Do not miss this under followed regional bank

franklin

 

Would you like to invest alongside with a proven management team that already has successfully sold two banks at attractive valuations? Would you like to own a promising bank that has demonstrated tremendous growth in the past few years and is poised to grow further? If these questions piqued your interest, read on.

 

According to the bank’s 2014 10-K filing, Franklin Financial Network(ticker symbol FSB) is a bank holding company that owns Franklin Synergy Bank located in Franklin, Tennessee. The founding team, led by Chairman and CEO Richard Herrington, found their first bank Franklin Financial Corporation (not related with this current bank) in 1988 and sold it at five times tangible book value to Fifth Third Bancorp in 2002. Then they took over a troubled Tennessee-based bank in Dec 2002, turned it around by slashing nonperforming loans to a seventh and expanded net income six times within four years, and sold this second bank at three times net tangible book value to Green Country Bancshares in May 2007. Without taking much pause, such savvy management picked the worst timing for the banking industry and started their third bank in the midst of the Great Recession. They didn’t just survive in this terrifying environment- they totally killed it. The management swiftly worked out the majority of the non-performing loans and FSB’s non-performing loans to total loans is at 0.1% at the end of 2014, a stunning figure which is about 2.5% lower than its peers. Net charge-offs even in 2009 was only at 0.26%, which is about 1% lower than its peers, and the charge-offs at the end of 2014 is around 0.

 

Recently, another Tennessee bank has filed for an IPO, and their filing shed some more light on Tennessee’s local banking landscape. I was able to locate most local Tennessee competitors and compare their results against Franklin Financial’s. The results are quite revealing and even further strengthened my belief that Franklin Financial has probably the best managerial talent in Tennessee. But before I talk about the comparisons, let’s answer another important question first: why Tennessee?

 

The state since the past few years has become very business friendly. As a result, it is benefitting from business and manufactures relocating from other places. Tennessee has been the No.1 states

for advanced industry job growth since 2013.  Fast job growth push unemployment below the national average and is around the lowest level in 15 years.  Forbes magazine ranks Tennessee’s Nashville metroplex fourth on the 2016 Best Big Cities for Jobs, only behind San Francisco, San Jose and Orlando.

branch locations

Yellow dots mark Franklin Financial’s branch locations.

 

Williamson County and Rutherford County, where Franklin Financial’s 11 out of 12 branches are located, have a blended median household income at $79,443 in 2014, higher than cities like San Francisco and Honolulu. Their projected population growth is at 8.4% which is on par with other high growth cities such as Houston and Dallas.  A combination of high income, robust job growth, healthy population growth makes the area very attractive to banks.

Now let’s move onto the local competitive banking landscape.

Deposit growth and branch efficiency

 

Deposit CAGR 2013 – 2016 Q2 Branches Total Deposit(in millions) Deposit/ Branch
First Horizon National Corp(FHN) 5.48% 152 20,630 135.7236842
Pinnacle Financial Partners(PNFN) 13.36% 44 7,293 165.75
FB Financial Corp(N/A) 8% 45 2,500 55.6
Franklin Financial(FSB) 38.83% 12 2,250 187.5

All data compiled from the listed companies’ 10-K and 10-Q reports

 

This table shows the publicly listed Tennessee-based banks that only conduct businesses in Tennessee. As we can see, Franklin Financial experienced a superior deposit growth compared to other banks. Although observant readers will point out that Franklin started with a much smaller base compared to its larger competitors, but what makes Franklin’s truly shine are two facts behind the already stellar numbers. First, the deposit/ branch number is highest on the list. For the same amount of deposit held, lower bank branch number means less branch costs, contributing to lower Efficiency Ratio (which we will get into in a second). Second, most of the deposit growth is from organic growth. Franklin grew its deposit base in Williamson County solely in an organic fashion and became the No.1 bank in that county in 7 years, coming on top over many other much more established national and other regional contenders. In July 2014, it acquired MidSouth Bank that exclusively operated in Rutherford County. The MidSouth Bank had $244 million deposit and 5 branches, making the deposit/branch at a much lower $50 million/branch. Franklin’s combined total deposit immediately after the MidSouth Bank acquisition stood at $992 million and after 2 years at the end of 2016 Q2 the number increased by an astounding 127%. Therefore, of the $2,250 million deposit it currently holds, $2 billion is from organic growth. The huge organic growth just shows how good Franklin’s bankers are at getting deposit against the competition. It gives me the confidence that the company is capable of acquiring banks and growing the acquired businesses if more acquisitons occur in the future.

