Project YOKU-zuna: Deconstructing Questionable Revenue Growth Assumptions

6 Jun

I don’t like stating the obvious, except when it seems many if not most are seemingly oblivious to it.  Such, I believe, is the case with the stock price of Youku.com (YOKU).  As I shared last week, I believe the firm is grossly over-valued even when assuming amazing revenue growth and margin expansion over the next decade.  We’re talking 70% average revenue growth for the next 10 years.  Off the top of my head, I’m not sure any firm of this size has achieved a decade-long run that impressive in the history of the corporation!

This should be obvious, but firms can only grow so much, so fast.  YOKU makes substantially all of its money from online advertising, which means its revenue growth is bounded by two factors: the growth rate of the Chinese internet advertising market, and its share of said market.  The very-same “independent” research firm YOKU cites in its regulatory filings – iResearch – says the market only (yes, only) grew 54% last year, yet YOKU’s revenues grow three times as fast (152%)!

The only way for this to happen (and continue to happen) is for the market to grow faster than estimated, the sub-market in which YOKU operates – online video advertising – grew (and will continue to grow) faster than the broader internet advertising market as a whole, and/or YOKU made (and will continue to make) HUGE market share gains last year.  (YOKU could also expand into new markets, but for our purposes, we’ll assume the company invests most of its capital in the internet video space.)  Of course there is another way – falsifying revenue – but as I have done in my financial analysis, I’m working on the (very possibly unrealistic) assumption that YOKU’s financials are fraud-free.

In order to rationalize YOKU’s current (at the time of my analysis last week, around $42/share) price, not only did YOKU’s revenue growth rate have to significantly outpace that of the industry rate, but going forward, it will have to continue to do so for years to come!  Even if Victor Koo is the most brilliant CEO the World has ever seen, he is still (using our no fraud assumption) faces real-world constraints in how fast he can grow the company.

If we take a deeper look at the industry and YOKU’s position within it, I think it will become even more crystal clear that YOKU’s share price – driven largely by unrealistic revenue growth assumptions – is grossly over-valued.

China Online Video Advertising Market

YOKU quotes an iResearch report (presumably a newer version of this one, which I’ve yet to read given our budget of approximately $0) which estimates the following growth rates in the internet video advertising market:

YOKU’s still-private competitor, Tudou, included what must be slightly more dated metrics in its F-1 regulatory filing late last year about the Chinese online video market, screenshot here:

According again to the iResearch estimates in Toudu’s filings, “according to a survey on 17 major advertisers’ online advertising spending in China, total online video advertising spending is set to grow” at a CAGR of 65.3% from 2010-2013, with the growth rate declining from 85% in 2011 to 52% by 2013.  The numbers quotes in YOKU’s more recent prospectus (from which the screenshot is taken) filed last month, the CAGR is 66.3% 2011-2013, and the rate is set to decline from 74% in 2010 to 66% in 2013.  Again, assuming the numbers in YOKU’s filing are more updated/recent than in Toudu’s, you should notice how the 2010 rate was significantly adjusted down from 107% to only 74%, while estimates for 2011, 2012, and 2013 were adjusted from 86%, 59%, 52% to 65%, 68%, and 66%, respectively.

As I haven’t read the report I can only guess as to why these numbers were changed, but considering the nearly-identical CAGR (only a 1.6% difference) between the presumably newer and older numbers, it looks alot like the 2011, 2012, and 2013 estimates were fudged to solve for a similar CAGR.  If that is even remotely close to what happened, don’t be surprised if/when these estimates are revised-down over the next three years, that is, prudent investors would be well-served to assume the actual growth rates will be at least slightly lower than the iResearch’s estimates.

