WR Hambrecht analyst James Lee sent a note to investors upgrading Sina Corporation (SINA) shares to 'Buy' from 'Hold' on indications the online advertising market could be once again underestimated in China. The note follows:
Investment Conclusion: We are upgrading Sina to Buy from Hold with a price target of $45 per share. Recent checks indicated that the online advertising market could be once again underestimated in China. In addition, Yahoo China recently shifted away from the portal business, removing a major competitor in the space. Finally, an industry survey shows that Sina has maintained its market leading position in portal and several key vertical channels, positioning the company for the positive trends mentioned above. As a result, we are raising our 2007 and 2008 EPS estimates by roughly 15%. Our new price target implies 30x our 2008 EPS estimate plus $4 in cash.
• Strong online advertising trends. Based on our recent channel checks, we believe the trends for online advertising remain very favorable. We heard from our sources that ad agencies are aggressively hiring people, anticipating increased activities in media planning. In addition, some agencies are creating dedicated digital media departments to meet strong project demand. On the advertiser front, MNCs are finding ways to connect brand campaigns with the Olympics games, sponsoring Chinese national teams to increase their exposure (Nike, Adidas, Visa, Coca Cola). On the other hand, domestic firms have become more aggressive, realizing the importance of branding ahead of further deregulation in key verticals. With a greater emphasis on targeted advertising, the Internet has become the third largest medium behind TV and newspaper.
o Industry trends suggest substantial upside. Advertising agencies we spoke with estimated that as much as 10% of ad dollars could go to the Internet, representing roughly 50% upside to our industry forecast ($1.3B vs. our $882M estimate). Advertisers typically allocate 60%-70% of online advertising budgets to major portals, and therefore, we believe Sina will be a primary beneficiary as the largest portal in China.
o Deregulation another catalyst. We also believe that deregulation is a main catalyst behind that as the company expects increased spending from banking and insurance sectors. We expect other key industries will also drive advertising spending due to the WTO entry, such as automobile (lower tariff) and telecom services.
o Internet = targeted and effective marketing. Our checks reveal that online media not only provide a targeted platform, but also a cost effective one. Rates for airtime on TV channels in top cities like Shanghai are much more expensive than in developed countries due to competition for popular slots. Even mass- market consumer goods such as P&G are increasing their online spending.
• Key competitor moving away from mass-market portal. Yahoo China recently announced that it would be reorganized as a business-oriented search engine. We think this strategy makes sense given the company’s synergies with e-commerce sites such as Alibaba (B2B) and Taobao (C2C). After moving back and forth between portal and paid search, Yahoo China’s market share of online advertising revenues dropped from 9.5% in 2005 to 8.0% in 2006. Despite a smaller market focus, we believe that Yahoo! China will differentiate itself on the core strength of Alibaba’s e-commerce. We believe the company should build its search to facilitate e-commerce transactions in B2B, B2C and C2C results.
• Recent study indicated strong hold on market lead. A recent market study by Data Center of the China Internet shows that Sina has maintained a market lead in portal and several key vertical categories, including blog and auto channel. According to this report, Sina has a reach of 56% of people surveyed (more than 1M), exceeding peers NetEase, Tencent, and Sohu. At the same time, we believe the company is well positioned for web 2.0, as the young generation in China continues to embrace sites offering socializing and self-expression. We believe the data point indicates that Sina has solidified its position as the defacto portal in China. With positive trends mentioned above, the company should continue to grab advertiser mind share as more dollars are allocated to the web.
• Raising estimates. We are raising our 2007 revenue estimate from $244M to $260M and EPS estimate from $0.88 to $1.04. For 2008, we are raising our revenue estimate from $321M to $356M and EPS estimate from $1.22 to $1.47, roughly ~15% above consensus. We assume that online advertising will grow ~50% CAGR from 2006 to 2008 and 3% for non-advertising revenues (mobile content and other). In sum, we expect EPS will grow ~35% per year over the next 24 months.
• Online advertising should be main value driver. We believe going forward, online advertising will become a larger valuation driver for SIna. In 2008, we estimate that advertising will contribute 80% of EPS vs. ~60% in the past quarter. Our price target of $45 is based on a sum of the parts: we value the online advertising business based on 33x our 2008 estimate of $1.17 and mobile content based on 8x of our 2008 estimate of $0.29. The stock trades at 21x our 2008 EPS estimate including cash, which is at a discount with our expected growth rate of 35%. Our price target of $45 implies 30x our 2008 EPS estimate plus cash.
Sina Corporation provides comprehensive online products and services to customers and businesses in China. It operates a branded network of websites which provide an array of services including aggregated content, wireless services, online games, free and premium e-mail, and enterprise services.
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