 

2016 Q2 Operating metrics comparison

 

Net Interest Margin Efficiency Ratio Net charge offs Nonperforming asset ratio ROE ROA
First Horizon National Corp 2.92% 70.51% 0.25% 0.24% 10.00% 0.91%
Pinnacle Financial Partners 3.72% 51.90% 0.39% 0.33% 9.92% 1.33%
FB Financial Corp 4.20% 69.54% 0% 0.66% 16.00% 1.40%
FSB 3.33% 52.58% 0% 0.10% 14.48% 1.14%

 

All figures except FB Financial’s are from the companies respective SEC 2016 Q2 filing. FB Financial figures are adjusted based on its initial IPO filling by normalizing its tax rate.

 

In this table, like I mentioned before, Pinnacle and Franklin the two banks that have a much higher deposit/branch number also hold a much better Efficiency ratio. In addition, Franklin’s net charge offs and nonperforming asset ratio are the lowest among the four. ROE is the second highest right behind FB Financial. However, FB Financial’s income and ROE figures benefited greatly from its mortgage re-financing business while Franklin’s income is mostly from its lending business. If interest rate starts to rise, re-fi business will shrink while lending will become more profitable. So my forecast is that going forward in a rising interest-rate environment, Franklin will have the best ROE among the four Tennessee banks.

 

Lastly, let’s look at the valuation comparison. I removed FB Financial because it is not yet listed. Also, I added the median numbers for region banks in the South and banks with a similar asset size to Franklin’s. The median numbers are referenced from here. The stock prices are from Aug 26, 2016.

 

TTM P/E Forward P/E P/TBV
First Horizon National Corp 14.3 15.9 1.68
Pinnacle Financial Partners 20 18.6 3.15
Franklin Financial 16.3 13.2 1.89
median for southern banks 16.3 1.47
median for $1B-$5B banks 15.3 1.44

 

Franklin is not cheap based on average price to tangible book value but we are not paying for an average bank either. The investment is a bet on the continued healthy net income growth reflected here in a low forward P/E ratio. From 2012 to 2015, Franklin Financial’s loan quadrupled and so did its net income. Its revenue in the most recent quarter is growing at 50% year over year and net income year over year doubled. As Franklin Financial demonstrate continued fast revenue and income expansion, the market should eventually reward the bank with a premium valuation.

 

Future catalysts for Franklin Financial:

 

  1. Loan expansion. Based on management’s consistent past record, the loan volume should keep rising in the future. The company is well above the required ratio for banks to be considered well capitalized so it is allowed to leverage its balance sheet further even if it doesn’t acquire any more deposit. But I don’t believe the company will stop taking deposit in its market so the combination of deposit growth and increase in leverage will be the engine for loan volume growth.

 

  1. Asset mix improvement. Franklin Financial’s loans make up only about 62.4% percent of total earning assets, a figure quite low compared to average bank’s number. As lower yield assets(securities held for sale such as bonds), which generates only half of the yield as Franklin’s loans do, become a smaller part of the total portfolio, the mix will improve and net interest margin will rise.

 

  1. Expansion into Nashville. The company expanded into Nashville with one bank branch. It also announced acquisition of Civic Bank which consists of two branches in Nashville. I believe Franklin can repeat its previous acquisition success and take market share in Nashville.

 

  1. M&A. Regional banks are not as much heavily regulated as the big banks. It is almost impossible for big banks to acquire more assets due to regulatory constraint so a lot of M&A activity is happening between the smaller regional banks. Franklin’s management team sold its previous two banks valued at five times and three times tangible book value respectively. Williamson County and Rutherford County are highly desirable markets for any banks that want to grow in Tennessee and what is a better way to enter these market than buying the Franklin Financial the best franchise in these two regions? Franklin currently is in the sweet spot where it can either be an acquirer or a target. A high net tangible book value multiple is probably well deserved to buy Franklin’s well managed assets.

