Eyeing a Youku Position

 | Jul 03, 2012 | 9:30 AM EDT
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Chinese online video site Youku (YOKU) was hit by two pieces of news yesterday that yanked down the stock by 7%.

First, they announced that CFO Dele Liu will be promoted to president, which is in the process of merging with its main rival Tudou (TUDO). Liu's replacement is Michael Xu, who is relatively new to the company (arriving last September) and previously worked at Levono, Alibaba Group and Cisco (CSCO).

Any time there is a change in players of a Chinese company in the finance department it attracts investor scrutiny. But in this case Liu is getting a promotion, not leaving the company under a cloud. Xu's background is also strong, so concerns about this announcement seem unwarranted.

The second, more-damaging piece of news had to do with a new study of the Chinese online video market share in Q1. EnfoDesk's report revealed that the combination of Youku and Tudou saw their share drop to 32..4% in the first quarter of this year from 34.5% in the year-ago period. Growth in the rest of the market came from Sohu's (SOHU) video offering, Tenceent and PPS.tv. Other video providers, including the one from Sina (SINA), saw their share drop as well.

In these early stages of growth in this online video market in China, this one data point also has to be taken with a grain of salt. Youku and Tudou are still the top two players in this market by far. Their combination is going to allow for a lot of cost savings and unified ad selling across their properties. Although other middle-sized players are nibbling away at a few points of share now, they are still far back from these leaders in the market. And we see the smaller players beginning to fade out.

Youku and Tudou are trying to position themselves as the dominant players to grab the lion's share of the growth in the market when it starts to happen over the next two years and they are still in the driver's seat to do that.

I'm looking to initiate a position in Youku over the next few weeks, especially if it drops into the teens.

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