Here Are The Key Factors Underlying Our Valuation For Sina

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SINA: Sina logo
SINA
Sina

Sina (NASDAQ:SINA), an online media company in China, has seen its stock rise by over 70% over the past three months. This has partially been driven by the recent announcement of $456 million cash investment by the company’s chairman and CEO, Charles Chao, to acquire 11 million newly issued ordinary shares of the company. This investment has significantly boosted investor confidence in the company, which is facing challenges in its core businesses. We believe Sina’s overall business could continue to grow over our forecast period, driven by opportunities in the Chinese mobile Internet market, which could lead to expansion in user base on both Weibo as well as Portal.

See our complete analysis of Sina here

What Are The Major Ways Through Which Sina Derives Its Revenues?

Segment

2014 Revenue (Y-o-Y Growth)

Q1 2015 Revenue (Y-o-Y Growth)

Portal Advertising

$375.5 million (-1%)

$71.2 million (-15%)

Weibo

$334.2 million (77%)

$96.3 million (43%)

Others

$58.6 million (-41%)

$17.1 million (-15%)

Total revenues

$768.2 million (16%)

$184.6 million (8%)

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Sina primarily earns its revenues through online advertising and marketing on its Portal (which includes media offerings such as SINA News, SINA Finance, SINA Sports and SINA technology) as well as on its social-media platform ‘Weibo’. Sina owns a controlling stake in Weibo, holding around 58% of its overall outstanding shares. In addition to online advertising, Sina also provides game-related services, VIP membership, and data licensing on Weibo platform. Finally, the company offers mobile-value added services (MVAS), where it allows mobile users (2G and 2.5G mobile subscribers) to receive news and information, games, pictures, ringtones, etc.

Who Are Sina’s Customers And How Does It Sell Its Services?

Sina offers online marketing services to a diverse set of customers, including large domestic companies, multi-national companies, as well as small and medium business enterprises. The online marketing customers belong to various industries such as automobile, fast-moving consumer goods’ (FMCG), Internet services, IT & telecom services and financial services. Online advertising services include display advertising, promoted marketing, as well as sponsorship arrangements. While revenue from display advertising is based on the duration of the ad, revenues from promoted marketing is based on engagement activity (such as when a user clicks on a link or follows a brand). Additionally, Sina derives MVAS revenues from mobile phone users by offering SMS, MMS, CRBT, WAP, as well as IVR and KJAVA games (charged on a monthly or per-usage basis).

What Are The Major Operating Expenses For Sina?

Operating Expenses

2012 2013 2014 Q1 2014

Q1 2015

Cost of Revenues (as a % of Revenue)

46.8% 40.8% 37.8% 40.0%

41.9%

Sales and Marketing Expenses (as a % of Revenue)

26.9% 24.1% 29.8% 29.1%

32.6%

Product development expenses (as a % of Revenue)

20.4% 22.0% 25.0% 26.0%

28.0%

General and administrative expenses

7.4% 9.7% 10.8% 10.0%

11.2%

Total operating expenses (as a % of Revenue)

101.6% 96.6% 105.3% 105.1%

113.7%

Operating Margin (%)

-1.6% 3.4% -5.3% -5.1%

-13.7%

Cost of revenues and sales & marketing represent the key expenses for Sina, accounting for nearly 70% of the overall operating expenditure. During Q1 2015, Sina’s operating margin fell sharply owing to an increase in personnel costs and marketing expenditures. Promotional events such as the red envelop campaign during the Chinese New Year was also responsible for this sharp rise in expenses. Going forward, we expect this margin-related pressure to persist mainly due to growth in sales and marketing, and product development expenses.

What Are The Key Growth Opportunities For Sina?

High Growth Potential In The Chinese Internet Market

With Internet penetration rate less than 50% in China, the country’s Internet market still has significant room for long-term growth. Moreover, the majority of new Internet usage in China is driven through the mobile platform due to rising adoption of smartphones. Sina has shown promising results in mobile monetization — mobile advertising revenue contributed for around 58% of its overall advertising revenue during the latest quarterly results. We believe the rapid surge in China’s mobile Internet population provides an opportunity to Sina to significantly expand its mobile user base on both Portal as well as Weibo platform.

What Are The Key Risks To The Business?

Core Business Is Facing Challenges

The advertising business on Sina’s Portal has come under pressure due to the rapid shift in Internet usage from desktop to mobile devices. While mobile advertising revenues on Portal rose by 239% year-over-year in Q1 2015, it was not enough to offset the fall in traditional PC business. In addition, macro-economic challenges and reduced ad spending by large brands have also impacted Portal revenues for Sina.

Further, the company’s MVAS revenues continue to decline because of dwindling user base and frequent changes in operator policies. We expect this business to face continued challenges over our forecast period.

We are in the process of revising our $39.81 price estimate for Sina’s stock.

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