 

  1. Rise in interest rate. This is the obvious catalyst that should propel all bank stocks higher.

 

  1. Recovery in housing market. Franklin’s bankers are specialized in real estate lending. Residential construction loans and residential real estate loans make up about half of its loan portfolio. If the auspicious August new housing starts indicates a sustained housing market recovery by any chance, Franklin should be able to crank up even higher residential loan volumes.

 

Summary

Franklin Financial is managing lending risks better and growing a lot faster than the average regional banks, a sign that demonstrate management excellence. The management team already has two successes under its belt, prospered through multiple cycles, and enjoyed working together for a long history. The banking business in Tennessee should experience solid growth under the current economic expansion and job growth. Therefore, as investors of this company, we are investing in the right place at the right time with the best management who owns over 12% of the company.  This is not a typical discount to tangible book value play but I believe paying for the current premium will reap big dividend in the future.

Skechers has further room to run up

skechers_gorun_ad1

Introduction

Skechers is a shoemaker that manufactures both lifestyle shoes and sports shoes. In 2010, the company developed shape-up shoes that promises of toning legs while walking. Those shoes were hot sellers back then until lawsuits broke out suing the company for injuries and false advertising.In recent years, its running shoes have enjoyed tremendous growth since Meb Keflezighi, the Skechers endorsed U.S. marathon runner, became the first American runner to win the Boston Marathon in 31 years.

Considered a big growth company in the hot athleisure space, Skechers was a darling on Wall Street during 2014-15 when its share price enjoyed a more than 400% run. However, as the company could not exceed the overly hyped expectation, its share fell precipitously, currently trading around 50% of its 2015 all-time high. With a 14 times P/E, is the stock a fallen angel to buy or a value trap to avoid?

Qualitative Analysis on Skechers

Strength: Skechers presents a unique value proposition different than most of its better-known competitors: unbeatable comfort at an attractive price point.

Skechers shoes are probably the most comfortable in the sports/athleisure category. As a person who exercises regularly, I owned quite a few pairs of sports shoes. Skechers shoes, with their memory foam cushion, are very soft to the feet. After getting used to the comfort of Skechers, when I switched back to a pair of my Nike, my feet were screaming at how hard my Nike shoes feel. Skechers’ athleisure shoes also offer superior support and comfort, making them very popular items among professionals, such as nurses, who walk a lot during the day and people who prioritize foot comfort over styles.

Skechers shoes have a different price range that its main competitors including Nike, Adidas, Under Armour and New Balance. Except the golf shoes and the GoMeb running shoes targeted at hardcore runners, most of Skechers shoes sell between $65 and $75 dollars. Although its competitors do have a selection of shoes priced in the similar range as Skechers, the majority of other brands’ shoes command a selling price between $100-130.

Challenges: current shoe designs do not impress and brand awareness is relatively low

Compared to the sleek and modern looks of its competitors’ shoes, Skechers shoes in general seem casual, laid-back and sometimes even a bit funky. Admittedly, there are customers that like the current Skechers design. However, to expand its customer base further and attract people who love the modern looks of other brands Skechers need to further improve its designs.

Another challenge Skechers facing is brand awareness. For the athleisure line, although celebrities such as Demi Lovato and Meghan Trainor have boosted the brand, internationally the brand still lacks recognition. For the sports shoes, the brand is still behind bigger shoemakers in terms of endorsements. This survey shows Skechers’ brand lags most of its competitors’ and ranks eight in 2014 among US males.  To be fair, the company recognizes this challenge and is trying to further boost its image by expanding its line of sponsored athletes such as runner Kara Goucher, , golfer Matt Kuchar .