Market Share

YOKU says it had a 21% share of the China online video advertising spending in 2010, while Tudou says as of 9/30/2010 it had approximately 18% share (stated 71.7mm users/2010 estimated 394mm online video users).  Other competitors like 56.com claim to have  approximately 8-14% share (imputed) depending on whose numbers you believe (if any).  Various news sources have suggested that larger, more entrenched and established companies like Sohu and Bidu (Qiyi.com) have been successful in gaining market share with their own online video efforts, and plan to invest even more in them going forward.  Considering the intense competitive landscape, I would be quite surprised if YOKU was able to make any material gains in market share absent some sort of significant shock like the PRC government going after a competitor, a transformative acquisition (using the company’s over-priced shares as currency) or something along those lines.

Conclusion

The aggressive revenue growth assumptions I used in my analysis give YOKU ~27% of the estimated Chinese online video advertising revenues by 2013.  While its not impossible that YOKU becomes THE de facto destination for online video in China and/or the market grows even faster than forecasts, I find it EXTREMELY improbable that either happen, especially as soon as implied by YOKU’s recent stock price.

UPDATE: a friendly comment below brings our attention to a newer report on online video in China not available in English from what I can tell.  Here is the iResearch 4-19-2011 translation

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43 Responses to “Project YOKU-zuna: Deconstructing Questionable Revenue Growth Assumptions”

  1. Techinsidr June 6, 2011 at 4:23 pm #

    I think there is a big difference between fraud and a rosy forecast..

    If putting out a rosy forecast is fraud, then 99% of Fortune 500 companies are fraudsters…..

    Not to mention, our government’s congressional budget office regularly sandbags their forecast too. Remember the revision on how much healthcare would cost?

    • The Analyst June 6, 2011 at 4:42 pm #

      I’m not accusing anyone of any fraud, although as the past year has shown, the odds of fraud are certainly greater with China companies as they are in the U.S.

      All I’m saying is that YOKU investors are quite clearly assuming that YOKU can grow revenues faster than any reasonable estimate.

      Thanks for the comment!

      • Techinsidr June 6, 2011 at 4:50 pm #

        Yep, I think you were totally on the money with CCME as a fraud, but YOKU does look legit to me.

        Will they be successful? Will they grow revenues and profits at a fast clip?

        Who knows, but either way you raise a great point that the revenue growth targets are extremely aggressive. Caveat emptor…

      • CH June 6, 2011 at 5:48 pm #

        Again, this naive dude is making silly comments again.. Have you ever been to China? Do you know how robust the economy over there vs shady numbers here in US?

        To give you an example of how shitty the economy in US. I have traveled to most countries over the world and it is a shame for US airline to charge $25 dollar for check-in luggage…Then ppl here just want to save the $25 bucks and carry “oversize” luggage onto the aircraft competing for limited space in the overhead locker and taking others spaces where they don’t sit at. Why like this, because economy sucks. People don’t want to spend 25 buck for what necessarily to be spent!

        How could our “analyst” to analyze company in other booming economy while living in such a declining economy?

        Dude, you think too small, like the frog at the bottom of the well. Can’t see the big picture of what’s going on now!

        • The Analyst June 6, 2011 at 5:52 pm #

          So let me get this straigh: Because I live in the US, that renders my entire analysis completely incorrect?

          Ha, ok buddy. Good luck being long the stock.

          • CH June 6, 2011 at 6:22 pm #

            Dude, you are missing the point again. I am saying you need to see how robust the economy and internet usage OVER THERE IN YOUR OWN EYES before questioning the very fundamentals.

      • CH June 6, 2011 at 6:01 pm #

        What makes you conclude this? Every company is independent so your logic is if there is an Enron in US history that every single US company has greater odds to be like Enron?

        • The Analyst June 6, 2011 at 6:14 pm #

          If you think that is my logic you have not read more than a few words. Try again.

