Despite rapid growth in China’s Internet market over the years, Chinese online media company, Sina (NASDAQ:SINA), has seen its stock decline from a high of $133 in April 2011 to the current level of around $46. Declining market share, increasing operating expenses and the slow progress in capitalizing its micro blogging website Weibo, are some of the factors that have eroded the stock value. Additionally, the slowdown in the growth rate of Chinese companies on account of macro headwinds and the decline in Chinese web stocks on delisting concerns in the U.S. have further pulled down Sina’s stock price in the last few months.
Except for a temporary decline in 2009, Sina’s top line has historically registered double digit growth. Strong traffic growth across its major product lines, including Weibo, PC Internet portal and mobile Internet portal continue to fuel Sina’s growth rate.
Our price estimate of $67.51 for Sina places our valuation at a premium of almost 50% over the current market price. While we are wary of factors that could impact Sina’s short-term growth, we believe that the company continues to have strong fundamentals that would help sustain growth in the long run. In this article we list down certain key factors that reiterate our belief in the same.
Chinese Advertising Market Offers Rapid Growth Opportunity
Due to macro headwinds the overall Chinese display ad market registered a decline in the first two quarters of 2012. However, as evident from the strong growth in Sina’s advertising revenue in Q3 2012, the Chinese advertising market registered positive growth in the third quarter. Sina derives close to 65% of its valuation from display ads as per our estimate. Its advertising revenue marked a 19% y-o-y and 17% q-o-q increase last quarter, backed by strong growth in automobiles, FMCG, IT and telecommunication.
However, Sina claims to have witnessed weaker conditions since September 2012 as companies have become cautious about their advertising spending in light of global economic worries. Additionally, the lack of any significant media events this quarter might slow down its advertising revenue growth rate. Nevertheless, China remains one of the fastest growing economies in the world, and we believe that with increasing Internet penetration, the online advertising market in the country offers immense growth opportunities.
Though the total number of Internet users in China (513 million) are double compared to the U.S. (245 million), the former still offers a higher opportunity for growth for Internet companies. As per Internet World Stats, the Internet penetration in China is close to 38%, while that in U.S. is over 78%. China is expected to witness an increase in its total number of Internet users in the coming years.
Monetization Of Weibo To Stabilize Sina’s Declining Share In Chinese Ad Market
Sina has lost almost 50% of its market share in the Chinese ad market since 2008, from 14.1% in 2008 to an estimated 7.7% in 2011. Incurring huge investments to develop its micro blogging website, Weibo, Sina expects the same to become a significant revenue contributor for the company. Though the pay offs from the monetization of Weibo are not likely to be very prominent this year, we expect Weibo to be a major factor driving growth in Sina’s online display revenues.
Analogous to a hybrid of Twitter and Facebook, Weibo has been increasingly gaining popularity among users in China, and is estimated to be used by 30% of Internet users in the country by 2013.  Weibo continues to attract an expanding user base and register higher user activity. In Q3 2012, the total number of registered users on Weibo increased to 424 million, a 15.2% increase from 368 million users at the end of June 2012. Additionally, the average number of daily active users increased by 16% in Q3 2012, reaching 42.3 million.
Sina has recently taken a number of steps to accelerate its monetization efforts for Weibo. It launched the Weibo display advertising system for brand advertising in April this year. By incorporating a social and Internet graphs recommendation engine, the new system allows relevant advertising to be more targeted, thereby increasing its relevance.
Additionally, Sina started testing the advertising system in a news feed, which targets small and medium-size enterprises, in Q3 2012. This advertising system allows any user to place sponsored feed at the top of the news feed for its followers. The company intends to launch the complete promoted feed advertising system by the end of this quarter.
Sina has also stepped up its efforts to develop its mobile platform, which we feel would add another medium to effectively monetize Weibo. (Read: Sina Enhances Its Mobile Portfolio By Partnering With AutoNavi)
Advertising revenues from Weibo as a proportion of Sina’s total advertising revenues increased to 16% in Q3 2012, a significant jump from the 10% in Q2 2012. We expect the proportion to be even higher in the coming quarters.
Increasing Operating Expenses Is A Short Term Trend
Sina’s operating expenses, specifically sales & marketing and research expenses, were at an all-time high in 2011 which led to a significant decline in gross margins. Much of the increase can be linked to its growing investment in Weibo. Sina spent around $110 to $200 million in 2011 for its Weibo platform and is expected to invest another $160 million in 2012. 
The continuous increase in Sina’s marketing and product development cost has put a downward pressure on its bottom line. However, going forward we expect Sina to reduce its operating expenses and forecast the gross margins to stabilize in the future. Additionally, we believe that as the current investments in developing Weibo start paying off, Sina could realize higher revenues at a similar cost base, which could help stabilize margins.
However, if Sina fails to control its expenses and continues to spend at the current rate, its cost burden will weigh on its cash flows and impact its value significantly.
- China’s Weibo vs US’s Twitter: And the Winner Is?, Forbes, May 17, 2011
- Sina watches 70 pct of market value evaporate over a year, Morning Whistle, December 7, 2012
Disclosure: No positions