Weibo To Boost Sina’s Results As Government Action Weighs On Growth

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Sina (NASDAQ:SINA) is set to release its results for Q2 2014 on Friday, August 15. The leading Chinese online media company posted a 36% year-on-year increase in revenues in the first quarter of fiscal year 2014, topping $170.5 million. Advertising revenue grew by 44% and contributed close to 80% of total revenues, while non-advertising revenues increased by 13% to $35.8 million. The sharp jump in advertising revenues was the result of rapidly improving monetization on Sina’s Weibo platform. [1]

Weibo is a microblogging and social networking website that enables users to follow celebrities and share user-generated content. Advertising revenues on the Weibo platform grew by 176% year over year to $51.9 million in Q1 2014, helped by the partnership with Alibaba and newer revenue streams such as promoted feeds for small and medium enterprises.

We believe that Weibo will continue to be the biggest contributor to Sina’s growth, at least in the near term. Weibo is already growing rapidly and  raised $285 million via a U.S. IPO (initial public offering) earlier this year. It intends to use about half of the proceeds to develop technology, infrastructure and products, to expand sales and marketing efforts, and to manage working capital needs. The remainder will be used to repay loans to its parent, Sina. (Read: Weibo Files For $500 Million U.S. IPO)

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We will update our $72 price estimate for Sina after the upcoming quarterly results are announced.

Weibo Will Maintain Its Growth Trajectory

Advertising contributes over 80% to total company revenues, and is thus the primary business for Sina. The company’s advertising revenues have increased by high double digits in the last few quarters, largely driven by the increasing scale and monetization of Weibo. Launched in August 2009, Weibo started generating revenues in the back half of 2012. It earned about $66 million in 2012, which grew nearly three-fold to $188 million in 2013. [2]

Weibo is strengthening its collaboration with Alibaba via tighter integration between Weibo users and Taobao merchants, and the use of Alipay to enhance mobile monetization.  As the two companies continue to collaborate in areas such as account connectivity, data exchange, online payment and online marketing, we expect Weibo’s monetization to pick up rapidly in the future. We also expect the platform to benefit as social media gains more acceptance for online advertising.

Sina has heavily invested in Weibo since the launch of the platform. This restricted Sina’s ability to invest in its portal advertising business. Now that Weibo has been spun off as a public entity, Sina will be able to focus resources towards building and marketing mobile and video products. The contribution of mobile to Sina’s portal business has been less than 5% for the past few years and the company is aiming at tripling the percentage this year. [3]

Government Action to Impact Video and Internet Publishing Businesses

In Q2 2014, Sina received notices from government bodies stating that the company’s license for Internet publication and for online transmission of video programs would be revoked due to certain indecent user-generated content posted on the company’s portal. As per the notice, the company can continue to offer certain video and online reading services to users, although the scope of such offerings is not very clear. [3] It is difficult to quantify the likely financial impact of the ruling. According to management, some of the company’s advertisers have become reluctant about buying video advertisements on its portal since the revoking warnings. The government move has also negatively impacted Sina’s stock price which has plunged from about $70 in March to under $50 currently.

Acquisition Of Aicai to Boost Lottery Business

Sina recently acquired the remaining shares of Shenzhen Zhong Wang Cai Network Technology, the operator of online lottery website Aicai.com. Aicai was established in 2007 with Sina as the majority stakeholder. According to the Ministry of Finance (MOF), China’s lottery industry generated 309.3 billion Yuan ($49.5 billion) in sales revenue last year, up by 18.3% compared to 2012, making it the second-largest lottery market in the world after the U.S. In the first quarter of the current year, the industry generated 80 billion Yuan ($13 billion), of which online channels had about 18% share. Aicai’s market share of online sales was 4.9%, behind taobao.com’s and 500.com’s market shares of 11.3% and 5.8%, respectively, according to Analysys International. [4]

We believe the acquisition will strengthen Sina’s position in the Chinese online lottery industry, which is expected to grow by 70% this year from 42 billion Yuan ($6.7 billion) in 2013 due to the FIFA World Cup. The Internet does not cannibalize lottery tickets sales of traditional distribution channels since many people still prefer to buy tickets from lottery stores. It rather helps the lottery industry to generate incremental sales because buying tickets online is more convenient. In 2010, the MOF made online distribution a legitimate channel for authorized lottery distribution organizations. Since then, online lottery sales as a percentage of total lottery sales have increased from nearly 4% to over 18% today. We expect this to slowly converge with the online penetration in developed countries, where over 30% of lottery tickets are sold online.

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Notes:
  1. SINA Reports First Quarter 2014 Financial Results, Sina Earnings Release, May 21, 2014 []
  2. Form F-1 Registration Statement, www.sec.gov, March 2014 []
  3. SINA’s (SINA) CEO Charles Chao on Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 21, 2014 [] []
  4. Winning ticket?, Global Times, May 13, 2014 []