      • CH June 6, 2011 at 6:12 pm #

        Let me just give you a few numbers.
        1. China total Ad market was US$45bn in 2010. (expected to grow at a 5yr CAGR of 17%, which is 2x GDP growth, very reasonable)
        2. Assume TV ad grows at the same rate as market (US$30bn in 2010)
        3. ~US$5bn Online Ad market in China in 2010. Roughly 5% penetration to TV ad market from Online Ad. This will end up with a online market of US$30bn market by 2015
        4. Youku’s market share as online was only 1.2% in 2010 and even we assume 3.5% market share (which is approximately the same market share of Youtube in US in 2010), the company can achieve US$1.1bn revenue in 2015, which representing a 5yr CAGR of 80%!!!

        As you can see from above, this is VERY VERY conservative assumption. Even with that, Yoku can achieve remarkable growth.

        I would highly recommend learning Chinese and start reading Chinese news and talk to local experts vs. researching blindly by divorcing yourself from reality

        • The Analyst June 6, 2011 at 6:18 pm #

          As I thought, you’re just here talking your book. Using the very numbers YOKU quotes from iResearch (themselves extremely optimistic) on the online video ad market, YOKU needs 27% of that market by 2013 for my analysis to be even remotely close, and that still only values the company at ~$26!

          There is no possible way you can rationalize YOKU much higher than that, unless of course you’re using almost unheard-of growth and penetration rates.

          Hope you’ve enjoyed being long the stock the past few days as its down ~15%…

          • CH June 6, 2011 at 6:23 pm #

            What’s why I am saying you can’t get a job in Investment banking, let along hedge fund….You are totally not reading the numbers…

          • CH June 6, 2011 at 6:27 pm #

            I don’t want to get into too much numbers as you are not quite a maths person.
            Simply think the following big pictures:
            -per person revenue of Yoku vs. Youtube
            -number of internet user (460mm now) and total population (1.3bn and growing)
            -GDP growth
            -spending pattern
            -exchange rate and RMB appreciation

            Do these ring the bell?

          • CH June 6, 2011 at 6:34 pm #

            No, I am waiting to getting into it to make big buck. I have to admit there are so many naive US investors like you who know jack about China creating so much opportunities for making money.

      • CH June 6, 2011 at 6:37 pm #

        Hey Analyst, why not enlightening us and share your view on Linkedin and Groupon valuation?

  2. Sean June 6, 2011 at 4:26 pm #

    Dude, you are way off here.

    Look, go and talk to some experts in the field. Go talk to people who can read Chinese. You linked to an report on the Chinese Online Advertising market — that includes Baidu, Sina, Sohu, Netease, etc. The entire advertising market.

    Look for the online video market. The most recent report iResearch did is here: http://www.iresearch.com.cn/Report/view.aspx?Newsid=137561 . A summary: in 2010 online video revenues grew 78.1%, once they excluded IPTV-like video services. Competition is drawing more eyeballs to the overall market. International sport events will lead to more online-viewing. Longer videos offer additional monetization options. Revenue breakdown: 68.5% advertising, subscriptions 6.4%, other 25.1%.

    • The Analyst June 6, 2011 at 4:31 pm #

      While I appreciate you pointing out that I should have linked to the online video report (which I’ve updated, thank you), the numbers I quoted from the YOKU and Tudou regulatory filings are from the video report. I guess you didn’t read that far.

      • CH June 6, 2011 at 5:50 pm #

        Dude, why not start learning Chinese and read some real report before making silly comments?!

      • Sean June 7, 2011 at 3:29 pm #

        Okay, on reflection, I’m coming off too nasty against you once again. I appreciate that you’re taking a serious look into this, but just wish you would ask and look to answer more questions rather than spout off. I did read the rest of your piece, but laughing at the growht of Youku revenue in light of the entire online advertising market growth is bush league.

        I’m not long YOKU. The valuation is too rich for my blood, and I see better risk-reward opportunities elsewhere. But I absolutely can see the possibility of it being undervalued right now. You have incredible hubris to claim it is foolisly overvalued when you are so unfamiliar with the other Chinese internet names. I first noticed your posts when you brought up the VIE structure, and immediately compared it to CCME. You have questioned how much of a real business Youku has elsewhere. You’re being embarrasingly ignorant here.

        And believe me, I have seen some terrible frauds and criminal behavior here. My first week at a new fund six years ago saw one of its major positions implode into nothing. I’ve been decent at avoiding them, and have made some profit shorting a few blow-ups. So please believe me that Youku is not a short like the rest.

        I’ll stop pestering you and start congratulating you if you stop working from your a priori assumptions.

        First: Take a serious look at CH’s numbers. There is a large market to expand into. Yes, there is competition now, but network effects are strong. MySpace was once a serious competitor to Facebook. Have you seriously addressed why the market should not trend towards rates seen elsewhere, as has happened in every industry in China so far? Have you considered how some firms take dominant market positions, like Baidu and Ctrip, when there was significant competition when they began?

        Second: Take a hard look at your assumptions. Why is there no leverage in Sales, no leverage in Product development, no leverage in G&A? Baidu went from a 10% operating margin when it went public to a 40% margin in two years, and has been hovering around 50% for the last year. How did it do that?

        Third: Get a bit more familiar with the company and the industry. Is Youku like Youtube? Like Hulu? How is it different from both? What are ads like in the Chinese online video market? Are they direct equivalents to YouTube’s? Does the average Chinese know of Youku?

        Like I said above, it’s not crazy to think that Youku could be undervalued at this point. If it works right, the payoffs are huge. But I also think that it’s crazy to think anything of Youku’s business model is assured. If you want to look at some names that are already lagging, look at MCOX DANG or LONG, which are growing but are well behind the market leaders in market share. Youku is still too venture-capital like in its investment to be really useful as an exercise in equity analysis.

        • CH June 7, 2011 at 3:49 pm #

          @Sean. After some exchange on the author’s twitter, I re-confirmed his ignorance on China. He knows jack about the economy, people, biz, culture over there at all… He still thinks corporates won’t pay a similar rate to Yoku as paying to Youtube or Facebook as US income is 10X of China thus to gauge the growth of Yoku…..(such a typical ignorant and self-indulgent white American never been out of this country)

          Another big mistake he made is that he purely based his analysis on iResearch’s market estimates, which is usually underestimated. Why? because it is no way to catch entire market for iResearch given its rapid changing situation coupled with the enormous market size and China research firm always tend to be conservative to be prudent caring their reputation. (I worked with on of big IBs in Hong Kong before and worked with iResearch directly for an IPO project. This is a very culture thing, how could this dude who never live in China know it?)

          Others like you mentioned, he totally ignored margin expansion, currency appreciation, TV ad market shifting to online, etc.

          • The Analyst June 7, 2011 at 3:59 pm #

            If you read my previous post you’d know I did not ignore margin expansion. See my response to Sean if you’re still harboring such ignorant thoughts.

        • The Analyst June 7, 2011 at 3:57 pm #

          Thanks for the very thoughtful comment. I’m posting things here as I learn them (well, a bit after, but not much). I don’t claim to be a China expert, not hardly, its just an area I’ve grown increasingly interested-in, as it appears time-tested investment maxims (etc) are being throw to the wind, and “support” for often ridiculous positions boils down to “YOU JUST DON’T UNDERSTAND THE CHINA GROWTH STORY!!!!!” (all caps very intentional.)

          The OPPORTUNITY in China is enormous, but calling I consider it hardly a conservative case to say that that a firm is going to go from ~$125mm in 2011 revenue to almost 10x that by 2015, no matter how you slice it.

          Yes, Youku is more than cute kitten and “Jackass” style UGC videos.

          Yes, Youku can capture more market share by offering subscription services and showing more licensed content (movies, tv shows).

