Youku.com (YOKU)

[eastunder]

YOKU: Goldman Says Buy, Profit In 2012.
By Tiernan Ray

Goldman Sachs analyst James Mitchell this morning raised his rating from Neutral to Buy on shares of Youku.com (YOKU), the online service often referred to as the “YouTube of China.”

Mitchell set a $40 price target; the stock today is up $1.17, almost 4%, at $34.05.

Back in mid-January, with the stock trading at $37.48, Mitchell initiated coverage with the suggestion that Youku’s heavy losses — it had a negative 12% net income margin last year — could turn to a 20% or 25% operating profit margin come 2014 as costs fall and the company signs advertisers in China’s highly fragmented video market.

Today, Mitchell writes that “rapid growth in TV and movie viewing online will drive a dramatic expansion in Youku’s revenue and margins, and Youku will evolve into a clear category leader in China media.”

Mitchell thinks the company’s February 28th earnings report will show revenue growth, as advertisers take up the service, and it’s possible Youku could by 2014 catch up with Focus Media Holding Limited (FMCN), which currently has six times the revenue that Youku has, he argues. Focus Media, he writes, has shown that it’s not hard to tap into China’s multi-billion-dollar TV ad market, with revenue for the company rising from just 480 million renminbi in 2005 to 2.2 billion in 2010.

Moreover, Mitchell sees Youku as being similar to prior darlings such as Tencent Holdings and Baidu (BIDU): Both those companies got punished for earnings growth stumbles, but in retrospect, they really established lasting franchises, he writes.

Similarly, Youku is an investment in “business franchises experiencing favorable structural changes and ignoring near-term earnings trends.”

Mitchell sees Youku turning a profit sooner than he’d expected: he raised his revenue view for this year by 11% to 742 million renminbi, while cutting his EPS loss estimate by 19% to 20 cents per share on a non-GAAP basis, and he sees a profit of one penny per share in 2012, on revenue of 1.35 billion renminbi, which would be 14% higher than he’d previously expected.