The spam machines continue to grind away, churning out a succession of email stock promotions. Regulators are well-aware of this blight, as evidenced by the SEC’s recent announcement of “Operation Spamalot.” See, Spamalot – SEC Style. Yet, despite the Commission’s heartfelt intention to protect investors from spam emails touting worthless companies, the messages continue to arrive.
And promoters continue to strike familiar chords, seeking to lure investors by comparing obscure penny stocks to well-established, widely recognized, successful companies. Take, for example, China YouTV Corp. ((OTCBB: CYTV), a relative newcomer to the over-the-counter market – at least in its present incarnation. Over the past week, promoters have dispatched a series of emails urging investors to jump aboard this unknown entity.
The hook? China YouTV has designs on becoming the You Tube of China. Until earlier this month, however, the Company was known as Admax Resources, Inc., and video sharing did not seem to be on its horizon. Admax had previously announced plans to explore for gold on a single claim in British Columbia, Canada. Admittedly, a You Tube clone would be sexier and potentially more profitable.
So far the Company has nothing but aspirations, a recently announced joint venture agreement with a Chinese company, and a knack for latching on to the latest hot concepts – but the promoters have unabashedly been circulating their hype. The first spam email we saw, on March 15th, implored investors to “Get in on the You Tube of China now.” The promoter cited You Tube’s success and partnership with Google – claiming that China YouTV’s Chinese partner was “well on the way down the same road.”
The incessant promotion has had considerable effect. On March 14, 2007, before the touts stirred up a buzz, China YouTV stock opened at $0.55 a share. 32,000 shares traded that day. The following day, as emails began to circulate, China YouTV shares hit a high of $1.00, as more than 100,000 shares changed hands. Trading volumes and share prices have continued to increase – evidently keeping pace with the spam. On March 21st over 2.3 million shares were traded, and the share price reached $2.50 before closing at $2.20. On March 22nd, as the hype continued, share prices peaked at $2.85 (before closing at $2.25) as almost 4 million shares changed hands.
Then reality interceded. Trading volume remained high – over 2.7 million shares – but China YouTV closed at $1.49, down $0.76 cents from the previous day. The slide has continued and trading has slackened. 1.25 million shares traded on March 26th as share prices dropped to $1.35. By March 28th, the share price had slipped to $1.14; fewer than 500,000 shares were traded. The stock price bounced slightly, to $1.25 a share on March 29th – but trading had receded dramatically, to approximately $53,000 share.
Was all the noise simply an opportunity to move stock, or is there substance behind the shilling?
TV Or Not TV?
If you are about to reinvent a company, why not model it after the hottest concept around? These days that would mean You Tube. Since bursting onto the scene in February 2005, You Tube has established itself as the destination of choice for anyone, anywhere round the world, who wishes to share videos over the Internet. In November 2006, Google acquired You Tube for $2.65 billion – further evidence that video sharing had achieved critical credibility and was here to stay.
You Tube’s stellar success certainly did not escape the notice of either ordinary web users or savvy web developers. Competitors have been trying to grab a share of the market, but so far, You Tube, backed by the power of Google, has dominated the video-sharing field
China YouTV claims it is focused on developing the market for video sharing in China, whose population offers the world’s largest potential market – although not necessarily one that can be easily tapped.
What has China YouTV been saying about its nascent operation? On March 14, 2007, the Company announced that it was about to enter into a Joint Venture with Beijing HuaJu Netmedia Technology Co. Ltd., which it described as a “Chinese Internet Video Sharing Company.” According to China YouTV, Hua Ju presently has 100,000 members and over one million original videos. Two days later, the Company issued a second press release saying it had entered into a definitive agreement for the joint venture.
The Company has made no secret of its intention to latch onto the success of You Tube. “We want to position ourselves as a leading video viewing and social networking site company in China, just like You Tube in the world," according to China YouTV’s President, Zhenyong Gao.
Still, the Company is hedging its bets. China YouTV says it will continue to explore for mineral properties in British Columbia.
Money, however, could present an immediate and ongoing problem for the new venturers. China YouTV, which will own 51% of the joint venture and appoint a majority on its Board off Directors, agreed to contribute approximately $63,000 to the venture. In addition, China YouTV is obligated to provide all required working capital.
The Company has not indicated how much money will be needed to move forward – but financing is likely to be a priority. At last report, China YouTV did not have sufficient funds on hand to meet either the initial obligation or to pay ongoing expenses. As of December 31, 2006, the Company had approximately $18,000 in cash and no revenues.