          Yes, I assume margins will improve SIGNIFICANTLY. Their 2010 gross margin is 9.4%, which I assume will increase almost 74% by 2020. Similarly, I assumed operating margins will increase to almost 40%

          No, Youku isn’t the “youtube” or “netflix” or “hulu” of China; its some combination thereof, and then some. I’m not so simple so as to say that since YouTube is a $ loser, Youku will be, too. However, YouTube, Hulu, and Netflix all had/have some semblance of first mover advantage, or at least got a number of things “right” where earlier competition didn’t (e.g. blockbuster, vimeo, etc)

          The problems as I see it are the fact that Youku offers no unique value proposition. How is it different than 56.com or Tudou (etc)? If Youku gets big enough (and the Government cares enough) that they have to actually start aggressively enforcing copyrights, what’s stopping users from jumping any of the other video sites? Hell, what’s stopping users from jumping to newer/less profit-oriented competitors as Youku mucks-up the experience with more and more intrusive ads to keep revenue growing? What about when they start charging for more and more? I’m not sure how Chinese consumers will respond to these almost inevitable changes, but as long as there’s free/cheaper, easily-accessible alternatives, I’m short brand loyalty.

          • CH June 7, 2011 at 4:11 pm #

            1. 10x growth is very possible simply because it is way to small now and it is an infant NOW! (think about how much weight you have gain by eating all American junk food in college compared to when you are just born)
            2. Youku is not netflix (which won’t work at all in China) nor Huhu (which is Qiyi.com backed by Providence and Baidu). But it IS youtube kind and even more. why not just try watch videos on Yoku (sorry I forgot you can’t read Chinese…)
            3. You suggestion on subscription is another ignorant one….It will NEVER work in China. It is a culture and consumer behavior thing. Chinese are got used to free video entertainment and they are simply NOT GONNA pay!
            4. If you compare 56.com and Tudou, Yoku’s quality is much better. Not like Tudou, the site is flooded with Ads that is simply annoying. Not like 56.com, which is lack of quality content and slow updates
            5. I short on brand loyalty too but it is what it is. Same as you are so used to search using Google!

          • CH June 7, 2011 at 4:12 pm #

            I don’t think anyone on this site will die before 2015. Why not betting on this whether Youku can achieve 1bn revenue by then?

  3. Josh June 6, 2011 at 7:14 pm #

    CH: go get laid or something. You make some valid claims – I think theanalyst, me, and most would agree. But frankly, the way you’re going about this, sounds like a pump n dump prick who has just lost 20+% in the last few days (I’m not saying that you did lose money or that you’re long YOKU).

    I’ve followed the Chinese RTO space..and I’ve had some decent returns betting against people who sound like you.

    As I said, I agree with a lot of what you’re saying. Real fraud, fear of slowdown, etc. are bringing down most, if not all names, and that may, in time present all of us an opportunity to make a killing.

    That said, there were plenty, like TPG Capital’s purchase of WaMu, who were too early into going long financials in 2008…and were bloody murdered. I suspect we are closer to inning 4-5 of this ‘short china’ (especially the frauds and bubblicious tech plays) than we are to 8-9. Bottomline, I don’t know, so good luck to all.

    • CH June 7, 2011 at 12:21 am #

      Josh, nope, I haven’t. I am waiting for the entry point. Think about it, the market is so freaked out that they are even pulling back Baidu!!

  4. Also sprach Analyst June 7, 2011 at 1:16 pm #

    Funny exchanges. Looks like the belief in China economic miracle is turning into something almost like a religion

    • CH June 7, 2011 at 1:57 pm #

      For those dudes who can’t even do math in your mind (with your figures maybe) always confuse what is reality

  5. The Analyst June 7, 2011 at 4:26 pm #

    @CH

    Ok, now we’re kind of getting somewhere, minus the insults. Let’s move on:

    I’ve spent some time on the various sites looking at the ads on them. I noted that big global firms are advertising (e.g Unilever), which is very bullish for these names. However, as you said, I imagine Chinese are as if not more price-sensitive than Americans, which means Youku’s revenue will continue to be substantially ad-derived for the foreseeable future.

