What I Liked: Weibo Monetization Taking Off
As I mentioned in the earnings preview, investors should focus on Sina’s strategy of monetizing Weibo.
Sina recently introduced Weibo 4.0, which features a wider layout, a new photo album, and attachment function that are designed to create user stickiness which ultimately translates to further monetization. In addition, over 20,000 applications have been launched on Weibo, and additional 180,000 are under review, according to management. Finally, Sina introduced virtual currency, called Weibi, which is used to buy virtual items and services. Each Weibi equals Rmb1 and operates in similar fashion to that of Tencent’s QQ coin.
The new features and improved platform helped Weibo to climb one spot to No.6 from No.7 in the traffic ranking among websites in China. Weibo’s registered users grew 33% to 250 million and generate 86 million daily posts per day.
What Concerned Me: Impairment Charges Indicate Poor Strategic Executions
Sina booked a $350.1 million loss in the quarter to write off its intangible assets in the mobile value-added-services (MVAS), China Real Estate Information Corp (CRIC), and Mecox Lane (MCOX). Of the write-off, $68.9 million was related to MVAS and $281.2 million was related to CRIC and MCOX.
Sina began to provide MVAS in 2002 and soon it accounted for 36% of Sina’s revenue by 4Q06. However, providing MVAS in China is an unsustainable business model because Sina, along with other MVAS providers, is simply a middleman between telecommunication providers and content holders and faces severe headwind due to operator policy changes from the wireless carriers (eg. Suspension of WAP billing) and deteriorating margins. Sina has gradually shifted its reliance on MVAS to traditional online advertising and is now increasingly relying on Weibo for future growth.
In February 2008, Sina formed partnership with E-House China (EJ) to develop the largest online real estate portal in China. China Real Estate Information Corp, a unit of E-House China, was later merged with Sina’s online real estate unit when CRIC became public in October 2009, after which Sina received a 33.9% of equity stake in CRIC. Since CRIC’s IPO, the shares has fallen 61% due to the weak sentiment investors have on China’s real estate market despite the company reporting strong quarterly results.
Earlier in March this year, Sina spent $66 million on a 19% stake in the online apparel retailer, Mecox Lane, from Sequoia to gain its foothold in ecommerce. Since Sina’s purchase, Mecox Lane’s share price has fallen 74% as the online retailer faces intense competition. The management also withdrew its previous full-year 2011 guidance of 40% y/y revenue growth due to declining catalogue sales and rising advertising costs.
Sina’s history of poor executions and investments should be a concern to the investors because they can expect further impairment losses from Sina’s equity stake in the unprofitable online video company, Tudou (TUDO). In late August, Sina paid $66 million for a 9% stake in Tudou, in which $31 million was paid at Tudou’s IPO price of $29 per share. As of November 10th, Tudou’s share traded at $14 per share. As I mentioned in my first article on Tudou, Tudou’s future in China online video industry is highly unattractive due to its heavy dependence on UGC in a market where viewers prefer PPC. Sina’s stake in Tudou could turn into another bad investment should Tudou continues to lose market share to Youku and Sohu in the highly competitive online video market.
Sina should focus on transforming Weibo into the leading social networking tool and an ultimate information portal in China, and should avoid pursuing questionable acquisitions that could turn out to be destructive to shareholder value.