Skechers’ Growth Catalysts:

Domestic

The athleisure trend is not going away and Skechers will continue riding the wave. First, the 21st century workplace dress code will keep leaning more and more towards being casual. Tech start-ups are the early adopter of such relaxed dress code. More companies, wishing to be viewed as promising and energetic like a start-up to its current and prospect employees, have also relaxed its dress code. Even JP Morgan in June this year has expanded business casual dress code to its bankers who before were only allowed to wear suits(Athleisure is still prohibitied in the firm)  In addition, with the rise of Lululemon yoga pants people started to wear athletic wear outside of gym or yoga studios. To gym-goers, it is convenient to go in and out of gym without changing clothes. As people desire a healthier lifestyle, the athleisure wear, which is associated with being sporty and energetic, will increasingly become even more popular. Another simple reason that athleisure trend will be sticky is because of these clothes and shoes are much more comfortable than their more formal brethren are. If sneakers are acceptable who want to wear dress shoes every day?

Skechers should also benefit from the fast fashion trend. Fast fashion retailers such as H&M and Uniqlo are taking shares from the traditional clothing brands by offering customers superior quality and affordable price. The concept of fast fashion should not stop just at apparel. Once people get used to buying 10-20 dollar t-shirts they will naturally start exploring alternatives to 100 dollar plus shoes. A shift from premium shoes to value shoes will greatly benefit Skechers.

International

Skechers’ international operations can expand further. Compared to its competitors, Skechers is still in the early stage of international expansion. According to Nike’s  and Adidas’  annual reports, Nike currently owns 683 international stores and Adidas has a total of over 2700 stores worldwide. On the other hand ,Skechers in its 2015 annual report showed that it owns only 259 international stores and 649 stores in total.   Particularly, Nike and Adidas both view China’s sports wear market still in the infancy stage and are still investing heavily in the country. As of end of 2015, Skechers in China only has 52 stores in the mainland(another 29 in HongKong). In the fast growing Southeast Asia region and India, Skechers only has 21 stores and 30 stores respectively. There is still ample room for Skechers to expand in all of these promising international markets.

Affordable price allows Skechers to penetrate developing countries’ markets better. Compared to in developed countries, in developed countries the advantage from price difference between Skechers and its premium brand competitors should become even more pronounced. Chinese on average earns less than $10,000  and the average Indian’s purchasing power is a quarter of Chinese’s. So the 30-50 dollar difference between Skechers and its competitors is not pocket change to the average consumer in developing countries. Skechers will be able to capture international consumers who cannot afford Nike or Adidas but desires quality shoes from a foreign shoemaker and who want to trade down from higher priced shoes but had no alternatives in the past.

Risks:

Running shoes sales may have peaked. Struggling with obesity and other health problems, Americans have increasingly adopted healthier lifestyles. As an integral part of healthy living, exercising is incorporated into more and more people’s routines and running is the most popular exercise. This in turn fueled a surge in running shoes sales in recent years and Skechers benefited tremendously from this trend. However, based on a WSJ article, the growth in running participation may have peaked and millennials have picked up other exercises such as indoor cycling, cross fit classes, and interval training as alternatives. Therefore, the big tailwind behind Skechers’ running shoes sales may have stopped and it is imperative for the brand to expand its line of offering and compete effectively.

The low price segment of athleisure might become more crowded. Adidas recently entered the same market segment Skechers currently occupies with Addids NEO. Adidas’ NEO shoes, priced at around $60, is an athleisure brand that maintains the looks and feels of more expensive and popular line Adidas Originals. It will not be surprising to see other established premium brands to adopt a similar strategy and enter this segment in the future.

Management Stock Ownership

One concern about Skecher’ stocks is the consistent insider selling. However, the selling mainly stems from options granted to management as bonuses and management still holds significant ownership of the company. Founder and CEO Robert Greenberg owns over 29 million shares of Skechers stock according to the latest proxy statement, making him the biggest shareholder. Combining his ownership and another roughly 5 million shares held by other Greenberg family members who are also officers of the company, the founding family currently owns over 20% of the company.