    That being the case, we’re back to forecasts for the size of the market and YouKu’s market share. It seems on these two things, you and I disagree, which is after all what makes a market. We do agree, however, that YouKu has and will likely continue to grow revenues at a very high rate. They will also likely expand their margins similarly. As a value investor, the price is still too high for me to want to get long. In the low 20’s I’d take another look, though.

    • CH June 7, 2011 at 4:44 pm #

      Ok. For the market size, I gave you the current market size number and TV ad market size in 2010. (Data are from CEIC)

      As I mentioned, if we have 5% penetration to TV ad market per annum and assume 3.5% (yes, only 3.5%) market share by 2015, Yoku can achieve 1.1bn top line!

      The Hunan Satellite TV has a similar daily reach of ~20mm viewer and has achieved a revenue of US$540mm revenue in 2010, why CAN’T Youku?

      To be frank, I never doubt the topline of it but profitability (real challenge here) given its continuous investment and increasing content cost due to competition.

      • The Analyst June 7, 2011 at 6:21 pm #

        I see your estimates at penetration/market share are not impossible, but again, I’m a very conservative investor, so I think they may be just a bit rosy. To each his own, though!

        On your later point though, that’s a serious concern of mine as well, and even more, they may very-well run into cash flow/solvency problems if the market is not receptive to additional follow-on share offerings. It does not appear they have a revolving credit facility, so unless their financial performance improves significantly in the next 2, 3 years, they need to obtain one and/or keep selling shares, which may be difficult as insiders/early investors sell their sizable stakes.

  6. Josh June 8, 2011 at 12:59 am #

    So here are a few thoughts:

    (1) The market humbles all
    (2) No one knows the future

    Having said the above, the philosophical (albeit with real world implications, and real implications for the YOKU business/stock) problems I’m finding with CH’s YOKU approach are the following:

    (A) House prices go up forever right? Therefore, if house prices can go up forever, ad spend can go up forever too….right? Not to mention, “conservatively” at a smooth 17% CAGR…Right?

    (B) What drives ad spend? How did ad spend fare in the US during the 2007-2009 financial crisis? How did the businesses (and stocks) that derive revenue from ads fare? Did it matter if it was online vs offline?

    (C) How is the macroeconomic picture looking for China? For China’s largest customers (hint hint: US + Europe + Japan) ? What % of China’s economy is construction related? Do you know what happens to China’s GDP ‘growth’ figures if construction slows?

    (D) How is the inflation picture looking in China? Do consumers have more or less money to spend on discretionary goods, after housing + food + transportation? If consumers have less money to spend, and start spending less, what incentive do businesses have to increase ad spend, online or offline?

    (E) How reliable are macroeconomic figures released by China (sigh, the US too)? If China were growing at 6%, vs 8%, nominal, do you know what the real ‘growth’ rate would be, with current levels of inflation?

    Again, the market humbles all, and no one knows the future.

