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|
Weibo’s Revenue and Income in Million USDs
|2016 Q1||2015 Q1||2016 Q2||2015 Q2|
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
|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
|2016 Q1||2015 Q1||2016 Q2||2015 Q2|
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
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
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.
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:
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.