An Overview Of Sina’s Businesses And Our $83 Valuation For Its Stock

Sina (NASDAQ:SINA) is a Chinese online media company that enables Internet users to access professional media and user generated content from the web and mobile devices. It provides its services mainly through: 1) Sina.com and Sina.cn for online news and content; 2) Weibo.com for microblogging; and, 3)  Sina Mobile for mobile value added services (MVAS).

Sina earned approximately $360 million in revenue in 2009. This increased to $530 million in 2012 and is expected to have neared $650 million for the year just ended, on the back of strong growth in revenue from advertisements placed on its website. We think that Sina will continue to perform well in the advertising space driven by improving monetization of its Weibo platform. We forecast Sina to triple its revenue by the end of our review period. Sina’s company-wide gross margin has historically been below 60%. We expect this to cross 65% by the end of our forecast horizon as the company’s investments start generating higher returns.

Our price estimate of $83 for Sina is in line with its market price. In this article, we provide a quick snapshot of how Sina makes money and the important segments that contribute to its growth.

Check out our complete analysis of Sina

How Does Sina Make Money? Who Are Its Key Customers?

Sina generates revenue from display advertising on its websites, mobile value added services and other fee based services, such as paid email services and casual games. Advertising revenues are derived from online advertisements placed on particular areas of the company’s websites. Advertisers can place adds in different formats and over different periods of time. For advertising, its key customers are global corporations doing business in Greater China and domestic companies in each of the regions in which Sina operates.

MVAS revenues are derived from mobile phone users by providing them with news and other content subscriptions, picture and logo downloads, ring tones, ring back tones, mobile games and access to music files. Sina charges mobile users on a monthly or per-usage basis for using MVAS.

Our model divides Sina’s business into three main operating segments:

1. Advertising: Sina derives about 78% of its revenue from display advertising and earns 53% gross margin on this business. The online advertising market in China nearly tripled in size from $1.9 billion in 2009 to $5.7 billion in 2012. During the same period, we estimate Sina’s share of the market declined from 11.7% to 7.2% as growth in Sina’s advertising revenue lagged behind growth in China’s online advertising market.

However, Sina has taken a number of steps to accelerate its monetization efforts for Weibo, a microblog analogous to a hybrid of Twitter and Facebook. In April, Alibaba (a leading e-commerce player in China) entered into a strategic alliance with Sina to purchase an 18% stake in Weibo for $586 million. Sina expects this deal to rake in $380 million in advertising and other revenues for Weibo over the next three years. ^[1]

Additionally, Weibo has been increasingly gaining popularity among users in China. In Q3 2013, the daily active users on Weibo increased 11.2% sequentially to reach 60.2 million, and advertising revenues from Weibo increased 46% to $43.7 million. ^[2] Going forward, we estimate Sina’s share of the online display ad market will marginally increase on account of its efforts to improve monetization at Weibo.

Sina’s advertising gross margin declined in 2011 and 2012 due to heavy investments in building the Weibo platform. However, Sina is now experiencing an increase in profitability as Weibo monetization is starting to pick up. We believe that Sina’s advertising gross margin could climb further over our forecast horizon as Sina scales up its advertising business, and as the investments in Weibo and the strategic partnership with Alibaba pay off.

2. Mobile Value Added Services (MVAS): MVAS generate about 13% of Sina’s revenue with a gross margin of about 40%. The revenue contribution of MVAS stood at 33% in 2009 and has been declining since then. We expect the trend to continue going forward.

Sina’s ability to offer mobile value added services to users is highly influenced by the policies of the various operators such as China Mobile, China Unicom and China Telecom. The industry is subject to various regulations which keep changing, making it difficult for companies to keep astride with the changes.

We believe that the operator policy changes will continue to be a risk to Sina’s MVAS business. We also think that competitors like Kongzhong, TOM Online, Linktone and Hurray, some of whom have access to greater financial resources, could be a threat to Sina’s MVAS market share. Based on this we estimate MVAS revenue to continue declining for the rest of our forecast period.

The stringent regulatory environment in the industry has led to a decline in MVAS gross margins. We expect gross margins to continue to decline in the future.

3. Other Paid Services: Sina also offers other paid services such as paid email services, online games, and eReading. These services contribute 9% to Sina’s total revenue. With a gross margin of 77%, it is the most profitable division for the company.

Sina’s revenue from other paid services increased by more than 55% annually since 2009 to reach $37 million in 2012. We estimate the revenue from paid services will quadruple by the end of our forecast period. We believe that the rising Internet penetration and the growing popularity of online games in China will fuel growth in revenue.

We expect Sina to incur increasing expenses in order to attract users in the highly competitive online gaming market in China, and therefore, we estimate the gross margin on paid services to decline marginally in the future before stabilizing.

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1. Sina sells Weibo stake to Alibaba for $586m, Financial Times, April 29, 2013 [↩]
2. SINA Corporation’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, November 13, 2013 [↩]