During my coverage and research of the Internet in China, I’ve uncovered traps and gems. Some companies are grossly overvalued based solely on speculation and future earnings. There are also some stocks that seem comparatively undervalued, given their history of strong earnings, leading market position and growth; Sina Corp (SINA) is one of those stocks. With a PE ratio hovering around 11 and growth forecasted in the mid teens, SINA seems poised to be another success story in the line of Baidu (BIDU). Despite the positives, people have been downgrading this stock, talking about it being censored from the Internet and questioning their ability to make money.
Given the negativity surrounding this stock, I thought it looked like it had great potential for a contrarian play. After digging into the numbers some more, I am convinced there is still plenty of upside for this Chinese social media giant. Although they are in the infancy of fully monetizing their site and sovereign risks remain outstanding, I believe SINA is a great value at the current price given the market they cater to. They have outperformed analyst estimates by 11.62% over the last year according to Kapitall, and I believe despite Youku’s (YOKU) hiccup yesterday, they will turn in more strong results. Given the recent pullback in stock price, I think an investor could stand to gain from the earnings release. I’ll go over some concerns with SINA here, and a post earnings analysis and valuation in a subsequent article.
Overview of Sina Corp
Sina is a leading microblog service for Chinese Internet users that very much resembles Twitter. They are expected to have more than 120 million users by 2012 (source), with more expected to add services as Internet users in China increase. The appeal, like with Twitter, is very entertainment and celebrity driven; there is nothing quite like feeling like you are engaging one of your idols directly. Sina has a dominating market share, accounting for as much as 87% of the time people spend on microblogs in China (source). Even the number of characters is the same as Twitter, standing at 140. Said Charles Chao, CEO of Sina:
We learned much from Twitter.
Copied might be the more appropriate word, as even the styling of Sina Weibo are very similar to their Western cousin. I say this partly because the 140 characters were carbon copied from Twitter; despite the stark difference in the structure of the languages the sites represent (symbols vs. letters). Intellectual property theft notwithstanding, the site is an absolute hit! After Twitter and Facebook were blocked in mainland China as the anniversary of the Tiananmen Square protests approached in 2009, the door was cracked open for Weibo to gain traction. Competitive services from other Internet leaders like Baidu, Sohu and Tencent didn’t release until later in 2010. So, a market leader was born.
Despite this market dominance, many analysts have gone south on Sina in the last couple weeks. My humble opinion is that many analysts follow a herd mentality, and will neglect solid investments based on the recommendations of others. Deutsche Bank analyst Alan Hellawell said cut his rating to a sell from a hold recently. The reasons for the cut, he said, are as follows:
While we continue to recognize Sina’s dominance, innovation and leadership in the portal space, and view its Weibo microblog service as a breakthrough in Internet-based communications, we do believe that the risks of tightening government regulation around its "Twitter-like" service continue to mount. We believe the occurrence of (admittedly sparse and lightly attended) demonstrations across China over the weekend may move the authorities to disable aspects of microblog services that they view as destabilizing. Further Mideast unrest could also lead to tightening.
This is certainly a concern for the short term, and I believe the tensions mounting in the Middle East are also reason for worry. However, I feel the potential returns from this stock (especially in light of its recent downturn as a result of analyst ratings cuts) outweigh these concerns. As with any Internet company in China, there is an inherent risk of censorship. That comes with the territory. Goldman Sachs analyst Catherine Leung also cut her rating on stock to Neutral from Buy, saying:
Although we believe Sina has maintained Weibo’s solid user-growth momentum and encouraged its ecosystem development through apps and improved functionality, thereby also improving Sina’s portal properties, we see limited upside to Weibo’s valuation because monetization remains in an early, more exploratory stage. We see limited upside to the stock until Weibo is monetized more meaningfully.
This seems like a more valid reason to me, and if they believe the Weibo service is fully valued, then perhaps they should take their profits. It is also worth noting that Goldman Sachs has been on this bandwagon since the early stages, netting their clients a return of over 230%. Not bad, I say.
