The Case for SINA Corporation

Posted on 07/03/2011

1


SINA is an owner and operator of a number of online services in the People’s Republic of China.  These include SINA.com (a news portal), SINA Mobile, SINA Community (social services and games), SINA.net (search & enterprise services) and SINA E-Commerce (online shopping).  In FY10 SINA generated revenue of $402m (+12.3%yoy) and net profit of $109m (+193%yoy, after adjusting for asset write-downs/gains on sales of investments).  The company generated EPS of $1.66 in FY10 (again, after adjusting for the asset write-down), which given the current share price of $84.13 means a Price/Earnings ratio of 50.7x.  At first glance, this appears to be particularly expensive.

However, to use such a ratio in this case would be particularly short-sighted.  Looking at SINA’s balance sheet it is immediately apparent that the company has a number of assets the value of which is not fully-captured in the EPS number.  These assets are as follows:

  • Cash and short-term investments of $816m (after adjusting for the purchase of Mecox Lane, which occurred after the year-end).
  • 19% of the shares in Mecox Lane, the owner and operator of www.m18.com, a Chinese online fashion retailer.
  • 33% of the shares in China Real Estate Information Corporation, which provides real estate information and consulting services.
  • 100% of SINA Weibo, a very popular version of Twitter, which currently has 100m users in China, but is not yet generating any revenues.

Like SINA itself, Mecox Lane and China Real Estate Information Corporation both have shares listed on the NASDAQ exchange.  Using these values, we can estimate the value attributed to the remainder of the business.  This can be seen in the table below.

After adjusting for these other investments, we can see that SINA is valued at $3.5bn and generates net income of $68.3m.  However, these numbers are themselves made-up of the established online properties – which generate all the revenue and more than 100% of the $68.3m of net income – and SINA Weibo – which currently generates no revenue and is therefore loss-making.  It is difficult to estimate how much net income SINA would generate if it did not have to finance the operating losses of SINA Weibo; however, for the purposes of the rest of this analysis I will assume that the established properties generate all the $68.3m of net income and that SINA Weibo is exactly break-even.

Clearly, given we have already accounted all the cash and the equity investments, all the remaining value must be attributed to either: (1) the established business; or (2) SINA Weibo.  The chart below shows the possible valuations for SINA Weibo (on the x-axis) and the trailing P/E ratio of the established business (on the y-axis) that is implied from each particular valuation of SINA Weibo.

As Weibo is not currently generating any revenue, it may appear foolish to place upon it a price-tag of $1.5bn or more, but given the valuations at which shares in comparable company Twitter have been changing hands, I think such analysis makes eminent sense.  Twitter, which operates a micro-blogging service in all countries (except China, where it cannot operate due to a lack of integrated censorship), has an estimated 190m users and shares have recently changed hands at a valuation of $7.7bn, despite the fact the company has yet to turn a profit.  SINA Weibo currently has 100m users but is adding users more quickly than Twitter and arguably has a richer interface, which is described in this presentation by Bill Bishop.  This platform includes groups, organised replies, polls, media integration, applications and games.  This business should therefore have huge potential for revenue generation as SINA begins to integrate advertisements into the service.  Given this potential, and the valuations already being applied to Twitter, I don’t have any problem in viewing SINA Weibo as a $1.5-2.5bn business.  The corollary of this, of course, is that this implies the established business is trading at a P/E ratio of 15-30x.  Given that SINA has increased net income at a rate of 35% per annum from FY06-FY10, and can reasonably be expected to continue growing at a double-digit rate over the next few years, I don’t think a trailing P/E of between 15x and 30x for the established business is particularly expensive.  This argument is reinforced when compared to other Chinese internet businesses such as Tencent (47x), Baidu (80x) and Alibaba (49x).

In summary, SINA has an exceptionally strong balance sheet with no debt and $800m of liquid assets, its established business has been growing net income at 35% per annum over the last few years, it owns Weibo – which is arguably worth at least $1.5-2.5bn today and perhaps north of $10bn in the future, the shares are currently trading at a trailing P/E ratio of between 15-30x on the established business, and the potential exists for the valuation to be re-rated to levels comparable with other major Chinese online businesses.  Consequently, I believe that SINA represents an attractive investment opportunity.

Disclosure:  The author is a shareholder in SINA.

Related Articles

Advertisements
Posted in: Investment Ideas