Sina’s Preview: Advertising Revenue & Operating Expenses In Focus

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SINA
Sina

Despite the challenging advertising market in China, Sina (NASDAQ:SINA) registered strong traffic growth across its major product lines including Weibo, PC Internet portal, and mobile Internet portal in Q2 2012. However, owing to increasing operating expenses due to personnel and infrastructure related expenses, the company posted a marginal decrease in gross margins for the quarter. The company is expected to announce its Q3 2012 earnings on November 15, and we do not expect the results to be significantly different.

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 double digit growth.

While the high operating expense remains a concern, we believe it to be a short-term trend and expect the company to reduce its expenses in the future. Additionally, we expect the heavy investment in product development will pay off in later years as Sina starts capitalizing on the same.

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Decline in Chinese Advertising Market Growth Rate

Sina derives most of its revenue from advertising, and we estimate it to contribute over 66% to the company’s valuation. Despite the steady increase in the Chinese online display market, Sina’s market share has significantly declined since 2008 as growth in Sina’s advertising revenue has lagged behind growth in China’s online advertising market.

Due to macro headwinds and the slowdown in China’s GDP growth, the overall Chinese display ad market registered a decline in the first two quarters of 2012. We expect the trend to continue for the rest of the year as well and estimate the robust growth rate in China’s online advertising market to drop this year.

Stabilizing Advertising Revenue

While the macroeconomic headwinds negatively impacted Sina’s display advertising revenue growth in Q1, the company registered a solid 31% sequential increase in Q2 2012. Sina has lost almost 50% of its market share since 2008, from 14.1% in 2008 to an estimated 7.7% in 2011. Though we expect the market share to decline further, we estimate the rate of decline to significantly drop going forward.

We believe that Sina’s focus on monetizing Weibo through socially powered brand advertising and social recommendations to drive e-commerce sales will contribute additional revenue in the coming quarters, and could compensate for any decline in its traditional display ad revenue.

Monetization Of Weibo To Contribute To Higher Revenue

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. [1] Time and again, Sina has declared its intention to focus on further developing its microblogging site Weibo to revive its declining market share in China. In fact, the significant increase in Sina’s operating expenses is mostly attributable to the development of Weibo.

Though Weibo is gradually becoming a significant revenue driver for Sina, the company claims that it is unlikely to produce any significant operating profits before 2013.

High Operating Expenses Is A Short Term Trend

Sina’s operating expenses, specifically sales & marketing and research expenses, were at an all-time high in 2011 which led to a significant decline in gross margins. Much of the increase can be linked to its growing investment in Weibo, which has led to the latter’s user base growing to around 368 million registered users (as of June 2012) from around 300 million in 2011.

Registering a 11% y-o-y increase in operating expenses, the company continues to make aggressive investment in product development. However, we expect Sina to reduce its operating expenses and forecast the gross margins to stabilize in the future.  Additionally, we believe that as the current investments start paying off, the company could realize higher revenues at a similar cost base which could help stabilize margins.

However, if Sina fails to control its expenses and continues to spend at the current rate, its cost burden will weigh on its cash flows and impact its value significantly.

We will update our current price estimate of $72.61 for Sina post the Q3 2012 earnings release.

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Notes:
  1. China’s Weibo vs US’s Twitter: And the Winner Is?, Forbes, May 17, 2011 []