In one of China’s biggest comedy films of 2014, two hapless musicians decide to pursue their dream career in New York, but end up ensnared in a war between triads.
The movie Old Boys: The Way of the Dragon, starred a singing duo called the Chopsticks Brothers. A mini-film produced by the two men was picked up by talent spotters at internet video firm Youku Tudou, which subsequently financed the big screen version.
But in an unfortunate case of life imitating art, Youku Tudou – created by the merger of two major Chinese video portals – is now facing its own set of problems in New York. A group of investors has just accused the US-listed company of providing inaccurate and misleading financial information. Several law firms filed class action lawsuits at the end of March.
The move followed the release of Youku’s fourth quarter results, which included the revelation that the US SEC is investigating its accounts. Youku’s share price immediately lurched south, continuing a descent that has seen it lose half its value in the space of a year.
Company executives were quick to quell the negative speculation, no doubt conscious of past scandals at US-listed Chinese firms. In an internal email published by China Business Observer, Youku’s president Liu Dele told employees that the investigation is routine and that any changes required by the regulator are likely to have a negligible impact.
The SEC probe is said to concentrate on questions relating to revenue recognition for barter transactions, as well as how Youku values its licenced content. But over the past month, Youku has also been on the receiving end of some of the biggest drop in earnings forecasts of any of the major Chinese internet players. Having believed that Youku might soon turn a profit, many analysts are now realising that the company finds itself caught in the classic bind of having to devote increasingly greater sums of cash to sustain and expand its market share.
Profitability, on the other hand, continues to look elusive.
Youku faces a number of formidable competitors, not least Tencent, China’s largest online content provider. However, as 21CN Business Herald argues, at least it is burning its cash in a more rational manner than before. Rather than relying on third-party material, it has been investing in its own content and is planning to double the outlay on proprietary programming to $98 million this year. Talent spotters will stay on the look-out for creative talents such as the Chopsticks Brothers, tempting them with the prospect of multi-year contracts and co-production deals.
Youku’s tie-up with Alibaba is also expected to yield dividends in the future. The e-commerce giant owns 18.5% of the video site and some believe it may eventually try to buy Youku out. In the meantime, the partners are utilising Alibaba’s big data analytics to give advertisers more measurable information on Youku’s users, which should in turn spur additional advertising.
Ad spend currently accounts for 87% of Youku’s revenue, but pay-per-view and subscriber revenues are rising and could finally tip the company into profit. While 2014 net losses of Rmb228 million ($37 million) were higher than analyst expectations, revenues did beat consensus forecasts.
Youku Tudou will also be heartened by the fact that China surpassed the US as the world’s biggest box office in February, with takings of Rmb4 billion. During the fourth quarter of 2014, takings grew 41%, at Youku’s filmmaking arm, HeYi Pictures, which is co-producing 12 films over the course of the year.
There was better news for Youku investors this week too, when its shares rose the most in three years, soaring more than 14% in New York. But analysts cautioned that money was moving into Chinese stocks in Hong Kong and New York in general, because prices on Chinese bourses have climbed so aggressively.
And if Old Boys is a metaphor for Youku’s ambitions, it doesn’t bode too well either. The Chopstick Brothers end the movie with their showbiz dreams unfulfilled. They disband, leave New York and return to China – claiming to be happy to have tried and failed.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.