Sales Growth trend for Skechers,Nike,Adidas,Under Armour(in millions)

 

2013 2014 2015 TTM 3.5 yrs CAGR
Skechers 1,854 2,387 3,159 3,448 19.4%
Nike 25,313 27,799 30,601 32,376 7.28%
Adidas 19,483 17,921 18,426 20,159 0.98%
UA 2,332 3,084 3,963 4423 20.05%

 

NI(Net Income),Margin,ROE Comparison

2013 NI Margin 2014 NI Margin 2015 NI Margin TTM NI Margin TTM ROE
Skechers 55 2.93% 139 5.82% 232 7.34% 268 7.77% 19.69%

 

Nike 2,472 9.77% 2,693 9.69 3,273 10.70% 3,760 11.61% 29.58%
Adidas 1,080 5.54% 604 3.37%  691 3.75% 1,091 5.05% 16.00%
UA 162 6.96% 208 6.75% 233 5.87% 232 5.24% 10.61%

 

Valuation

P/E and  Ebitda Comparison

 

TTM P/E Forward P/E P/E net Cash EV/EBITDA
Skechers 14.37 12.22 10.7 7.70
Nike 27.88 24.39 22.3 17.77
Adidas 34 32.79 35.1 16.94
UA 113.54 72.46 71.9 38.09

(All comp data from GuruFocus.com as of 08/22/2016)

From the tables above we can see, for the last three and half years, Skechers has enjoyed a high growth rate almost on par with Under Armour, improved net margin and ROE that already passed Adidas and UA. Yet the stock is trading at a huge discount compared to sports brands’ stocks and the S&P 500. Although it may be hard to assign Skechers stock with similar multiples to premium sports brands, even a 50% increase in stock price would still put the forward P/E net cash at 16 times and EV/EBITDA at 11 times.

The stock suffered a big drop after Q2 earning partly because of an order pull forward into Q1 and sales pressure caused by some sporting goods stores’ bankruptcy liquidation clearance. The management stated June is the largest domestic shipping month in history and early July sales have exceeded their model.Given the current depressed price trading near 52 weeks low and the lowered expectation going into Q3, investors should accumulate a sizable position before Q3 earning comes out.

Analysis on Sina and Weibo stocks: SINA has further room to go but arbitrage between the two is the current best bet

Sina(Ticker SINA) stock has rallied about 30% from the recent low set in May. Although a sum-of-the-parts analysis of Sina still suggests the stock is trading at significant discount to even a conservative valuation, the discount gap has rapidly shrunken. In this article, I will give an introduction of the company, lay out the valuation of SINA based on a conservative case and a bull case, list the possible catalysts and risks, and recommend on how to trade the stock.

To avoid confusion, all financial figures are in USD not Chinese RMB.

An brief introduction to SINA

The best way to think of SINA is to consider it as the Chinese Yahoo because it resembles Yahoo in many ways. First, SINA started out as a Chinese news portal website that offers different types of information, such as finance, politics, entertainment, cars, weather and etc. Second, just like Yahoo, the hot web company in the past was eclipsed by newer Chinese net companies such as Baidu and Tencent; SINA’s traffic peaked and suffered a long decline. Third, although SINA’s core business is not doing so well, it also has a very valuable asset called Weibo with close ties to – yes, you guessed it—Alibaba. I think we are in the early to middle innings of the stock’s rise just like Yahoo did couple years ago when the market finally began to recognize the company’s underlying assets and bid up the stock.

Here’s what’s different between SINA and Yahoo: Yahoo doesn’t run Alibaba but SINA does runs Weibo. From Weibo’s annual reports we can see, SINA determines Weibo’s cost basis and allocates part of SINA’s overall cost and expenses to Weibo; Weibo in turn report these costs and associated revenues to Weibo’s shareholders.

 

Analysis on Weibo(Ticker WB)

Weibo diluted share count: 220M

Share Price: 37.17 (as of Aug 8 2016)

Market Cap: 8.14B

Sina ownership of Weibo: 54.5%

Alibaba’s ownership of Weibo: 32%

 

Monthly Active Users/Daily Active Users In Millions

End of  2013 End of  2014 End of 2015 2016 Q1 2016 Q2
MAU 129.1 175.7 236 261 282
DAU 61.4 80.6 106 120 126

 

Weibo’s Revenue and Income in Million USDs

2013 2014 2015
Net Revenue 188.3 334.2 477.9
Costs&Expenses 246.9 356.3 440.4
Non-Operating P&L -17.7 -43.4 -3.3
Net Income -40.9 -65.5 34.2

 

2016 Q1 2015 Q1 2016 Q2 2015 Q2
Net Revenue 119.3 96.3 146.9 107.8
Costs&Expenses 112.1 100.8 119.6 105.5
Non-Operating P&L -0.1 -1.4 -1.03 2.23
Net Income 7.1 -3.1 24.4 4.2

Weibo, the Chinese Twitter, over  the years has experienced strong growth and actually started turning a profit last year.Admittedly, judging based on the TTM P/E ratio, the stock is ridiculously expensive. However, we have to understand that to Alibaba, or to many other companies who wants to either enter the fast-growing Chinese online media space or strengthen its existing position in this space, Weibo does, at the moment, deserves a high valuation.

