The large premium that Youku is paying signals that Youku's current business model is not sustainable in meeting current earnings expectatations. The merger is also subject to shareholder and governmental approvals. There are some risks that this deal may be called off by the government due to monopoly concerns. Still there are various other competitors in the space that are pretty good and backed up by other large internet companies. Sohu, Baidu and Tencent all have their video sites.
Anonymous Xia believes that company fundamentals cannot support current valuation levels for Youku and Tudou in the long term. The two stocks are also overbought in the past 2 days and will likely retreat in the short term. On the other hand, Sohu seems to be slightly undervalued from valuation standpoint, given its strong portal business, strong video business, strong gaming business (Changyou) and strong cash balances. Citron Research today just published an report about Sohu: http://www.citronresearch.com/index.php/2012/03/13/why-sohu-is-the-best-buy-in-the-china-internet-space/
A good trading idea taking advantage of such situation will be:
- Put Youku (YOKU) and Tudou (TUDO)
- Call Sohu (SOHU)
(with option ex-date 1 year to 2 years from now)
Apologize for having a detour from HK Stocks
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