Monday, May 26, 2014

YOD: Still nothing to see here.

On Thursday, it was reported that Xeuchu He, a Chinese billionaire Picked up 2.2 million shares or so.  It was also reported that Shane Mcmahon picked up 24,600 shares.  I had no position when this happened but the market certainly liked the news and YOD closed up over 50% on huge volume.  

The question I must ask is whether, does these events change my analysis and conclusion that YOD is fundamentally flawed.  I conclude that they do not and have re-entered my first tranche of my short.

  • The Shane McMahon Buy
As I discussed in the context of my review of YOD's earnings this stock is being heavily diluted and sold by insiders.  1.3 Million shares were added so far this year.  

Now Shane McMahon files an form F  announcing that Shane McMahon also bought 24,600.  shares on behalf of a trust Shane B. McMahon Trust u/a/ Vincent K. McMahon Irrev. Trust dtd. 12/23/2008, 24.  How is buy consistent with my conclusion that insiders are dumping?

 In filling out this form, McMahon had to list the number of securities owned following the transaction.  He lists 2,300,000

Now let's compare that to what McMahon declared in the February 6, 2014 Form S3:

C Media Limited (3) 9,142,8558,209,522933,333*
Shane McMahon(4) 5,782,9852,829,0982,953,88718.0%

The third column lists his shares following C-Media. 2.9 Million. In other words, he's cut his stake by 600K in just a few months. Heck, if you consider the shares he sold to C-Media (and I understand why he did as this company was out of cash and had received a delisting notice last August) He's cut his position by 40% in less than 6 months. 

 Second, I expect more selling from McMahon. I've noted that Shane McMahon has to exercise
 his warrants or he loses the right to do so and would make 4% interest. I base this conclusion on repeated statements in various filings, most recently the 10Q:

"Effective on January 31, 2014, the Company and Mr. McMahon entered into Amendment No. 4 to the Note pursuant to which the Note will be, at Mr. McMahon’s option, payable on demand or convertible on demand into shares of Series E Preferred Stock of the Company (the “Series E Preferred Stock”) at a conversion price of $1.75, until December 31, 2014. " 

The news that most people have been excited about is 2,285,715 share purchase by He. He purchased these shares from C-Media, which had recently purchased the shares from various insiders including McMahon.  The terms of the deal were not released.

So is this a game changer? Or is YOD still the same company losing 89 Million since it engineered a reverse merger with a public shell company, Alpha Nutra (PINKSHEETSAPNAand became China Broadband in January 2007 (China Broadband changed its name to YOU on Demand in 2011.  (Don't you love "Chinese companies with American names) . YOD made  $138k in revenues last quarter.

I am assuming that He purchased the shares at a discount. I base this assumption on the fact that most PIPE deals are discounted (sometimes significant) and also on the short period that C-Media has held their shares.Some have suggested that C-Media sold their shares after buying from the insiders to lock in He's experience and connections.  I admit that initially thought this scenario was plausible but after more research I do not believe that this was the reason C-Media sold to He for several reasons.

First, Xeuchu He's fortune was made in mining. At Honbridge Holdings. Nothing in their organization chart would suggest a background, connections, or necessary experience in technology or video on demand, or even in China for that matter. He deals primarily with South American companies.

To that end, I began researching the link between Xeuchu He and Xeusong Song (the head of C-Media).  The two had been associated on numerous "blank check" companies also known as Special Purpose Acquisition Companies ("SPACS")This is a process where He and Song, among other ("Jin Shi" a YOD board member) would create shell companies or engage in various reverse mergers.

SPACS were big in the 1980s but were abused by insiders looking to make a fast buck through the promotion of the stock. The SEC then began placing more restrictions including the amount of money that must be raised and price of offering, etc.. , Surprise the SPAC is back in China. In any event, Song seems to have the experience and connections for all of these deals and does not need to buy He's experience. For all we know the shares could be a thank you gift from Song to He for investing in the other SPACS.

Point being, I don't expect He to play a major role as an investor. He's not on the board, not part of management, doesn't have the authority to bind the company and does not have the background in the industry. And let's face 2.3 million shares of a $3 stock is not a whole lot of money to a billionaire to get actively involved.  By contrast he has his fortune tied up in Honbridge and his investors would probably not be pleased if he was avoiding his day job to work on a penny stock project.

Regardless of He's involvement, (even if he took the CEO) is that I don't think YOD can compete against multi-billion dollar companies on the same content. 

  • YOD still offers nothing that Chinese Internet Giants do not already provide.
YOD is going in to mobile now that its VOD cable has bombed. It is currently "pre-loaded" on one phone.  But guess what?  The mobile movie  market is already crowded with Billion Dollar Competitors:

Yoku yoku mobile app
Tenecent's QQ

YOKU just missed earnings and got hit bad after guiding lower.  The reason more competition and increasing costs of content.  I thought the analyst's comments were very telling as they echo my sentiments on YOD:
“They are in a dilemma,” Echo He, an analyst at Maxim Group LLC who has a sell rating on Youku, said in a phone interview. “If they spend money on content, they cannot make profit. If they don’t spend, there won’t be viewers and ads. They are in a tough spot.”
Similar comments followed Tenecent's earning discussion on video.  So the big boys are all seeing compressed margins, the need to spend more on licensing and advertising to attract viewers. I don't see any possibility that YOD would be successful in such an arms race when it does not have the content, the infrastructure, or the money to advertise.  And the 138k in revenue demonstrate that it has not been successful.

In conclusion, the YOD is still the same company with contracting revenue growth.   It's my opinion that day traders took the news and ran with it. Momentum always dries up without earnings. And as YOKU demonstrates revenue growth will become increasingly difficult in this sector.

RISKING 1.5 R% on this one. 

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