Alibaba’s valuation serves as a base for Weibo’s floor price

Alibaba paid 585.8 million USDs and obtained 18% of Weibo in April 2013,valuing Weibo at 3 billion dollars. When Weibo went IPO in April 2014, it further boosted its stake to 30% buy purchasing 30 million shares at 14.45 per share, valuing it at 3.6 billion dollars. As illustrated from the revenue table above, Weibo still experienced very solid growth in 2015 and a modest growth in revenue Q/Q in 2016 Q1. The appeared slow down in 2016 Q1 revenue growth is actually due to the end of strategic agreement between Weibo and Alibaba, which leads to the next point.

End to Alibaba’s strategic agreement increases Weibo’s valuation

Between 2013 and 2015, Alibaba and Weibo had a strategic agreement in which Alibaba spent significant advertising dollars on Weibo for its e-commerce business. During that period, the revenues contributed from Alibaba accounts about 30% of Weibo’s total revenue. However, at the beginning of this year, the agreement came to an end. As a result, Alibaba only contributed 11.1 million revenue (9.3% of total revenue) in Q1 16 compared to 34.5 million (35.8%) in Q1 15. Therefore, non-Alibaba related revenue grew from 61.8 million to 108.2 million, a stunning 75.1%. In essence, Weibo has proved to Jack Ma that Weibo can prosper without Alibaba’s aid, and therefore Weibo would command a strong position in negotiation if an Ali buyout talk takes place. To other possible would-be acquirers, Weibo’s valuation should also increase because Weibo has shown it is no longer that much dependent on Alibaba.

 

Valuation for Weibo

Based on Alibaba’s valuation and recent revenue growth trend, we should be able to price Weibo as a whole at least around 4.5-5 billion dollars. Let us cross check Weibo’s valuation against other comparable companies.

Comparison with Momo Inc and Tencent

Weibo Momo Wechat(Tencent)
Valuation 4.5 B 2.84 B 50 B
MAU 282 M 72.3 M 762 m
MAU Trend YOY 33% increase 7.4% decrease 39% increase
Valuation per MAU 16.0 39.3 65.8

Momo’s market cap is used as Momo’s valuation. Momo is a messenger service which is well known for people looking for casual hookups or getting escort services in China. The company is serving a niche market but ,despite the Momo’s effort to expand its service into mainstream, it has been extremely hard to grab market share from Tencent.

For Wechat’s valuation, I estimated its price based on a few facts:1).the app is owned by Tencent which has about a 226B market cap 2).Tencent’s main business consists of QQ(877M MAU) and Wechat 3). Wechat is currently the undisputed champion in Chinese social network space 4). Valuation metric comparison and competitive position against other social messengers, such as Whatsapp, Line, Facebook Messenger and etc. And even if this valuation of 50B turns out to be too optimistic, Weibo’s Valuation per MAU is at around a quarter of Wechat’s, which leaves plenty margin of safety.

Bull-Case for Weibo

If we price valuation per MAU of Weibo at around 35, we reach to a valuation of around 10 B.

 

Analysis on rest of SINA

SINA’s ex-Weibo segment revenues

2013 2014 2015
Portal Ads 378.1 375.5 340.8
Others 98.7 58.6 62.0
Segment Income 63.5 24.5 -21.8

 

2016 Q1 2015 Q1 2016 Q2 2015 Q2
Portal Ads 43.7 51.2 58.1 67.8
Others 35.7 31.6 38.9 34.7
Segment Income -15.6 -22.1 -3.6 -11

 

Clearly, the ex-Weibo segment is in decline. However, as SINA focuses efforts on growing Weibo, it is very likely that the portal and others did not receive as much attention as they did in the past and therefore performance suffered. Recent Yahoo’s core business acquisition shows that despite the loss in popularity and revenue, portal sites still hold some importance to strategic buyers even in today’s everything-going-mobile environment. Furthermore, its portal site competitor Sohu.com was able to keep its portal business revenue basically flat from 2015, indicating SINA’s portal business might have room for improvement.

