Day Hao Capital (T.H) released research report today

The following is a summary of the contents of the report:

The mobile commercialization process is expected to start in the fourth quarter;

Youku will report its third-quarter earnings in 2013 after the close of the U.S. stock market in the eastern time of November 14 (Beijing time November 15), with earnings calls at 20 o ' 9 o'clock in the eastern United States (Beijing time 15th).

According to our own data, we expect Youku's third-quarter revenue to be in line with expectations, but operating margins (not in accordance with US GAAP) will be better than expected, mainly because of the increased efficiency of content management measures. But we believe that Youku's outlook for the last quarter is likely to be less than Wall Street analysts ' average expectations, since the distribution of advertising budgets from the FMCG sector may be weaker.

Despite the recent volatility, we believe that the increase in mobile traffic and the adoption rate on the mobile side is conducive to the future growth of Youku potatoes. As a result, we maintain a "buy" rating on Youku's stock and may adjust its performance forecasts and valuations after its earnings.

-third-quarter revenues are expected to be at least as expected, mainly due to the steady growth in content distribution and content viewing volume:

We believe that Youku's third-quarter revenues will be at least as high as Wall Street analysts ' average forecast of $139.42 million (13.6%) and our expected $138.7 million trillion, underpinned by steady growth in the volume and content of new content.

According to our own data, the total number of cool potatoes active in the third quarter could be 22,791, up from 20,340 in the second quarter and 12% per cent in the chain. The newly released hit TV series in the quarter could be 49, up from 47 in the second quarter. With these metrics in view, we believe that the revenue from Youku potatoes will be at least as high as analysts expect.

-profit margins may rise, driven by increased management efficiency of exclusive content and Home-grown content:

We believe that the management measures for the exclusive content and initiative content of Youku potatoes are beneficial to profitability.

According to our own data, the exclusive license for Youku in the third quarter was 11, less than 14 in the second quarter, but the number of views on the content could increase to 1.85 billion, up from 1.275 billion times in the previous quarter to 45.1%. In addition, the Youku potato "cool all entertainment" and "Xiao said" and other independent creative content in the audience's tolerance continues to rise.

The rate of return on investment in Home-grown content may be higher in comparison with exclusive licensing, which helps to boost profitability. Based on this, we expect Youku's third-quarter operating profit margin (not in accordance with US general accounting standards) to be better than analysts ' average expectations.

-The steady growth of mobile application downloads may bring more upside potential for future growth:

We believe that the commercialization of mobile business will start in the quarter, because the adoption rate of Youku's mobile applications is growing rapidly. We note that the mobile app downloads of Youku potatoes continue to grow during the quarter, which is a good factor for the increase in total viewing times.

According to our own data, as of October 25, the total number of cool potato mobile applications downloaded 581 million times, compared to the 560 million times as of September 30 increased. We believe that the growth of mobile application downloads and the possible deployment of 4G networks in the near future will continue to push up mobile traffic.

-The fourth-quarter performance outlook may be less than the analyst's average expectation:

We believe that Youku's outlook for fourth-quarter revenues may be in line with analysts ' average forecast of $152.1 million trillion, but it is unlikely to meet that expectation.

From the earnings of our peers, we believe that the distribution of advertising budgets from the FMCG sector may be weaker than normal seasonal levels; advertising budget allocations from businesses and the financial sector may be stronger than normal seasonal levels. For Youku potatoes, FMCG is a key sector, while autos and finance are not.

Valuation：

We maintain a "buy" rating on Youku's stock and may adjust its performance forecasts and valuations after its earnings.

Youku is one of the leading online video providers in the Chinese market, and we believe that Baidu (Nasdaq:bidu) (rated "holding"), Sina (Nasdaq:sina) (rated "buy"), Qihoo 360 (Nyse:qihu) (rated "buy") and Tencent (0700). HK, not rated) and other leading internet media companies can be used to compare with Youku potatoes.

Historically, these companies have an average expected market rate of 6.5 times times. Based on this, we set the target price of Youku to $28, which is based on a 6.5 times-fold market rate and a forecast of 710.1 million dollars in the 2014-year Youku potato revenue.

Risk：

1 The growth rate of China's macro economy slows down;

2 online video providers are subject to limited advertising capacity;

3 online video providers also face the possibility that advertising budgets could be diluted by other new media, such as mobile internet advertising, social networking sites and other new advertising models;

4 the rapid reduction of PC viewing time.