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 Reports and Commentary from the Investment World

Reports and commentaries are posted here on a regular basis.




Sina (SINA:NASDAQ) 2006-02-10

Sina, offers news and other information through more than 30 content channels, as well as email, search, bulletin boards, instant messengers, mobile services, and online games.

The website ranks sixth in the world for reach and page views, and it’s number two in China, just behind Baidu (Nasdaq: BIDU). It still outpaces Sohu (Nasdaq: SOHU), which ranks third in China and ninth worldwide. China’s number four site, NetEase (Nasdaq: NTES), rounds out the worldwide top 10.

Four of the ten most trafficked sites in the world are Chinese media portals!

Back in 2000, only 1.74% of the population of  China used the Internet, ac­cording to United Nations data. But  by 2003, this figure had almost quadrupled. Today, we are still barely scratching the surface. The world’s most populous nation is growing economically by leaps and bounds, coming online at  breakneck speed and starting to dominate the world in overall Internet traffic.

This is the backdrop that sparks our interest in Sina, far more than considerations over its position relative to its competitors or even its most recent quarterly results.
The number one traffic spot is held by Baidu, commonly referred to as the “Google of China.”
While Baidu has concentrated on a search model, Sina has kept a broad portal approach (a strategy similar to Yahoo!, which is the most trafficked site in the world). There is some overlap among these competitors, but each has carved out its own niche that should allow all to enjoy continued success. For example, Sina makes less than 50% of its revenues from advertising, while Baidu has adopted a model closer to Google, and makes virtually all its money from advertising.

At this stage of the Internet’s evolution in China its probably sensible for Sina to keep a diverse revenue stream. The Chinese market is quite different to the U.S. market: for example the explosive popularity of online games in China, which the government now regu­lates because of their potentially addictive properties. Or consider that China does not have the wired telephone infrastructure that the United States does, making reliance on mobile phones and additional services much higher.

China is an incredible growth story that is still unfolding, and we con­tinue to like Sina’s model of exploring different revenue opportunities with a variety of services.

In the third quarter of 2005, Sina released results that were disappointing. Total revenue, at $49.6 million, was in line with prior guidance. Yet while advertising revenue climbed 24%, revenue from other sources fell 22%. The biggest shock was the bottom line — net income dropped 37% to $9.1 million, or $0.16 per share. The income shortfall came from an unexpected splurge on advertising in an effort to attract customers to Sina’s short message services (SMS) with features like mobile fortune-telling. While it appeared to work, with SMS revenues growing by 11% sequentially, the cost of acquisition was high, with management counting on continuing subscriptions to make the campaign pay off.

Sina sank its advertising cash into television and radio. This shows that Sina is fighting aggressively to sell its services via traditional offline media. This makes sense in a country still rapidly bringing new customers into the fold. There is plenty of expansion yet to come, in China. Sina still faces some emerging market risks. It is operating in a communist country with a government that can impose draconian regulations very quickly and without much warning.
But the company’s valuation, at present, is attractive. It is trading at about 21 times projected 2006 earnings - a bargain for a company in one of the fastest-growing sectors of ’the Chinese economy. Compare that to Baidu, which is trading at about 116 times projected 2006 earnings.

Sina still maintains a strong balance sheet, with $288.6 million in cash and investments and $100 million in con­vertible debt. This gives Sina considerable scope to take the business in whatever direction the marketplace pushes.

Considering Sina’s past, it has been a remarkably static investment, lately, its shares have traded in a narrow range around $25, since September 2005. This is a stock, after all, that swung from a low of $1 per share to a high of $49 before pulling back to the mid-$20s. It is just below $23 today. I think it is due for another upturn. It could well resume its $49 share price in the near future.

Buy Sina (SINA:NASDAQ) below $25 for the prospect of big capital gains, as more Chinese become net savvy.


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.