    • CH June 8, 2011 at 8:53 am #

      @ Josh
      Have to admit these are typical US based ppl type questions. Let me try to give a shot:
      A. Not quite sure about your view at this point. I was saying for a 5yrs CAGR of 17% is a very reasonable assumption as ad spending growth at 2x GDP growth is quite acceptable
      B.If you are arguing financial crisis’ impact, firstly, China is far from it for now. Yes, offline goes online is an inevitable trend. Same for both China and US (think about the ROIs)
      C. This is not true again. (I think you are still stay at the perception of 5-10 years ago). Domestic advertisers are the major driving force (don’t have the exact data handy but will provide later) China’s economy has been shifting toward more consumption driven vs. investment driven. This is partially evidenced by much stronger consumer stocks performance if looking at Hong Kong Heng Seng market. FAI contributed ~60% of GDP and don’t forget, even there is slowing down in coastal area, there are huge huge demand in middle and western China as there is dramatically in short of infrastructure. (actually development of western China was a key topic during the national congress meeting in March). Nobody worries about GDP slows down and we hope it could slow down a bit in fare of inflation. Plus, as mentioned, the consumption will take a bigger pie (which has been observed. China is already the largest auto market in the world; luxury players see much significant growth from China while negative or flat numbers in US, Eur even Japan)
      D. Yes, inflation is a concern and this is a priority. But what’s different is that, Chinese has much much higher saving rate coming for decades. The perception is very different, even with higher price, whatever they want or necessarily to buy, they will buy as they fare the price will go even higher. While in US, i would say ppl are blindly spending. They spent more they earn. (it is so common in US you see ppl accumulate huge debt on their credit cards while only payment min payment. This is so rare in China as nobody wants to pay interest on it. If they can’t afford something, they will never buy it. Even for housing, ppl take a much higher down-payment ratio vs. here in US)
      E. I don’t know how to answer this question…. it was like “how about Megatron coming back and attack earth again” type of question. ^_^

      • Also sprach Analyst June 8, 2011 at 1:29 pm #

        Well, if you are talking about macro, I wonder if your discussion is very relevant to ad revenue and stuff, except that if the macro suck, everything will likely be suck as well.

        The Chinese government wants to switch their growth model from investment-driven to domestic consumption driven. In fact, they have been talking about that for years, even in the previous 5-year plan. The problem is that the progress is simply way too slow, and the real estate boom is more than obvious that the bubble will quite likely burst as the government is very determined in bringing down home prices and inflation.

        The bubble is contributed by the expansion of money supply, which, at one point, was closed to 30% yoy vs. the historical trend of 16% or so. This is due to the fiscal stimulus and monetary stimulus in response to the financial crisis in 2008, as well as the out-of-control bank credit growth in China, which are all going into the real estate sector and the local government financing vehicles. You may very well say that some people in China are insanely rich that they can buy so many luxury goods and properties everywhere, but the reality is that these are based on the amazingly fast monetary expansion.

        If the economy slows down, monetary expansion will go into reverse. In a fractional-reserve banking system, the monetary base can be multiplied through the banking system. When the economy slows, however, the process goes into reverse. For every RMB of deposit vanished, RMB5 will disappeared in the broad money supply. At that time, that would be wealth destruction even for those previously seemingly rich people.

        Expect the Chinese government to bail out everyone, but if you include all debts, including local government, state-own banks non-performing loans, policy banks debts, asset management companies and others, the government’s consolidated debt balance would reach at least 75% of GDP. If even state-own enterprises’ debts are consolidated (not unreasonable if the government has to bail them all out), the debt balance can easily exceed 100%, well, not really any better than the US.

        The only good news is that saving rates are much higher, that means the more likely scenario would be a Japan’s scenario, not US.

        Obviously you wouldn’t believe in such argument (or you might want to say that this is not evidence AT ALL). Just like so many most hardcore China bulls, you will most likely refuse to see the risks. These are risks that no one can be sure that there is 100% probability of materialise, but it seems that the most hardcore China bulls are current assigning a 0% probability to a disastrous hard-landing scenario.

        • CH June 8, 2011 at 2:35 pm #

          You know what. This is a typical China bear view. Some ppl in US has been talking about China collapse for more than a decade! (see what has happened)

          You can always argue the risks from a “weak” government economy such as that in US. Whatever has been cited, bench-marked to and referred to is what happened in this economy and political-environment.

          The fundamental difference in China is that China has a “STRONG” government and they basically can do whatever to intervene the economy. They are cash-rich and they are powerful. They are doing it and has been done very well so far. (control on property price, inflation, etc. shifting the growth driver) Stop complaining “they are too slow”. What China has achieved in the past 30 years was more than that US had done for more than 100 years. (think about how shitty the economy there way back to 80s. PPl at ago can never ever imagine what China has achieved today. )
          They don’t have to worry too much shits originated from so-called “democracy” in US and everything is cut to the chase.

