Two of China’s money-losing Internet companies to make New York IPOs at the height of an investor frenzy for their shares in 2010 have posted more losses, though e-commerce firm Dangdang (NYSE: DANG) and online video leader Youku (NYSE: YOKU) appear to be moving in different directions in their quest for profits. Let’s look at Dangdang first, which was profitable when it first went public, but slipped deeply into the red last year as competition intensified with other names like Jingdong Mall in China’s crowded e-commerce market. Dangdang posted its third consecutive quarterly loss in its latest reporting period, losing $15.8 million to be exact. (results announcement) Investors certainly didn’t seem to like the news, bidding down Dangdang shares by 16 percent after the numbers came out. But from my perspective, the numbers actually do appear to show that Dangdang may have turned the corner and its situation may be improving, which is good not only for the company but also for the broader e-commerce space where most players are now losing money as they fight for market share. In terms of actual numbers, Dangdang’s first-quarter loss was actually an improvement from the previous quarter, when it lost $21 million. Furthermore, the company’s gross margins also improved to 14.2 percent from a low of 10.5 percent in the previous quarter, though the figure is still well below the nearly 20 percent figure from a year earlier. It’s too early to say if Dangdang is back on the road to profitability, but if it can sustain this latest trend into the current quarter it could actually have a chance of returning to the black by the end of the year. That situation contrasts sharply with Youku, which reported its net loss more than tripled in its latest reporting quarter, even as revenue more than doubled for the period. (results announcement) The cause for the big jump in net loss appears to be ballooning costs, with operating costs up 140 percent while administrative expenses tripled. Rapidly rising costs isn’t necessarily a bad thing for a company at Youku’s stage of development, but only if that rate of increase is roughly comparable to the revenue growth rate. Ideally, costs should grow more slowly than revenue, showing a company is achieving better margins as it gains bigger scale. But in this case the opposite seems to be true for Youku, with costs growing much more rapidly than revenue. Further clouding the issue, Youku forecast revenue in the current quarter would only rise 90-100 percent, a slowdown from the 111 percent growth rate in the first quarter. Investors also punished Youku stock, which fell 10 percent before the results came out though its shares rebounded slightly in after-hours trading. Youku’s problems are only likely to grow as it prepares to merge with rival Tudou (Nasdaq: TUDO), which will bring together 2 very different corporate cultures. All that said, if I were an investor in these companies, I would say the outlook definitely looks much brighter for Dangdang than Youku over the next 12 months.
Bottom line: Dangdang could return to the profit column by the end of this year as e-commerce competition eases, while Youku may have to wait a year or more for its first profits.
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◙ Rumored Tie-Up to Challenge Youku-Tudou 腾讯、搜狐和百度或结盟 挑战优酷-土豆联姻
Despite a dismal climate for US-listed Chinese stocks, online entertainment specialist Shanda appears to be moving ahead with a long-delayed IPO for its Cloudary online literature unit by attempting to wow investors with something they haven’t seen in a while: a profit. If Cloudary does indeed make it to market, it would become only the second Chinese firm to make a public listing in New York this year, as US investors have largely shunned Chinese stocks following a series of accounting scandals last year. The only company to make an offering so far this year has been a money-losing online discount retailer named Vipshop (NYSE: VIPS), whose March IPO was a resounding flop. (
You have to admire the dogged determination of Sogou, the online search unit of web portal Sohu.com (Nasdaq: SOHU) that, after nearly a decade in business is still just a bit player in its space. Despite its lack of progress, Sogou is now telling the world about its latest strategy to steal market share from Baidu (Nasdaq: BIDU), the China Internet search giant which controls more than 70 percent of the market. (
I’ve saved the most interesting tidbit from the China Internet space for my last posting today, which comes in the form of a report that 3 Internet leaders are preparing to pool their online video businesses in a bid to challenge the industry titan created by the recent merger of Youku (NYSE: YOKU) and Tudou (Nasdaq: TUDO), the sector’s top 2 players. The report cites an unnamed industry source saying that Tencent (HKEx: 700), Sohu (Nasdaq: SOHU) and Baidu’s (Nasdaq: BIDU) Qiyi will announce the deal this week, possibly as early as Wednesday, creating a second major platform that would act as a single buyer of copyrighted content such as popular movies and TV shows. (
China may finally be opening up its animation market to foreign investment, with the latest word that none other than Disney (NYSE: DIS), arguably the world’s most famous brand in the field, is in talks with Internet leader Tencent (HKEx: 700) for a tie-up in the lucrative but largely undeveloped space. The media reports are rather vague, saying only that Tencent, China’s largest Internet company, is “communicating” with Disney about a potential animation development tie-up. (
After an initial bout of “irrational exuberance” in response to the merger announcement between leading online video sites Youku (NYSE: YOKU) and Tudou (Nasdaq: TUDO) earlier this week, investors are waking up to the reality that this new combined company is indeed still just a small potato, and potentially a costly and turbulent one too. The latest comments from Tudou — whose investors will get a hefty 160 percent premium for their stock — are hardly reassuring, and could hint at the turmoil ahead for these 2 companies with very different corporate cultures. Investors who bid up Youku stock 27 percent the day after the initial announcement seemed to be waking up to the new reality on Wednesday, when Youku stock fell 8 percent. That said, its shares are still well ahead of their $25 price just before the merger was announced, closing on Wednesday at $28.79. This marriage will face a number of major obstacles, including a slowing ad market that could compound both companies’ drives to become profitable. But perhaps one of the biggest challenges will be combining these 2 very different corporate cultures. Whereas Youku is much more corporate in its style under the leadership of CEO Victor Koo, Tudou is much more entrepreneurial under the leadership of outspoken founder Gary Wang. The companies didn’t say how much of a role, if any, Wang will play at the new company. But I suspect he may try to stay at the company and run Tudou as his own fiefdom, which could cause problems over the longer term. His latest comments seem to point in that direction, with Wang being quoted in the Chinese media as saying there will be no layoffs at Tudou after the merger and that, in fact, all employees will even get pay raises. (
