Sina Q3 Earnings Preview: Investments Outside Weibo Likely To Increase

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Sina (NASDAQ:SINA) is set to release its results for Q3 2014 on Thursday, November 13. The leading Chinese online media company posted a 19% year-on-year increase in revenues in the second quarter of fiscal year 2014, topping $187 million. Advertising revenue grew by 29% and contributed close to 83% of total revenues, while non-advertising revenues decreased by 15% to $31 million. The two important factors for the increase in revenue were the ever-improving performance of micro-blogging site Weibo and the beneficial impact of the FIFA soccer world cup tournament. [1] The world cup may be over, but Weibo is expected to continue its strong run going ahead. Operating income may, however, be bogged down by investments in new initiatives.

We have a $71 value estimate for Sina compared to $41 market price for the stock.

See our complete analysis of Sina here

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Optimistic On Weibo

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 99% year over year to $59.6 in Q2 2014. This increase in revenues was because of native ads, especially those of small and medium enterprises, and Alibaba and e-commerce merchant revenues. [1]

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)

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.

Investments Outside Weibo To Continue

Prior to Weibo’s IPO, the Sina management had found it difficult to invest in avenues outside of Weibo due to paucity of funds. Post Weibo IPO, Sina invested heavily in other segments in Q2. This is expected to continue into Q3. Talk of Sina entering the internet financial services space has been around since late 2013. In Q2 2014, it finally launched a portal called micro-fortune. According to Sina Corp’s CFO, “it is a web-based platform for selling high quality financial assets directly to individual investors supported by SINA Payment.” [1] It has partnered with two other companies, namely China Universal Asset Management Co Ltd and fund123.com in this venture. [3] Q3 2014 is expected to have witnessed increased investments in this venture.

Two other internet finance initiatives that could drain Sina’s cash in Q3 are online real estate finance and internet lottery. [1]Fang Jin Suo, a leading real estate services company in China, is a joint venture between Sina and E-house. It offers loan products guaranteed by insurance companies, micro-lenders, and real estate developers themselves. [4] China’s central bank requires real estate buyers to put up 30% down-payment for any loans from commercial lenders. Online firms are outside the purview of this regulation. This opens up a market valued at $16.4 billion in 2014 to online lenders such as Fang Jin Suo. [4]

We had earlier written on the Sina’s acquisition of online lottery website Aicai.com. During the soccer world cup, there was a large increase in sports related lottery sales through this channel. We had reported on how the Chinese online lottery industry is expected to grow by 70% this year from 42 billion Yuan ($6.7 billion) in 2013 due to the FIFA World Cup (See Sina Acquires Aicai.com). Sina is currently the largest shareholder but does not have a majority ownership. Based on the optimism expressed by the CEO of Sina during their Q2 earnings call, its possible that Sina increased its share in Aicai. [1]

Operating Expenses Also Slated To Increase

Last quarter, Sina reported non-GAAP expenditures of $117 million, a year-on-year increase of 55%. Three major causes were cited by the management for this rise. The first among these was higher marketing costs. Secondly there was an increase in labor costs due to increased employment of R&D personnel and wage increases for product development employees. The third contributor to increase in costs was the increase in infrastructure costs.

The management’s forecast for non-GAAP net revenues in Q3 is between $193 million and $199 million. Bloomberg Businessweek analysts consensus for the same stands at $196 million, with an EPS forecast of $0.18 per share.

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Notes:
  1. Sina Corp Q2 2014 Earnings Call Transcript [] [] [] [] []
  2. Form F-1 Registration Statement, www.sec.gov, March 2014 []
  3. Sina Acquired License For Fund Sales []
  4. China’s Online Mortgage Loans [] []