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Leading web portal Sina (Nasdaq: SINA) is rushing ahead with plans to separately list its Weibo microblogging unit, with word that it's taken the first major step towards a New York IPO by formally hiring investment banks for the deal. I've previously said Sina was likely to accelerate its listing plan, amid growing signs that Weibo's growth was slowing and users were abandoning the service in favor of Tencent's (OTCPK:TCEHY, HKEx: 700) more mobile-friendly WeChat. The latest quarterly earnings report just out from Sina adds further reason for pessimism about the upcoming IPO, showing Weibo remains highly dependent on advertising for most of its revenue.

I've had a quick look at Sina's fourth-quarter financial report, and it actually looks quite good on the whole. Revenue grew 42 percent to nearly $200 million for the quarter, with advertising revenue growing at a slightly faster rate (company announcement). Profit also leaped around 5-fold as Weibo's losses shrank and the broader advertising market rebounded. Investors seemed mixed on the report, with Sina shares rising 4.3 percent during the regular trading session but then dipping 1.4 percent in after-hours trade after the actual report came out.

I suspect one reason for the muted response was disappointment at the Weibo figures. Advertising still brings in the big majority of Sina's revenue, about 80 percent, and the latest report showed the same ratio holds true for Weibo. Sina revealed that of the $71.4 million in revenue that Weibo generated in the fourth quarter, some 78 percent came from advertising. That's a bit of a disappointment, since many were holding out big hopes for e-commerce development after Sina sold 18 percent of Weibo to leading e-commerce firm Alibaba last year for $586 million.

All that said, let's look at the latest Weibo IPO reports, which mark the first time we've heard of a concrete IPO plan. The reports say Sina has hired investment banks Goldman Sachs and Credit Suisse to underwrite the offering to raise up to $500 million (English article). The hiring of investment banks usually means an IPO is around 2-3 months away, and these latest reports say that Sina is aiming to make the offering sometime in the second quarter.

The reports also indicated that Alibaba is likely to exercise an option to boost its stake in Weibo to 30 percent before an IPO occurs. Alibaba's stake purchase last year valued Weibo at about $3.3 billion. The latest reports don't indicate how much of Weibo would go into the IPO's public float, but usually such floats account for 15-25 percent of the company's shares. If that ratio holds true this time, the $500 million fund-raising target would mean that Goldman and Credit Suisse believe Weibo now has a market value of $2 billion to $3.3 billion. That means the unit's value has probably plateaued and may even be starting to decline since the Alibaba investment.

Such a decline certainly wouldn't be unexpected. Government data released earlier this year showed the number of microbloggers in China dropped for the first time by 9 percent in 2013, even as the total number of Internet users grew 9.5 percent to 618 million (previous post). Sina commented separately at the time that its Weibo user base was still growing, though I suspect the growth was very small.

So, what does all this mean for the Weibo IPO? In my view the offering could still be attractive, though it's unlikely to get the high valuation of $5 billion or more that Sina was probably hoping for just a year or two ago. At this point there's probably little that Sina can do to change Weibo's financials too much before the listing, but I would suggest it try to accentuate the growth potential of Weibo's non-advertising business. It might even consider a management shake-up for the unit to bring in top-level gaming, financial services and e-commerce experts. That would show investors that it's serious about transforming Weibo into a diversified social networking site.

Bottom line: Sina is likely to attract strong investor interest for its upcoming Weibo IPO, but is unlikely to get a valuation for the unit above $3.5 billion.

Disclosure: No positions.

Source: Sina Weibo IPO Plan Fails To Excite