Assigning its ex-Weibo business a 1X sales figure, we price SINA’s other businesses at around 400 million.

Sum-Of-The-Parts Analysis of SINA

Assets:

Cash and Cash Equivalent: 2.1 B

Long-term investment: 1.24 B

Portal and Others business valuation: 0.4B

54.5% Weibo Ownership Valuation: base case (4.5B-5B) 2.45B bull case(10 B) 5.45B

Liabilities:

Convertible notes 800m, matures on Dec 1 2018, convertible at around $125 per share.

Double counting weibo’s cash 129.9M, short-term investment 266.6M and long-term investment 294M: 691M

Net Asset Value: 5.5B

SINA share count: 73.4 million diluted shares

Per share Value: base case $64-67.8 per share, bull case $104.9 per share

Current market price discount: 10-16% for base case, over 70% for bull case.

 

CEO’s stock purchase on margin and his big gain from past stock purchase

SINA issued 11 million new shares to its CEO Charles Chao at price of $41.49 per share, subject to a lock-up period of 6 months. News of the deal came out on June 1, 2015 and closed in November last year. Before the deal, the CEO’s stake in the company was in low single digit; after the close, Charles Chao became the biggest shareholder of the company with a 17.8% stake.  Further looking into the deal on SEC we can see that the CEO actually bought the shares with 50% of margin. Such a giagantic purchase especially with borrowed money speaks for Mr.Chao’s confidence in his own company.

Another very important thing to note is that this is not the first time Mr.Chao took a very big stake in the company. Back in 2009, then SINA management, with Mr.Chao at the helm, signed a 180M equity deal buying worth over 9% of the company. The stock then went from the 30s to all the way well over 100 within a year and a half, rewarding everyone who bought along with the CEO 100%-300% gain. For himself, Mr.Chao sold off his position and reaped enormous profit in his previous endeavor. This time, with an even bigger stake, and a very hot internet media property at his hand,  Mr.Chao will surely prop up SINA and Weibo with all his might.

SINA CEO Buy-in

How to trade:

Option 1. Establish a small position (1/3 of total committed capital for SINA) and increase the stake after a pullback

This option enables us to participate in further possible rallies towards the bull case target and leaves ample firepower left to purchase more shares should the stock fall back.

Option 2. Arbitrage the spread between SINA and Weibo by buying SINA and shorting Weibo

SINA’s Weibo ownership, valued at current stock price, is equivalent to about SINA’s whole market cap. That means SINA’s other businesses, its net cash and investments are valued at 0.  What’s more, being Weibo’s controlling majority shareholder and the actual company who operates Weibo on a daily basis, I find no basis for the market to undervalue SINA’s Weibo stake as such.  Either Weibo’s valuation has to come down or SINA’s market cap has to go up – such market inefficiency won’t last forever and arbitrage is the way to trade the inefficiency.

One share of SINA owns about 1.63 share of Weibo. Since in pure arbitrage we want to perfectly hedge ourselves the long SINA shares to short Weibo shares ratio has to be around 5:8. Currently SINA’s portion of Weibo has an implied value around 2B(SINA’s market cap minus the cash and investments, plus liabilities listed above), and current market value for this chunk of share should be at 4.47B. This is probably the best trading strategy for SINA and Weibo because the arbitrage spread is over 100%.

The spread between WB and SINA has further increased this year:

SINA vs WB

Option 3. Buy SINA options

For people who firmly believe in Weibo’s bull case or a repeat of rapid meteoric rise in SINA’s stock after CEO’s buy-in, we can purchase options with long expiration dates. In particular, the $60 strike price Mar 2017 call option and the $60 strike price Jan 2018 trade at $6 and $10 respectively. If the stock trades close to our bull case, say $100, these options will return 600% and 400% respectively.