Sina's Sweet Deal with China Real Estate Information

China Real Estate Information Inc. (CRIC), the Chinese real estate market research leader, floated 18 million IPO shares at $12, the lower end of its proposed price range, this Thursday.

This company combines together CRIC, the real estate information and consulting service unit of E-House (EJ), and LeJu, the housing portal of Sina Corp (SINA), the biggest Internet portal in China. Both units are dominant in their respective markets. They can share a broader customer base when merged and their synergy is quite visible.

What interests me, though, is not the business, about which I am very positive by the way, but how the deal gets structured. The following statements appear in the prospectus:

In April 2008, CRIC BVI, through our subsidiary E-House (China) Information Technology Service Limited, or EIT, together with SINA, formed a joint venture, China Online Housing Technology Corporation, or China Online Housing, to build and operate a leading real estate website in China. EIT holds 34% of the equity interest in the joint venture.

On July 23, 2009, we entered into a share purchase agreement with SINA, as amended on September 29, 2009, pursuant to which we have agreed to acquire SINA’s 66% equity interest in China Online Housing in exchange for issuing to SINA 47,666,667 of our ordinary shares upon and conditioned on the completion of this offering. Immediately upon the completion of this transaction, we will become the sole shareholder of China Online Housing, and E-House and SINA will become our two largest shareholders, holding 51.01% and 33.99% of our total outstanding ordinary shares, respectively, assuming the underwriters do not exercise their over-allotment option, and 50.04% and 33.35% of our total outstanding ordinary shares, respectively, assuming the underwriters exercise their over-allotment option in full.

At the IPO price $12, SINA now owns CRIC shares valued at $572 million in exchange for China Online Housing, the unit that contains the business of LeJu. A further reading of the financial statements of China Online Housing reveals that its book equity value was $11.6 million as of end of June this year. Its revenue and net income for the first half of this year was $16.6 million and $1.2 million respectively. This math looks quite interesting: China Online Housing, the SINA side of business, is sold at a P/B ratio of 49, P/E ratio of 238, P/S ratio of 17. These are SOME ratios: E-House and China Real Estate Information paid dearly for Sina Leju.

An alternative way to look at it is that SINA contributed $2.4 million annual net income, which would translate to $84 million market cap using its current trailing P/E ratio 35, to exchange $572 million in CRIC equity, a total gain of $488 million overnight. On per share basis, each SINA share contributed about $1.5 worth of business in exchange for $10.5 worth of CRIC stock, a total gain of $9 per share.

A third way to look at it is that Sina is able to claim a third of the net income CRIC makes starting from Q4 2009, according to accounting rules. If we conservatively assume the current running rate of CRIC at $9 million per quarter, one third of it would be $3 million, compare to $0.6 million before the transaction. SINA stock holders are getting 4 cents EPS per quarter for free.

E-House made an offer Sina could not refuse. And so, I see Sina as making me an offer I could not refuse: I am buying SINA.

Disclosure: Long EJ, SINA. No position in CRIC.