(YOKU): New Ban on Advertising During TV Dramas a Major Positive (NASDAQ:YOKU) and other Chinese online-video stocks could be on fire today after news the State Administration of Radio, Film and Television (SARFT) is planning to request that all advertisements aired during TV dramas should be removed nationwide in 2012. The losses caused by this new policy could be in excess of Rmb20bn.

We have couple of firms out with comments:

– Mirae Asset, a HK based brokerage sees this as a major positive to online video companies, including YOKU, TUDO, SOHU and Baidu Qiyi. The firm estimates at least 15-20% of the lost Rmb20bn advertisement fees will flow to online video, with the remaining flowing to outdoor media.

According to iResearch, online video advertisements had a revenue run rate of Rmb1.3bn in 3Q11. In particular:

– While SARFT did not specifically ask to remove advertisements before and after the TV drama (pre-roll and postroll), these advertisements are not as effective as the ones during (mid-roll) the drama. Also, adding pre-roll or postroll inventory would dilute the existing advertisers’ right and reduce their effectiveness. Assistant director of Jiangsu Satellite TV has already confirmed that the mid-roll will not be shifted to pre-roll and post-roll.They believe other TV stations will follow Jiangsu;

– Coupled with SARFT’s earlier regulation for major satellite TV stations to limit the amount of entertainment programming that can be shown in 2012, the cancelled advertisements could find it difficult to shift to other

– Online video is the closest alternative to TV, while outdoor media could also benefit;

– Advertisers are currently planning their budgets for next year. The law came at the right time.

YOKU will be the major beneficiary because its market share has gained
Mirae estimates YOKU to get 40-50% of the incremental advertising spending in online video because YOKU’s has enough inventories to digest the advertisers’ demands. Baidu Qiyi has already added mid-roll advertising but YOKU hasn’t, which means it can now sell for a higher price.

YOKU’s aggressive investment strategy will pay off. In October, YOKU’s time spent market share within the top 15 (P2P and web combined) rose 2.3ppt to 17.3%, the fastest gainer in the month, while SOHU Video, TUDO and Baidu Qiyi lost ground. If only counting web, YOKU’s time market share increased to 34% in October from 29% in September.

In 2012, YOKU has secured 22 exclusive TV dramas. With YOKU’s overall utilization still in the mid 20%’s, the chance for it to further increase revenue growth is high.

YOKU is Mirae’s #3 top pick in China’s Internet sector with a TP of US$31.5.

– Goldman Sachs’ Catherine Leung views these proposed regulations as materially positive for online video in general and Youku (YOKU) in particular.

The proposed regulations coincide with mass adoption of online video, with Youku leading in user traffic and time spent.

The regulations would follow recent SARFT rules issued in late October limiting entertainment content (e.g. variety shows) and imposing some ad controls. For example, Xinhua has reported possible new regulations to further restrict the amount of prime-time entertainment content among satellite TV stations.

Leung reiterates Conviction Buy rating on YOKU.

Notablecalls: If Mirae estimates prove to be correct, the new SARFT rules could more than double China’s online-video opportunity. With YOKU among the top-tier players, this could prove to be very beneficial for them.

Do note however that analyst consensus revenue #’s for 2012 already foresee a 100% growth rate. Nonetheless a material positive, as GSCO notes.

I’m thinking $17.50+, that’s a 10%+ move.

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