Following a rough week for IPOs, Tudou is the only deal scheduled to price this week as the IPO market enters its seasonal slowdown in late August. One of China's two leading online video websites, Tudou.com enables its users to watch, upload, rate, comment on and recommend mostly user-generated online video clips. Since launching in 2005, Tudou has built up a massive user base that now covers more than 40% of China's Internet population. The company has filed to raise $174 million in its IPO by offering 6 million ADSs (7% insider) at a price range of $28 to $30; at the proposed midpoint, it would command a market value of $867 million. Tudou intends to price on Tuesday after the market close and list on the NASDAQ on Wednesday under the ticker symbol TUDO. Credit Suisse and Deutsche Bank Securities are the lead managers on the deal.
Tudou's users are able to choose from an impressive library of over 48.2 million clips, which are mostly user-generated, though some are professionally licensed or developed in-house. The company incentivizes users to create content by offering monetary rewards and holding signature industry events such as the Tudou Video Festival. Tudou has also obtained licenses for 440 TV series, 400 movies and 130 variety shows from over 40 third-party premium content licensors. Its licensed content accounts for 55% of traffic, with user-generated content representing 45%.
Tudou generates revenue by charging advertising fees and served 378 advertising customers in the 1H11. It also recently began offering mobile video services through revenue-sharing agreements with China Mobile. For the three months ended June 30, 2011, revenue doubled to $18 million as it attracted new advertisers, increased average revenue per existing advertiser and grew its new mobile business. It booked $5 million in gross profit as it gained leverage on bandwidth costs, while operating losses narrowed only modestly due to higher administrative expenses.
With exposure to China's large and fast-growing online video advertising market, which is forecasted to grow 63% annually to reach nearly $1.5 billion by 2013, Tudou has more than tripled revenue in each of the past two years. That said, Tudou is in the early stages of scaling its business and will likely remain unprofitable for the next few years. It has also lost share to market leader Youku.com (NYSE:YOKU) in the last six months, during which it grew its top line by 118% as compared with 172% for Youku.
Going forward, gross margins are likely to turn down as Tudou invests more heavily in premium licensed content and bandwidth to fend off intensifying competition from Youku, Baidu (NASDAQ:BIDU), Sohu (NASDAQ:SOHU) and others in China's saturated online video market. Despite its impressive growth profile, it is unclear how investors will react to this IPO given these concerns and the current market environment.
Of note, though Youku's stock has struggled in the past few weeks, it is still currently trading at more than double its offer price. Youku surged 161% in its December 2010 debut, making it the best first-day performer since Baidu.com in 2005 (+354%).