Censorship of Social Media
One of the main gripes analysts have with Sina Weibo, despite it being a Chinese stock, is that the government could basically shut it down at any moment. This is very true; however, it goes against the nature of the Chinese government. I believe that they would rather censor this tool to utter uselessness before blocking it. When they decided to block Twitter and Facebook, China was blocking foreign entrants into their market. In this case, Sina is a home grown success story, something the Chinese hold very dearly to. I believe the government would rather bed with the executives of Sina to make sure they are on top of censoring the right words and phrases than destroy the functionality of the site.
Most of the use of Weibo comes from celebrities connecting with fans. For example, Yao Chen, an actress in China, has over five million followers. That is a lot more hits than Jasmine Revolution has ever gotten. So, in order to make sure nothing malicious is going on, you just have to keep on top of current events. Many people have been comparing what has been happening in the Middle East with what could potentially happen in China, and I believe that is unfair. China has the most advanced country level Internet firewall in the world. Fang Binxing, President of the Beijing University of Posts and Telecommunications, is said to have created the firewall and was recently interviewed by the China Global Times (source). Of course, the story was taken down, but it tells the tale of system that responds quickly and thoroughly to anything it regards as a threat. I believe they will keep on top of Weibo without removing the main purpose of the site.
Sina Pay was recently launched in an effort to monetize the efforts of Weibo. Sina Pay is an independent brand, much in the likeness of PayPal, meaning it can be used outside of Sina for services and goods. If they are able to follow in the footsteps of PayPal, this could be a huge advantage for them moving forward. However, there are already similar services available from other Internet leaders. It will be interesting to see if the monetization efforts gain traction, as they are in their early stages. The CEO of Sina is certain that revenues can be generated, as long as they stay on track. Charles Chao said:
Revenues and profits can be guaranteed so long as we have a large number of users and form a big ecosystem.
The way that they cultivate and maintain this ecosystem will be especially important in the next year. With competitors coming out with similar products, there will have to be a move to increase switching costs more than simply losing your followers.
I believe that Sina is in a great position currently, but it will be important to watch how they react to increased competition in the microblogging sphere. There are three companies that I believe have the network and ability to really take a charge at the market dominance Sina currently enjoys.
Sohu (SOHU) – Sohu released positive earnings about a month ago, and continues to be a massive presence in Chinese Internet. They are the second largest Chinese news portal and have the reach to initiate some sort of strategic microblog that could be used to accent their news product. If done effectively, this could be combined with their gaming platform (which has been growing handsomely) to create a more unique service than just a Twitter clone. I think right now, this is not very likely to happen, but their presence is enough to warrant a mention.
Tencent (TCEHY.PK) – I believe Tencent is the single biggest threat to Sina over the long term. Their instant message service, QQ, is the biggest China and they have a massive audience (over 600 million members). Their social site, pengyou.com is also poised to be a long term competitor. If you combine this with their presence in mobile, they have the recipe for a successful counter to Sina.
Baidu (BIDU) – This might also be a long shot, but they have been positioning themselves for an entry into social media for some time now. Despite the flat out failure of Google in trying to dismantle Twitter via Google Wave or Google Buzz, Baidu is still going to try. There is a lot to learn from the West in terms of missteps, and hopefully they are paying attention. Their entire online experience is centered on a platform that could benefit from a more immersive social experience. It hasn’t been announced, and it may not be a direct competitor to SINA in the short term, but it is also worth mentioning.
The thing to remember here is that SINA is not bulletproof. Anyone who remembers the hubris of Internet giants of the past can attest to the speed at which this industry changes. Li Tianfeng, an analyst with Analysys International, recently said:
Sina is in a dominant position currently, and its open strategy also fits the development of micro blogging, but Tencent, having a large user base with its instant message system QQ, should not be downgraded.
None of the other competitors should be forgotten either.
Sina is in a great position as a microblogging tool for the largest Internet population on the planet. They are aiming for 150 million users by the end of 2011, although analysts expect their growth to be a bit slower. Regardless, they are a leader in social media in China. The questions revolving around them are valid; how will they monetize their service and what impact will sovereign censorship have on their site? If you are comfortable with these two main risks, then Sina might be a good investment for you. More to come after earnings tonight.
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.