          Again, nobody denies the risks you mentioned. It is not 0% or 100%. But it is low.

          Back to topic of this article, my previous assumptions have been very conservative and should be more than enough to cover those risk factors you mentioned.

        • CH June 8, 2011 at 2:39 pm #

          Also to add, I don’t know where do you come from by using “out-of-control” credit and if talking about stimulus package, by comparing to at QE1 and QE2, it was nothing. (plus only 70-80% has been implemented)

          • Also sprach Analyst June 8, 2011 at 3:19 pm #

            Yours is the usual bull argument. “This time is different, because it is China”.

            No one denies that China has stronger control over the economy, but most bulls just feel like the government of China is omnipotent. I do think the Chinese government is very capable, and they have good understanding of the problem, but they are not omnipotent.

            And no one denies the achievement of the Chinese government in the past 30 years or so, that they have achieved something that UK used centuries to achieve. So what? You are assuming that China can go on like this. I don’t share such view.

            On money supply and credit, well, looks like you don’t get it. QE1 and QE2 did nothing but create bank reserve. Its effect of broad measure of money supply is remarkably little.

            US is in balance sheet recession, thus credit demand is low. Even by expanding monetary base dramatically, what it creates is only bank reserve, not broad money supply. M2 growth yoy in US has been for most of them time less than 10%.

            Compared that to M2 yoy growth in China of historical average of 16% and the peak of 29.7% growth. This is what it means by out-of-control.

            That’s China which is out-of-control, not the US.

        • CH June 8, 2011 at 4:01 pm #

          Dude, I don’t know what is your data source from which you get the 29% yoy growth. China M2 Yoy has been under 20% since 2H 2010 and it has been decreasing. Apr number was only 15.3%….

          What I sound is that you are a typical US bull and still enjoying the self-indulgence of typical uncle Sam while didn’t realize the challenge and competition this country is facing? ^_^

          • Josh June 13, 2011 at 11:31 pm #

            All right ladies, grow some balls and make a bet. Put some real $ at work. Nobody gives a shit about your or my opinion; take some action.

            This applies to all, those bashing YOKU as well as our resident China wonderboy perma-bull.

            If you are long/short, my apologies. Particular apologies for those who have been long YOKU.

  7. Josh June 13, 2011 at 11:38 pm #

    Sorry Analyst, but I’m going to have to call you out too. It’s been so effin obvious you have no position in YOKU for those of us who have been around. I could’ve bitched and moaned about the valuation too (and probably would’ve done a better job). but you weren’t bleeding like we shorts were back in April when YOKU went cuckoo up to $69.00 per share; you have no street cred brotha, I don’t care what stocktwits says.

    The timing of YOKU’s decline has been 100% luck (though one wonders if you posted and started doing some ‘analysis’ in anticipation of the lockup, followup offering, etc.)

    • The Analyst June 14, 2011 at 12:00 am #

      I started looking at it around the time of the secondary. My retirement savings is in passive investments and my non-qualified $ is so insignificant (drawn down to pay living expenses, not from trading losses), I couldn’t have really put on the trades I wanted (long 3-6month otm puts and shorter term straddles).

      I did not expect the stock price to crash so fast, and while I’d like to take some credit, I don’t think I can. We’ll see what happens, this story isn’t over, far from it.

Trackbacks/Pingbacks

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  2. 6/11 Weekly Summary « Stone Street Advisors - June 11, 2011

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  3. Project YOKU-zuna: Failure to Execute « Stone Street Advisors - June 15, 2011

    […] over- value the firm.  When I started, the stock was trading around $43/share, and even with aggressive assumptions for revenue growth, margin expansion, and other measures of management effectiveness, I couldn’t figure out how the company could […]

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