Sina/Weibo Relative Valuations Present As Compelling An Arbitrage Opportunity As We've Seen

| About: Sina Corporation (SINA)

Summary

We estimate the value of Sina's stake in Weibo, plus the cash and investments on its balance sheet, is worth approximately $151/share, or ~45% upside from SINA's current share price.

Sina's stake in US-listed Weibo alone is worth over $117/share to SINA shareholders, over 10% higher than where SINA trades.

SINA's net cash and investments are worth another $34+/share.

SINA has been distributing its stake in WB: initially in September 2016, and it just announced second spin occurring in June 2017.

Management sees the arbitrage opportunity obviously; why don't public market investors see it?

We first alerted our readers to the Sina (NASDAQ:SINA)/Weibo (NASDAQ:WB) arbitrage opportunity over two years ago in March 2015. At the time, the arbitrage worked very rapidly (within six months) as the CEO's massive insider buy in SINA soon thereafter told the market in no uncertain terms that it was clearly missing something in undervaluing SINA.

For reference, our prior article can be found here.

From our perspective, what's changed now is that 1) SINA management is actively taking steps to realize the arbitrage opportunity that the public markets are again affording it, and 2) the arbitrage opportunity is larger than when we first wrote about it.

Regarding point #1, for the second time since September 2016, SINA is distributing shares of WB in a ratio of 1 WB share for each 10 SINA shares owned. One WB share currently trades at $77.57, meaning this most recent distribution is worth approximately $560M to current SINA shareholders. While this may not seem particularly material given the multi-negative-$B Enterprise Value SINA trades at (when factoring in its WB ownership and cash and investments), we'd point out that this distribution of WB shares (should they hypothetically be done in their entirety) would be worth $117 per share to SINA holders (well more than SINA's current $104 share price), before even considering either its cash and investments balance or its core portal business (its non-WB business that also hits the consolidated income statement), which has been modestly improving lately.

In summary, we believe that SINA is minimally worth:

- $117/share for its stake in WB (108.9MM shares x $77.57 = $8.45B); note that this is 1) pre-spin (spin ex-date in June 2017), and 2) assumes 72.2M SINA diluted S/O (SINA has a small amount of convertible debt struck at ~$116 which I include as debt in my net cash calculation for SINA). The amount is small, so it wouldn't materially change the thesis.

- $34/share for its short-term plus long-term investments. Note that this is roughly comprised of 60% short-term cash and equivalents and 40% long-term investments. These do not include the value of its WB stake, as WB is currently consolidated in its financials. This also excludes WB's consolidated cash/debt on SINA's balance sheet. While we would typically lend a skeptical eye towards the marks it has assigned to its long-term investment portfolio, we'd note that 1) many investments are carried at cost (59% using the consolidated SINA/WB balance sheets as of 12/31/16) unless previously written down (so thus inherently conservative marks), and 2) there are some interesting investments contained in this completely ignored long-term investment balance (we'd note that one of SINA's long-term investments carried at cost is a 2015 investment in Didi (Private:DIDI), i.e. what's generally considered to be the Uber (Private:UBER) of China; we have trouble believing that this particular investment carried now at cost ($142MM investment made in 2015) isn't worth substantially more now.

- Finally, we have the least exciting part of the story, which is SINA's core portal business. Think about this business as a Yahoo (YHOO)-like portal essentially operating in the China market (yes, not too exciting we'd concede). While difficult to value and almost immaterial at this point to our investment thesis, this business should be breakeven or even EBIT positive this year (it lost $3M in its seasonally weakest Q117 on revenues of $76M that were down less than 1% Y/Y - a marked improvement versus recent quarters). We'll value this business at 1x revenues, using 2016 revenues of $365M, so $5/share.

Summary

So, where does this get us? In total, that gets to a $154/share value for SINA, or nearly 50% upside. The WB value can be hedged out at a very lost cost borrow in a ratio of 1.509 shares of WB per SINA share. When we originally wrote about this idea over two years ago, we acknowledged having no catalyst then. We'll acknowledge the same now (with the exception of the pending spinout of some WB shares to SINA holders which are worth more than their implied value in SINA's stock price). Going back two years ago, the catalyst soon appeared in the form of SINA's CEO/Chairman making a staggeringly large insider buy, something we would have had no way of predicting. So, in this case now, again, we also lack an obvious catalyst but feel comfortable owning a dollar at roughly 68 cents. The catalyst, we expect, will play out in hindsight.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LONG SINA, SHORT WB over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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