The appeal of the video sharing business to China YouTV is evident– however remote You Tube-like success may be. But why would HuaJu Network – assuming it is as successful and established as the Company suggests - settle for a minority interest in a joint venture with an unsuccessful Canadian mining company? Money always talks – in one form or another. China YouTV has agreed to issue 20 million shares of its common stock to HuaJu Network or its designees. Those shares, which were valued at approximately $10 million on March 16th, were worth about $44 million by the close of business on March 21st.
The shares, which were not registered, were sold under Regulation S, which permits U.S. public companies to sell unregistered stock overseas to non- U.S. residents. The individuals who acquire those shares – in this case HuaJu or its assignees – cannot sell the stock in the United States for one year, but that hardly creates a meaningful obstacle. The shares can be resold overseas immediately – even though they have not been registered.
The Company recently stated that the plan for issuing these shares – and evidently the identities of the recipients – has yet to be finalized.
The Regulation S sale almost doubled the number of shares outstanding – from 23.8 million shares to 43.8 million shares, although the Company insisted that this would not result in a change of control at China YouTV. Strictly speaking that may be true, but suddenly a new group of shareholders is holding close to 50% of the issued stock.
Boo Hoo?
The Company maintains that control has not shifted, but a new group of shareholders now holds almost half of the outstanding shares and the Company appears to be dependent on its business partner, HuaJu.
On March 19, 2007, the Company issued a press release announcing the debut of its English language website. The new site, which links to the existing Chinese language video-sharing site, provides an overview on the Company, including profiles of the HuaJu management team. According to the website, CnBoo. com (the existing Chinese video sharing platform)
provides hundreds of fresh short movies each day, attracting up to 1.2 million members worldwide. Everyday, about 500,000 members browse their favorite video clips, upload self-created movies, or set up their own video blog space.
CnBoo.com has more than 80 employees and more than 130 strategic partners. Based upon the solid understanding of the new network media, CnBoo.com has been extending its cooperation to all kinds of businesses. Beside the strategic partnership with China’s largest home electronics appliance store, Gome, it also has reached out to television industry, working on the cooperation with CCTV, BTV and other well-founded broadcasting stations.
Is CNBoo positioned to rival You Tube – at least in China? China YouTV cites statistics – like 1.2 members worldwide – but does not indicate how that translates into profits. The Company does not explain what “membership” entails, or how the website has – or will – generate revenues.
And while the website certainly describes the foundation for, at least, a modestly successful You Tube clone, thoughtful investors may be wondering why CnBoo would agree to accept a minority position in a joint video venture with a tiny Canadian mining company that has $18,000 in the bank and no revenues.
Certainly, the Company will be dependent upon the expertise and experience of its minority partner, as evidenced by the recent appointment of James Wei as a Director of China YouTV. Mr. Wei, who is the CEO and Chairman of the Board of HuaJu, has been involved with Internet companies since at least 1996. The Company’s existing, Canada-based officers and directors, Zhenyong Gao (CEO and director) and David W. Ze (Treasurer, Secretary and director) do not appear to possess any similar background.
And then there is this. On March 23rd the Company issued a press release stating that HuaJu had partnered with China’s largest electrical appliance chain to market its video-sharing service. Three days later the Company announced that HuaJu had arranged to launch an online version of an existing Chinese television program.
U.S. investors can only speculate as to the value of HuaJu's relationship with an appliance vendor or the viability of its plans for online television programming. Few observers of the U.S. securities markets are fully familiar with the nuances of Chinese business, politics and economics - and fewer still have the time or inclination to focus on the fate of microcap companies that enter into joint ventures with obscure Chinese entities.
But assuming, for just a moment, that HuaJu has developed something of value - with its true worth yet to be determined - one question rings even more loudly. Why partner with China YouTV - whose only connection to the Internet and video-sharing lies in its carefully chosen name?
The promoters have ignored that concern - as might be expected. Instead they have issued a daily barrage of hype, tracking the Company's shares as they ascended. Thus, the emails broadcast the Company's "Definitive Agreement For Online Video in China," and called China YouTV a "major provider of online media," as share prices reached $1.08 - "up 40%" as the touts proclaimed.
The hyperbole continued. A day later the emails declared that the Company had gained "control in joint venture" - never pausing to ask why the more established HuaJu would cede control to an upstart.
And so it has continued, with the promoters reporting the increased volume and share prices, and predicting further gains for lucky investors who jumped aboard. But never detailing the Company's financial condition or explaining the circumstances of its fortuitous connection with an existing Chinese video-sharing business.
Each of the recent press releases would seem to lend credence to the belief that - at the least - HuaJu has developed a fledgling video-sharing business.
These revelations may support the notion that HuaJu is attempting to emulate You Tube – but they rdo not answer the most important lingering question – what does HuaJu expect to gain from its relationship with China YouTV?
What is in it for HuaJu?
The answer may be as simple as 20 million marketable shares.
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