Description

SINA is a Chinese Internet stock with underappreciated optionality and limited downside. The stock has had a big run in 2016 as this written-off social media service made a comeback on accelerating user growth and soaring advertising revenue. After the 3Q16 earnings the stock has been going through a bout of profit-taking consolidation and settled back down to the $60 level. At this current price, the risk reward has become very favorable again.

Valuation - Part I

There is about $12/share of net cash and $11/share of value from its Internet Investment Portfolio. At current share price, you’re paying $2.6 billion for SINA’s operations. SINA’s operations mainly consist of Weibo, which it owns a 50.3% controlling stake in. Evidently, whether the stock is attractive at $60 mostly depends on what Weibo is worth. So what is Weibo worth?

Weibo’s business

Weibo is a one of a handful of social media platforms in China that draw a massive number of daily active users (300MM MAU and 132MM DAU to be exact). The massive daily reach of this social media makes Weibo a uniquely desirable property for advertisers. Only Tencent, Alibaba and Baidu provide a daily reach of over 100MM people, but these other platforms all have different niches and none of them quite do what Weibo is capable of doing in social advertising. Many would explain Weibo’s business as the “Twitter in China”, which sounds ominous because Twitter has been losing mindshare in the global social media space. Since Weibo began in 2009 as an imitation of Twitter, it has cultivated and witnessed the development of an evolved ecosystem of content generators in China, which I will call Key Opinion Leaders (“KOL”), for lack of a better term. These KOLs produce content that attracts audience in the open townsquare of Weibo, conducting commerce through the aggregation of popular attention. These content help Weibo grow and retain active users gratis. The increasing scale of the platform allows these KOLs to expand their commercial opportunities which then incentivize more content generation, thus the reinforcing virtuous cycle that typifies a social media service.

Weibo as a social media service, should be distinguished from the more formidable social network giant Tencent, whose Wechat application is built around the communication feature. Wechat does have a social media component called Moments, but its nature is much less open and does not challenge Weibo’s niche of being open and massively distributed. (I can see what actor Wang Baoqiang posts on Weibo but I can’t see what he posts on Moments – only his Wechat friends can.) If Wechat has the front row seats in this Internet Industry show, then Weibo has the cheap seat all the way in the back. Yes, Weibo’s position is less lucrative and less entrenched than Wechat’s, it is nonetheless a defendable niche. In fact, Tencent has worked very hard to unseat Weibo’s dominance in social media via their own Weibo duplicate service for many years, only to give up in the end. So just like Alibaba successfully defended their ecommerce turf, Weibo dug up the trenches and fended off even formidable giant like Tencent. No one could say for sure whether Weibo’s moat will always be insurmountable, but their defense has been tested and triumphed. As a side note, I like the management team – they struck me as focused and relatively straightforward. They have shown themselves to be strategic thinkers with imagination but also with a capacity to execute.

The Numbers

The industry is experiencing a strong rising tide. The US$42BN digital ad market in China is growing at 30%. And just like in the US, the digital advertising budget (~US$42BN in 2016) in China is on the cusp of moving to social, mobile and video. This amounts to billions of ad budget shift to Weibo’s niche. The traditional TV ad budget (~$22BN) is also ripe for digital migration, which also adds billions of revenue opportunity. Weibo will finish 2016 with about $600MM of advertising revenue, up 50% yoy. Even capturing a fraction of that secular migration would mean massive revenue growth for the Company.  And the Company has so far executed pretty well to put all the pieces in place to tap that migration. Just like other social platform that relies on User Generated Content (UGC), Weibo’s incremental margin is relatively high, at over 50%. In the first 9 months this year, 58% of the incremental revenue dropped to the EBIT line, demonstrating the power of its operating leverage (contrary to platform like Pandora or Netflix). So by growing its ad revenue from $400MM to $600MM in 2016, Weibo will grow its EBIT from $38MM to $140MM. I estimate that Weibo will grow its ad revenue by 50% and 42% in 2017 and 2018, allowing its EBIT to grow to $300MM and $450MM in 2017 and 2018. In a country with 800MM smartphone users, a social media platform with only 300MM MAU should have a decent runway of growth. 20% MAU growth automatically expand ad inventory accordingly. As advertisers shift ad budget to social, mobile and video, pricing will improve along with it, adding to the tailwind of growth. In my model, Weibo’s ad revenue in 2018 will be $1.3BN, whereas Today’s Headlines will have achieved $1.5BN ad revenue in 2016 just with 70MM DAUs.

Valuation – Part II

Some investors might roll their eyes at these kinds of hockey stick projections, especially since 2016 is just the first year where Weibo generates significant EBIT. But I don’t think it would be hard to see a clear trajectory to $300MM EBIT in the near future and this kind of social media property with network effect should garner a 10x multiple even if Weibo ends up losing its glitter. Below are a few scenarios I have evaluated. There is some modest downside risk if Weibo choked and got disrupted circa Renren (or MSN!). But I do think the upside case where Weibo ends up being a $10-15 billion property is realistic.

Without getting bogged down by the complex landscape of the Chinese Internet space, I hope it’s clear that the risk reward is quite attractive here. In the BAT era (as many investors would call the current state of the Chinese Internet industry), Weibo does stand alone awkwardly as a strategic target beckoning to be acquired. In fact, the recent selloff in Weibo and SINA shares has something to do with the speculation that Weibo is distancing itself from Alibaba, which is the most likely buyer of Weibo in most people’s minds. But I do think that there is nothing that said it has to be Alibaba who acquires Weibo.

Some might argue that there should be a holding company discount. I would counter that because SINA controls Weibo and that SINA doesn’t have other businesses that are meaningful relative to Weibo, a discount is not fair. In fact, because SINA owns the newly completed campus with over 1.4MM sq ft of office space in the heart of Beijing’s “Silicon Valley” (right next to Baidu and Tencent’s Beijing campus), and the fact that SINA shareholders are more aligned with the CEO of SINA, I would be happy to own SINA rather than WB even without any holding company discount. I think it’s very noteworthy that the CEO of SINA Charles Cao bought 11MM shares of SINA in the summer of 2015 at $41.49/share.

Investment Portfolio:

My $11/share estimate for the Investment Portfolio has factored in a 25% discount off its book value ($1.04BN). The performance of private equity investments made by SINA has been a mixed bag. The Alibaba investment in 2011 is a 5-bagger. The Today’s Headlines was a homerun also. Youku Tudou was pretty good. The Tiange investment is profitable but it’s probably too early to say. The E-House investment is the biggest so far and since it was just taken private, I think it’s too early to say. Other than that, the other investments have pretty much gone nowhere. Of the $1 billion investment portfolio on SINA’s book, E-house (at valuation where insiders new money recently went in) and the market value of Tiange, Alibaba and Jupai accounts for about half of it. I believe taking a 25% conservatism discount off of the book value would be appropriate. If you’re not Tencent, who is in the position to pick winners and losers in each vertical, tech ventures investing has been pretty hit or miss in China, where home runs such as Didi Kuadi and Today’s Headlines are hard to come by, which incidentally SINA both hit.

Investments made at the Weibo level, however, has been stellar so far. Two major investments, Didi Chuxing ($142MM at cost) and Yixia Tech ($190MM at cost) are likely to be home runs. I believe Weibo’s Didi Chuxing investment (made in May 2015 during the Coatue round) have more than tripled. So Weibo’s investment portfolio might already be more valuable than SINA’s.

SINA’s operations apart from Weibo

SINA’s operations apart from Weibo is in a state of newspaper-like decline and is on track to generate a modest loss of ~$25MM second year in a row. But I don’t think it makes sense to analyze Weibo and SINA ex-Weibo separately given their porous separation. On a consolidated basis the ex-Weibo loss is not likely to be ever material, given that Weibo itself is estimated to generate $300MM and $450MM of operating profit in 2017 and 2018 (my estimates).

Why does this opportunity exist?

Weibo just hit the inflection point recently and it’s often hard for the investment community to have conviction over this kind of steep trajectory right away. But the real opportunity is in SINA stock. Those who spend time following the complex web of developments in the Chinese Internet landscape and decided to be bullish on Weibo are likely to be investors who find the complexity of SINA too cumbersome. They’re likely to want to simply buy WB stock on the story than to spread the financial analysis that one typically has to do for a John Malone situation. Those who are comfortable with the complexity of the SINA stock might struggle with a story stock like WB in the unfamiliar Chinese Internet space.

Catalyst

None