Description

Weibo is the Chinese version of Twitter. At end of 2021, Weibo’s MAU reached 573m and DAU reached 249m, an YOY increase of 10% and 11% respectively. The company grew revenue by 34% in 2021 (albeit against easy Covid comps), which almost doubled the overall market growth, and 20% in Q4 ’21 vs. flattish for competitors like BIDU and Tencent. They also generated 37% non-GAAP EBIT margin and 35% FCF margin for the full year, monetization levels which every TWTR bull (myself included) could only have dreamt of. The stock had sold off with the rest of Chinese internet cohorts, dropping from $65 at beginning of 2021 (and hit again during a rumored takeover bid in the summer) to $20 recently. My personal view is that under 4x EV/EBIT and FCF discounts a lot of the negatives/sentiment. I don’t think it is remotely feasible to re-create this unique asset at current EV of under $3B (vs. 2021 FCF of $800m), or less than 1/10 of TWTR’s EV. Looking out two years, 10x FCF + cash is a double from today’s price.

Stable Fundamentals over the LT; Near Term Cliff:

One of the topics du jour in US social advertising space is the emergence of Tiktok. For better or worse, the Chinese market has seen this episode back in 2019, with Douyin (Tiktok’s Chinese sibling) wreaking havoc on peers. WB had withstood the onslaught and largely held its market share, judging by various engagement measures such as time spent and MAU/DAU. In the past, they had also come out unscathed from competition with Tencent’s wechat. It is fair to conclude that similar to Twitter, Weibo’s positioning as the go to place for current events and Key Opinion Leaders is very hard to crack. User engagement typically sees a boost from major events, ranging from Winter Olympics, Ukraine War and Omicron lockdown.        

2021 was a strong year for Weibo, as the company benefited from an improved content community ecosystem and continued migration to video contents. The number of video accounts grew from 1mn in 2020 to 25m+ in 2021, and video content accounted for nearly half of Weibo’s top search. WB was also under-indexed to the hardest hit verticals like education, gaming and fintech. Over 60% of revenue are from three relatively stable verticals-- FMCG, ecommerce, and 3C.

Mgmt did not give Q1 guidance on the Q4 call in early March, but suggested that double digit revenue growth is reasonable. However, macro economy and consumer spending in china had nose-dived starting in March, amidst a recession compounded by draconian (not to mention insane) Zero Covid policies. Focus Media, the largest operator of digital signage screens, recently reported that advertising revenue was flattish in Jan/Feb, but declined 40% in March and deteriorated even further in April. I think it is reasonable to assume that Q1/Q2 will be pretty ugly for WB and virtually every Chinese company. On the other hand, we could potentially see unprecedented government stimulus starting in 2H. I am modelling ’22 revenue to be down 10% YoY and profit to be down 20%, before recovering in ’23 to normalized growth rate of 10%. Again, current valuation has discounted a lot of the negatives.

Censorship/government regulation: Arguably the biggest risk for WB is an existential one. The immense power of this social town hall is widely recognized globally, and it is very natural to wonder how an increasingly authoritarian government could leave this platform in private hands. Making matters worse is that the 2^nd largest shareholder is Alibaba, which is obviously right in crosshairs of the government and currently liquidating all media related assets.

I am probably burying the lead here – I made a very inopportune decision to relocate to Shanghai last year, and unfortunately have spent 40 days under lockdown with 25m+ residents. It is an understatement that the government censorship of WB and all the internet sites has been taken to a whole new level during this recent fiasco. My own wechat account was suspended for a day for allegedly “spreading false information”. While it sucks to live in a real life 1984 setting, I have managed to find a few silver linings. First, people still seek news and information, and Weibo (“Hot Search”) is still most often where these news/stories are broken and shared. Most of the screenshots shared through wechat/tiktok were first posted on Weibo. People go to great length to combat censorship, using similar characters/obscure references in place of banned words. Secondly, there is palpable anger and discontent, and more importantly, reflection on how the heck so many tragedies and farces could happen in this once proud city. The spontaneous posting/reposting of a short video “Sounds of April” in wechat Moments was something I have never seen.

Perhaps naively, I am secretly holding out hope that this recent fiasco is sowing the seeds of another wind change in China. If you study the history of Communist China, you will find many twists and turns in the ideological and economic direction, most of which happened right after horrendous events, including the “Great Leap” and Cultural Revolution, which share some eerily familiar moments to the farce today. I suspect Xi’s strangle hold on power is not as strong as it appears to the outside world. Even Mao had to make significant concessions during his heyday. The reality on the ground is painfully obvious, even to the party insiders – the worst macro economy in 40 years, disastrous foreign policy mis-calculation, mishandling of Covid leading to wide-spread social discontent. Xi securing the 3^rd term this fall is still the base case, but if somehow he is pushed out, or sees his power curbed, we could potentially see a monster rally in Chinese equity.  

Corporate governance: WB has two big shareholders. Sina is the major shareholder with 45% shares and 71% of voting power, and BABA holds 30% of shares and 16% voting power, so public float is relatively small. Corporate governance was a major issue for Sina (check the various VIC write-ups for background), before the company went private in an arguably take-under (meager 12% premium) led by CEO Charles Chao. It is widely speculated that Chao will eventually make a bid for WB, possibly teaming up with a fund/entity with government background to take over the stake owned by BABA. Last July, there was a rumored bid by SINA at $90-100/share when WB was trading at $50. I think a take-under remains a risk, but less so with stock down at $20. The company did announce a $500m buyback program in April.

ADR/Delisting Risks: This issue is hotly debated on the BABA threads. I don’t have any strong opinions on ADRs in general, although I personally think they are issues that typically receive the most attention in bear markets. Ironically, there are many precedents where the same company is re-listed in China market at MUCH higher multiples, although I certainly don’t cheer for that scenario, as the path will be painful. WB itself is already listed in the HK market, though trading liquidity is abysmal. There was a Reuters story on Friday that PCAOB officials had arrived in Beijing to settle this long running dispute over auditing compliance. One can only hope that the Chinese government come to their senses and make the necessary “concessions”, which could serve as a NT catalyst in an otherwise brutal tape for KWEB.

Catalyst

Resolving delisting risk

change in course of Zero Covid