SINA stub trade

SINA is a dominant Chinese internet media company. It owns 57% of the newly IPOed Weibo, the Chinese version of Twitter. SINA’s stock is crushed after it received notice of hearing from National Anti-Pornography Office for disseminating pornographic content on its site. The two licenses in question are “Internet Publishing License” and “Audio/video program transmission License”. The stock lost  about 12% of its value since the news was broken out by Xinhua News Agency. I think this special situation gives investor a unique opportunity to selectively acquire SINA’s core business at a very cheap valuation.

Besides the 57% stake in Weibo, SINA also owns various publicly traded investments, that is not appreciated by investors. It owns

1, 29.3M shares of e-House (EJ), a on-line and off-line hybrid real estate service company.

2, 3.7M shares of Youku Tudou (YOKU), the Chinese youtube that provides internet video service.

3, Mecox (MCOX) worth roughly 8M. Due to the small value, I will omit it in my valuation.

Sina has about 1000M net cash on balance sheet or about $15

I think Sina’s control stake in Weibo should give them a premium to the public market valuation. For every 100 SINA shares, you can short 174 shares of WB, 44 shares of EJ and 5.5 shares of YOKU to create the SINA stub. Even if we take a 20% haircut on its publicly traded investments, you can own SINA’s core business and its private investment at very cheap price.

Sina’s core portal business generated 378M through online advertising and about 458M total revenue. It can generate 175-200M EBITDA annually. It should grow in the mid single digit this year, given the upcoming world cup. My base case for hearing regarding the two licenses is SINA reaches an agreement with the government, keeps the license and pays a fine, as event like this often turns out in China. In the worst scenario, where the two licenses in question are suspended, it is not going to be end of the world for Sina’s core business. The literature service does not generate material revenue for Sina. The video license is a lot more important to Sina, as SINA sells video ads accounts for 10-20% of its core revenue. Even SIna loses the video license, it does not necessary mean it will stop video service all together. There are several video operators in China without a license.

SINA also holds some valuable private investment, that is under appreciated by US investor

1, Sina Invested 50M in Alibaba in October 2011 together with other investors, including Giant. The investment give Sina abouturt 0.15% stake in Alibaba group. Giant sold its 50M investment to Tiger Fund early this year for 200M dollars. With Alibaba going IPO soon, Sina’s investment should worth at least that.

2, SIna invested 30M in 2010 for 30% stake in 9158.com. 9158 is a leading leading Chinese onlne music and video social platform. Users can play Karaoke and act as host. 9158 generates revenue through selling virtual goods. In 2012, it had 150M in revenue and generated about 30M net income in 2013.  It is rumored that 9158 plan to IPO in the second half of this year. The valuation is about 700M-1B.

I think 450M or $6.75 per share is a conservative valuation for Sina’s private investment. So even we assign a zero valuation to Sina’s core business and 20% discount on this public and private investments. Sina’s stub is still an attractive investment.

I think a better way to play the relative valuation between SINA and WB is through options. The July 30 delta call on WB (the 22.5 strike) trades on 80% vol while the 30 delta call on SINA (52.5 strike ) trades on 53.5% vol. You can buy 1 the July 52.5 call on sina and sell the 2 22.5 call on WB, netting a small amount of premium. July is a sweet spot because by the time of expiration the license issue should be resolved.