Investment Conclusion: The company’s Q4 revenues exceeded the high-end of guidance, driven by a 44% yoy growth in online advertising revenues. EPS beat the consensus by $0.04 due to strong cost controls. Mobile content came in modestly above our expectations at a 12% Q/Q decline. However, guidance was light due to an expected weakness in wireless (15%-20% Q/Q decline). We feel that advertising guidance is conservative, which may provide an upside to the company forecast. With no relief in sight for mobile, we value the stock based on SOP. Without attributing any value to wireless, we believe the stock is worth $36 plus $4 in cash. With that in mind, we reiterate our Buy rating on Sina shares despite soft Q1 guidance.
Key points are as follows:
• Online Advertising Exceeded Guidance. Sina Corp. beat our Q3:06 revenue estimate by 4% ($35.7M vs. $34.5M), driven by contributions from auto, real estate and IT verticals. The customer base increased ~50% YoY while average spending decreased 6% YoY. Heading into 2007, management expects online advertising revenues of $31M-$32M, representing a yoy growth rate of 40%-44%. However, this guidance implies a 10% Q/Q decline (consistent with last year). Although this trend is consistent with the seasonality vs. a year ago, Sina’s peer Sohu (NASDAQ:SOHU) expects sequential revenue growth in Q1:07. With that in mind, we believe management’s guidance is conservative, which may provide an upside.
• Exclusive Content Deals Solidified Portal Leadership. During Q4:06, Sina signed exclusive content agreements with most of the first-tier finance newspapers in China. In addition, the company signed video content agreements with Phoenix TV and Shanghai Oriental TV. Combined with a previous agreement with CCTV, Sina has secured exclusive content from three major TV stations in China. A recent survey of ~1M web users by the Internet Society of China showed that Sina remains the No.1 web portal in China, reaching 56% of all users.
• Web 2.0 Making Traction. On the Web 2.0 front, the company has executed well; 10K celebrities or opinion leaders have created blogs on Sina, attracting 3.7M daily unique visitors and 120M daily page views to Sina blogs in the last week of January, making Sina blogs the largest online user-generated content community in China. In addition, Sina's YouTube-like video-sharing channel achieved 15K daily uploads and 5M daily clip views since its launch in December 2006, making it one of the most popular video-sharing websites in China within one month.
• Beijing Auto Show Contributed to Online Advertising. China is the second largest auto market in the world. During Q4:06, Sina leveraged the coverage of the Beijing auto show to significantly grow traffic to its automobile channel. According to a recent survey by the Internet Society of China, Sina’s auto channel has ranked No.1 among all auto websites, reaching 17% of Chinese Internet users, leading the second place by 5 percentage points. According to management, Sina is the leader in auto-related advertising with about 40% market share.
• World Cup Effect. Sina also successfully carried the World Cup momentum into Q4:06. According to management, many advertisers started advertising on Sina during World Cup, and continued purchasing ads on Sina in Q4.
• Mobile Content Modestly Better, but Weak Q1 Guidance. Mobile revenues came in slightly ahead of our expectations, down 12% Q/Q vs. our 16% estimate. Despite managing regulatory uncertainty better than its peer Sohu, management expects the wireless revenues to drop nearly 20% in Q1:07. This is consistent with our recent checks that regulatory activities were strengthened since December. We spoke with a top-ten mobile content provider with China Unicom. The CEO stated that December was a very tough month. China Mobile was very strict in monitoring its firm’s marketing activities. The company has laid off 20%-30% of staff in December and expects another round after the Chinese New Year Holiday. We expect pure- play mobile content players will likely announce layoffs on their Q4 calls (after March). Although Sina did not announce a layoff, the company did experience a decline in headcount due to contract expiration of its wireless employees.
• Paid Search to Stay in-house. Management remains committed to keeping paid search in- house despite remaining a distant #5 player in the market. Sina’s video search had a lot of success, ranking among the most popular video search sites in China. We suspect this may be the reason that management decided to keep the search engine in-house as the company would like to integrate that in the overall search functions. CEO Charles Chao stated that the company will continue using its networks of sales agents to market its paid search ads.
• Estimate Changes. We are lowering our Q1:07 revenue estimate from $51.3M to $49.5M (Guidance = $48-50M) and our EPS estimate from $0.19 to $0.18, mainly due to the decline in mobile content revenues. Our 2007 estimates are adjusted accordingly from $260M to $248M in revenues (down 4%) and $1.04 in EPS (ex option expenses) to $1.00 (down 4%). We lowered the mobile revenues in 2007 by $17M (from $85M to $64M), while increasing online advertising revenues by $6M (from $172M to $178M).
• Attractive Valuation...Even without Wireless. Using SOP, we believe the advertising business is worth $36 per share. With $4 per share in cash, we believe the stock is worth $40 without accounting for any value for wireless. With that in mind, we reiterate our Buy rating of SINA shares despite soft Q1 guidance, as long-term fundamentals for brand advertising remain strong, in our view. Due to the weakness in wireless, we are lowering our PT to $43 per share from $45 previously.
SINA 1-yr chart: