friends come running. Blind lead blind.

    You guys should probably read the article before you generalize it with negative connotation towards what you have your money in. If you did that, you may actually make some money in the market for once. Otherwise, keep watching CNBC and Cramer for your picks.

    • CJ May 14, 2011 at 11:56 am #

      wow, here comes a new beater~let me ask you a simple question. Have you even be out of this country? Have you even been to China to do any site visit of any ADRs? Stop being self-indulgent anymore. wake up! US is being caught up~~

    • CJ May 17, 2011 at 11:15 am #

      have to admit that Cramer is almost the stupid clown i have seen on US tv show….anyone has ever made money by listening to Creamer…(sorry Cramer)

  7. gappingandyapping May 14, 2011 at 2:40 pm #

    The responses above are exactly what they were when someone questioned RINO’s internal controls. Ironic. If I was long this stock I would keep it very small and read everything I can about their “controls”.

  8. Josh Smith May 15, 2011 at 6:35 am #

    CJ and his ridiculous arguments seem evidence that one would likely make a decent return shorting yoku…lol

    • CJ May 15, 2011 at 10:44 am #

      why not trying shorting the stock right now?? Don’t be begging for a job after doing so.

  9. idbtc May 15, 2011 at 6:32 pm #

    The article doesn’t say anything new that people in the industry haven’t known about for years.

    VIE structure has been used in many Chinese IPOs – the first one to use it was one of those Internet stocks (either Bidu, sohu or SINA) and since then, bankers and lawyers have copied that structure for many followup Chinese deals and that is still happening today. VIE structures are used mainly to get around Chinese regulations of overseas listing. A chinese company seeking an overseas listing in China would need to apply for approval at a number of govt agencies and that takes a lot time. Many prefer not to wait and just use VIE structure. And in the case of protected sectors in China (like the Internet), companies in those sectors have little or no chance of getting the approvals. Therefore all Chinese internet listings in US now use VIE structure. Hence, the VIE structure allows for this to happen in an expedient manner. One might wonder aloud that gee isn’t SINA and other listings are well known in China and govt can see they are getting around regulations? so why have them in the first place? well, depending on who you speak to in China – you get different answers – in general it is an issue with bureaucracy and crazy as it sounds, some suggest the officials probably don’t see need for changes in law since they aren’t enforcing them anyway! and their tacit approval of VIE structure has given green light to this listing procedure. Of course, VIE structure is still a risk because at any time, the govt still have the power to say we no longer giving tacit approvals and then you’ll see collapse in many Chinese stocks but the odds of that happening (disrupting capital markets like that) are practically zero IMHO.

    Furthermore, I would argue that even if a direct listing structure is used (non-VIE), those who don’t trust Chinese companies will still have the same argument. Since legal recourse for foreign investors are limited, the issue with doubters will still be the same – how can you go after these Chinese nationals? VIE structure or not, if you believe that going after Chinese nationals is a huge risk then investing in Chinese stocks in not for you.

    • The Analyst May 15, 2011 at 6:34 pm #

      Thanks for the comment, great point!

      • CJ May 15, 2011 at 10:54 pm #

        You know what? I would suggest Naive American investors who know nothing about Chinese stocks (those who never ever been out of this country and still enjoy self-indulgence and brain-washed thinking USA is still the superpower over the world totally stay away from the Chinese ADRs or any ADRs. This is the best way for you sleep well and keep yourselves not too upset about what is going on now.

  10. bockwai May 15, 2011 at 11:04 pm #

    Id be curious to know of any structural similarities between the likes of YOKU and this Xinhua Finance scam run by Ms. Bush until 2008. This isn’t even Chinese scamming American investors, its Americans using the guise of a Chinese online media company to scam American investors.

  11. idbtc May 16, 2011 at 8:43 am #

    Even though there is risk, Greater risk = greater return. At this level of YOKU price, I will go long as I expect this stock will grow signficantly in the next couple months!

    • The Analyst May 16, 2011 at 9:42 am #

      There is no guarantee that greater risk = greater return.

    • Lee D May 16, 2011 at 10:57 am #

      People who say “the greater the risk the greater the return” know the square root of fuck all about either math or probability.

      Greater risk = greater risk. There’s nearly zero correlation to the size of the potential return.

      • CJ May 16, 2011 at 12:14 pm #

        Dude, may I ask how much is 36*89? can u do this in your mind? stop talking about math. Math in country is so fxxxx up


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