The number of online video viewers in China is gradually increasing as the government limits the number of popular shows on TV in favor of official programs. This trend bodes well for online video platforms such as Youku (YOKU), iQiyi, owned by Baidu (BIDU), and Sohu (SOHU). Beyond the online video platforms, rising viewership also benefits data center operators, such as 21Vianet (VNET).
PC Is The Popular Channel For Online Video
As of June 2012, China has over 350 million online video viewers, or 40 million more than the population of the United States. Despite its large size, the Chinese online video population only represents 68% of the internet population and 26% of the overall population, indicating a significant runway for growth.
In terms of video consumption, more than 40% of online viewers spend at least 20 hours per week on PC, compared with only 21% of these same viewers who spend at least 20 hours per week on TV, according to Data Center of China Internet.
High concentration of viewership on PC is the primary driver China's massive online video advertising market. According to DCCI, online video ad spend is expected to double this year to $964 million from $523.2 million in 2011.
Traditional video channels such as Youku, iQiyi, and Sohu will all benefit from this secular trend. In addition, the decrease in content cost should lead to margin expansion in all the major online video platforms.
Looking Beyond The Online Video Players
While the online video players are the most obvious choices for investors to capitalize on this secular trend, investing in internet infrastructure is also attractive in that such company generates reoccurring revenue and operates in an industry with high barriers to entry.
21Vianet is my top pick in this space given, that the company is the largest independent datacenter operator in China, and its top clients include Youku, Taobao, and 360Buy. The company's topline is expected to grow by 50% this year while trading at half of its North American peers. In addition, the company is focusing on expanding its self-built datacenters and cabinets, which will continue to bode well for the company's margins. I note that over the past year, VNET's EBITDA margin has improved to 15.7% in 1Q12 from 11.5% in 1Q11.
I currently rate 21Vianet "Overweight," with a $15 price target on the company. For a deeper analysis, please refer to my December 28th, 2011 initiation note titled "21Vianet: Banking On China's Internet Infrastructure."
The company is reporting Q2 results on August 16th. Please stay tuned for an earnings preview note in the following week.