What does the softening of the Chinese economy mean for companies like the Sina Corporation (SINA)? Here you have a company that generates income through advertising for its 324 million registered users. It has the largest online Chinese community in the world. But advertising is drying up as corporations become more conservative how they spend on a weakening economy. SINA is in a unique position that gives a short term income strategy some enticing opportunity.
Here is how it is developing for this stock.
While advertising revenue has shrank, investors are eagerly chomping at the bit anticipating what can happen as the company starts investing in Weibo. Weibo, the Chinese micro-blogging sight akin to Twitter and Facebook, is one of the most popular sights in China. This is a possible future cash cow for the company. Presently SINA has weaker revenue from its news-portal part of the business and then its continued investment in Weibo (it's popular but so far unprofitable) and this has tightened up margins.
Because of Weibo's possibilities to generate advertising revenue, analysts are cautiously optimistic on the stock. While they continue to lower the company's price target because of slowing advertising, they also issue buy ratings on the company.
Sina expects Weibo monetization to start in 2H12 driven by the launch of display ads system in April and SME ads system in 4Q12. Jefferies & Company has raised FY12 revenue by 1.5% but cut EPS to USD0.05, from USD0.13, on higher expenses. Those expenses are coming in the form of investment in Weibo. It had 50 large brand advertisers test its display ad system, and plans to test its self-service ad system in 4Q12 to address the market of smaller enterprises. Goldman Sachs recognizes Sina's Weibo monetization efforts, but is prone to be more conservative with slower advertising. Because of the economic climate, they believe SINA will continue to trade in a certain trading channel through the rest of the year.
This is where income opportunity comes in. While the company is investing heavily in advertising structure for Weibo, the present advertising dollars are just not as plentiful and operating margins are pretty tight right now. Great future potential, but right now the stock is just not going to go anywhere.
The stock is presently trading at 53.17 and has a trading channel between 50 and 60. We will follow then trend with a bear put spread.
The Options Play
- Buy a July 2012 put option with a strike of '52.50' (priced at $4.65)
- Sell a July 2012 put option with a strike of '50.00' (priced at $3.50)
- Net Debit to Start: $1.15
- Maximum Profit: $1.85
Reasoning behind the trade
- Following the trend.
- We are within the lower channel we believe the stock will trade.
- Weak advertising revenue will not cause the stock to rise soon.
The two things that will keep the stock in a low trading zone this year will be the lower revenue expectations due to a softening of the economy and its continued deep investment in Weibo to generate new advertising revenue. This will create tighter margins for the company for the short term.