Sina’s $73 Fair Value: Key Drivers & Potential Risks

by Trefis Team
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Having blocked more than 2,000 websites under its policy of internet censorship, China is known to have the most stringent internet censorship laws. [1] However, the ban on some of the most popular social networking sites such as Facebook and Twitter, leave room for Chinese internet companies such as Sina (NASDAQ:SINA), Bidu, Sohu and Yoku.

Sina is an online media company which also offers mobile value added services in China. It provides services mainly through Sina.com (online news and content), Weibo.com (microblog) and Sina Mobile (MVAS). Except for a temporary decline in 2009, Sina’s top line has historically registered a double digit growth rate. However, with the growing concerns over the economic slowdown in China combined with stringent government regulations for internet companies, the question remains whether Sina will be able to sustain the robust growth rate in the future.

We believe that the company will post low double digit growth in 2012 & 2013 and continue to grow at a high single digit rate thereafter until the end of our forecast period. Our price estimate of $72.61 is at a premium of just under 30% to the current market price for Sina.

Check out our complete analysis of Sina

Below is a list of certain factors that drive our outlook for the company’s valuation.

Growing Internet Penetration In China

Though the total number of internet users in China (513 million) are more than twice compared to the US (245 million), the former still offers a higher opportunity for growth for internet companies. As per Internet World Stats, the internet penetration in China is close to 38%, while that in US is over 78%. China is expected to witness an increase in its total number of internet users in the coming years. Additionally, with increasing disposable incomes, China is leading the world in PC demand growth rate. Thus, we expect the online advertising market in China to continue growing for the rest of our forecast period.

Stabilizing Display Advertising Revenue

We estimate display ads to contribute over 66% to Sina’s valuation. Historically, China’s online advertisement market increased from $1.2 billion in 2007 to $4.8 billion in 2011. Despite a slowdown in China’s growth rate on account of macroeconomic headwinds, the online advertising revenue in the country increased by 54% (y-o-y) in Q2 2012, according to Analysys. [2] Sina’s market share, however, has significantly declined since 2008.

Going forward we expect Weibo to be a major factor driving Sina’s growth in online display advertising. (Read Related Article: Sina Banks On Weibo Growth To Retain Foothold In Display Advertisement) With a base of 368 million registered users, Weibo is gradually becoming a significant revenue driver for Sina. The company has time and again expressed its intention to step up efforts for monetizing the microblogging website. Sina continues to invest heavily in developing the Weibo platform and aims to monetize Weibo through socially-powered brand advertising and social recommendations to drive e-commerce sales.

We expect the robust growth in Weibo to stabilize Sina’s market share in display advertisement.

Increase In Revenues From Paid Services, Games & Others

Through its website, Sina also offers certain fee-based services such as paid email services, causal games, online games etc. Sina’s revenue from paid services, games & others has increased from $6.7 million in 2007 to $30.6 million in 2011.

With new and advanced technology being developed everyday, online gaming, eReading and enterprise solutions are becoming increasingly popular. Additionally, there is a rising popularity of casual games in China which we feel will add to the growth in this segment. We forecast the revenues from such paid services to reach close to $50 million by the end of our forecast period.

Potential Risks

1. Stringent government regulations: The Chinese government has enacted an extensive regulatory scheme governing the operation of business with respect to the Internet. Any adverse policy change by the government could negatively impact the business and thus Sina’s valuation.

2. Uncertainties in advertising market in China: Advertising market in China is still in the nascent stage of growth. Advertisers have limited experience with the Internet as an advertising medium. Traditionally, they have not devoted a significant portion of their advertising expenditures or other available funds for web-based advertising. Moreover, the increasing use of advertising blocking software may result in advertisers staying away from the online advertising medium. If the Sina’s market share in display advertising continues to decline, there will be a significant downside to our price estimate for the company.

Our current price estimate of $72.61 for Sina is at a premium of over 20% to the current market price.

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Notes:
  1. Websites Blocked By The Great Firewall Of China – GreatFire.org []
  2. Room for Growth for Chinese Internet Companies as China’s Internet Penetration Rate Only 39.9%, Stock House, August 28, 2012 []
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  • commented 2 years ago
  • tags: SINA BIDU MSFT AAPL
  • Nice article. I would question whether display advertising, as opposed to ads placed in the information flow of a user, is ultimately expected to be the main generator of advertising revenue for SINA, the form factor of a smartphone, e.g., being too small for effective display ads. Also, I first saw your article on Seeking Alpha on 9/13. Since it was written, apparently the margin of safety has decreased from 30% to ~7.5%.