Sina (NASDAQ:SINA) is a Chinese online media company which also offers mobile value added services (MVAS). It provides its services mainly through Sina.com – online news & content, Weibo.com – microblog, and Sina Mobile – MVAS. SINA’s MVAS allow users to receive news and information, download ring tones, mobile games and pictures.
Despite rapid growth in the Chinese Internet market over the years, Sina’s stock has declined from a high of $133 in April ’11 to the current level of around $50. Declining market share, increasing expense base and the slow progress in capitalizing its micro blogging website Weibo are some of the factors that have eroded the stock value.
In this article we provide a quick snapshot of how Sina makes money, the important segments that contribute to its growth and the key trends that impact its current valuation.
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How does Sina make money? Who are its key customers?
Sina generates its revenue from display advertising on its websites, mobile value added services and other fee based services such as paid email services and casual games. For advertising, it employs a strategy targeting both short-term revenue opportunities such as banner advertising campaigns, as well as longer-term, higher-value contracts that include integrated marketing packages.
Internet users in China and the subscribers of China mobile value added services are the potential users of Sina’s services. For advertising, global corporations doing business in Greater China and domestic companies in each of the regions in which SINA operates are its key customers. Automobile, fast moving consumer goods, financial, telecommunication, information technology and Internet services are some of the top advertising sectors.
What are the important segments that contribute to Sina’s growth?
Except for a temporary decline in 2009, Sina’s top-line has historically registered double digit growth. Strong traffic growth across major product lines, including Weibo, PC Internet portal and mobile Internet portal continue to fuel Sina’s growth rate. Sina made around $480 million in revenues in 2011 and earned 56% gross profit on the same.
Below are the three key segments that contribute to Sina’s growth:
Display advertising contributes around 76% to Sina’s revenue and the company earns 58% gross profit from this segment, as per our estimate.
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. However, incurring huge investments to develop its micro blogging website, Weibo, Sina expects the same to become a significant revenue contributor for the company. Though the pay-offs from monetization of Weibo have not been very prominent so far, we expect Weibo to be a major factor driving growth in Sina’s online display revenues in the future.
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.  Weibo continues to attract an expanding user base and register higher user activity. Last quarter, the total number of registered users on Weibo increased to 424 million, a 15.2% increase from 368 million users at the end of June 2012.
Advertising revenues from Weibo as a proportion of Sina’s total advertising revenues increased to 16% in Q3 2012, a significant jump from 10% in Q2 2012. Sina has recently taken a number of steps to accelerate its monetization efforts for Weibo; and thus, we expect the proportion to be even higher in the coming quarters.
Sina’s advertising gross margin has also declined in the past few years. 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 operating margins. Much of the increase can be linked to its growing investment in Weibo.
We believe that as the current investments in developing Weibo start paying off, Sina could realize higher revenues at a similar cost base, which could help stabilize margins.
2. Mobile Value Added Services
MVAS accounts for close to 18% of Sina’s revenue and makes 36% in gross profit. Sina’s revenue from the MVAS division was at its highest in 2008, but has been declining since then. Sina depends on China Mobile, China Unicom and China Telecom to provide its mobile value added services to users. These operators change their policies frequently which greatly impacts Sina’s business.
We estimate MVAS revenue to continue declining for the rest of our forecast period. We expect that the operator policy changes will continue to be a risk to Sina’s MVAS business.
The stringent regulations in the industry, changing operator policies and intense competition in the MVAS business have led to a decline in gross margins. We expect this trend to continue in the future as well.
3. Other Paid Service
Other paid services by Sina include paid email services, online games, eReading, etc. Paid services account for around 6% of Sina’s revenue. With 85% gross margins, it is the most profitable division for the company.
Sina’s revenue from paid services has increased at a rapid pace since 2008 and we estimate the revenue to further increase over our forecast horizon. We believe that the increasing Internet penetration and the growing popularity of online games in China will fuel growth in revenue.
We expect gross margins to decline slightly over our forecast horizon. We feel that Sina might not be able to sustain such high margin levels in the long run. Additionally, the company will have to incur increasing expenses to compete effectively and attract users in the highly competitive online gaming market in China, which would put pressure on its gross margins.Notes: