Chinese online media company Sina (NASDAQ:SINA) reported solid top-line growth with a 11% y-0-y increase in Q2 2012 revenues. (Read: Sina Worth $66 As It Banks On Monetization Of Weibo) Despite the challenging advertising market in China, Sina registered strong traffic growth across its major product lines including Weibo, PC Internet portal, and mobile Internet portal. However, owing to a 19% y-o-y increase in non-GAAP operating expenses due to higher personnel and infrastructure related expenses, the company posted a marginal decrease in gross margins for the quarter.
The increase in operating expenses is mostly attributable to Sina’s increasing focus to further develop its microblogging website Weibo.com. Analogous to a hybrid of Twitter and Facebook, Weibo has been increasingly gaining popularity among users in China and is estimated to be used by 30% of Internet users in the country by 2013.  As the display advertising market in China is expected to see a slowdown in 2012, we expect Sina to focus on monetizing Weibo to compensate for the decline in its advertising revenue.
We estimate the display advertisement business to contribute over 66% to Sina’s valuation. Despite the steady increase in the Chinese online display market, Sina’s market share has significantly declined since 2008. Though the pay-offs from the monetization of Weibo are not likely to be very prominent this year, we expect Weibo to be a major factor driving growth in Sina’s online display revenues. We forecast the company’s market share to be more or less around the current level for the rest of our forecast period.
Launch of Weibo Display Advertising System
Sina launched Weibo display advertising system for brand advertising in April this year. By incorporating a social and Internet graphs recommendation engine, the new system allows relevant advertising to be more targeted, thereby increasing its relevance. Advertising revenues from Weibo contributed to around 10% to Sina’s total advertising revenues in Q2 2012, and we expect the proportion to be higher in the coming quarters.
Robust Increase In Weibo’s User Base
As of June 2012, Sina boasts of a user base of 368 million registered users, a 13.6% increase from 324 million users at the end of March 2012. Additionally, the company also registered a 21% increase in the number of daily active users, reaching 36.5 million in June 2012 compared to March 2012.
Increased user activeness on the Weibo platform implies its growing acceptance among users. We think until Sina starts realizing significant monetization benefits from the growth in Weibo user base, it should focus on expanding the current user base and improving user stickiness through product innovation.
Launch Of Weibi & Weibo Version 5
Sina recently launched a new product named Weibi, which is fully connected to the Weibo platform and allows users to participate based on topics and interests as opposed to user relations. Additionally, later this year, the company plans to launch an updated version of Weibo, which apart from improvising the existing profile page, will also offer an added feature that will allow users to privately share information and content among close circles. By enhancing the overall user experience, we think the new products will further equip Weibo to benefit from its rapidly expanding user base.
Potential Threat from Chinese Government Censorship
Weibo’s growth may be hampered by the latest censorship demands of the Chinese administration which requires that users submit their real identity information to continue using microblogging services in China. Sina has already been working to verify user accounts and is now planning to introduce a new user contract to control the flow of sensitive information on its website.
Our current price estimate of $72.61 for Sina is at a premium of over 20% to the current market price.Notes: