SINA - Sina Corp

[PatientCheetah]

My first draft, hope to hear some feedbacks on the idea

 

Sina Corporation (SINA) $47.80 on 4/30/14

 

Summary

 

Sina is a Chinese online media company that operates web/mobile portals (sina.com) and social media platform (Weibo). Sina is a compelling investment based on SOTP valuation. Its chief valuation risk is its substantial holdings in Weibo due to its lofty valuation and competitive pressure from WeChat (another Chinese social media platform). I am recommending a long position in Sina (SINA) hedged by a short position in Weibo (WB).

 

Valuation

 

Sina owns 56% of Weibo, which recently did an IPO and is the China equivalent of Twitter. Weibo has a market cap of $3.9 bil, so Sina’s 57% stake is worth $2.2. Alibaba, another Chinese ecommerce giant, purchased 18% of Weibo for $586 mil just prior to Weibo’s IPO. As of Q4, Sina has about $1 bil in net cash. So this amount probably doesn’t include the $586 mil. Sina has another $527 mil in equity investments in various Chinese public/private internet companies. Of this $527 mil, $50 million is for an unspecified stake in Alibaba that Sina bought in 2011, valued at cost. If Alibaba IPOs at $150 bil, the stake is worth $250 mil based on the recent transaction that Tiger Global had stroke.

 

To sum all of this up, Sina has $2.2 bil + $1 bil + $586 mil + ($527 mil – $50 mil) + $250 mil = $4.5 bil in net asset values. Weibo is still losing money, so strip out Weibo’s losses, Sina’s web/mobile portal business has earned $45 mil in 2013. Using a 15x multiple, this is another $675 mil. In total, Sina’s SOTP is close to $5.2 bil. Sina’s current market cap of $3.2 bil implies 60%+ upside. Given the valuation uncertainty on some of Sina’s investment and conglomerate discount, let’s knock 20% off the $5.2 bil figure, its SOTP is still at $4.2 bil or 30%+ above where it is currently.

 

Main risk factors

 

1) Optically, Sina looks very expensive/poor in every income valuation/return metrics due to the operating loss from Weibo and its largely under-utilized balance sheet. After stripping out Weibo, Sina's operating margins are between 20-25%. Weibo is Sina's growth engine. Without Weibo, its revenues have been flat for the last 3 years. Overall, it's a branded mature business with limited operating leverage due to hefty content creation and censoring expenses. I think a 6-8x EBIT is a fair multiple, which gives us a valuation between $600-800 mil. There are some risks that Sina will use some of its net cash to reinvest into the portal business and try to reignite its growth.

 

2)  Weibo is trading at over 20x P/S, comparable to where Twitter is trading at. It is still losing money so it is difficult to understand its true economics and justify its valuation on a standalone basis. I think the key difference between Weibo and Twitter is that Weibo has a cash rich strategic buyer providing a valuation floor. The $586 mil Alibaba transaction is Weibo’s private market value. Alibaba received the Weibo shares at a 15% discount to its $17 IPO price. According to a number of public statements, Alibaba clearly sees Weibo’s strategic value and is leery of WeChat’s popularity. Not coincidentally, Alibaba is also Weibo’s largest revenue source and is integrating Weibo into its services. Weibo’s heavy reliance on Alibaba undoubtedly decreases its bargaining power if it wants to sell stakes to Alibaba but it is also worth considering that Weibo is currently Alibaba’s only viable counter against WeChat.

 

Due to the recent government leadership transition, China has been cracking on social media. Weibo’s one- to-many nature makes it a natural target and the increased censorship is hurting its user growth momentum. Combined with the general negativity toward the social network space, Weibo’s short-term valuation risk is high. I would not be comfortable investing in Sina without hedging at least part of its Weibo exposure.

 

3) Sina has $527 mil in equity investments. Of which, $165 mil is accounted for under the cost method and this includes the $50 mil Alibaba stake. $222 mil is accounted for under the equity method and this includes $175 in E-House, which is a listed ADR. The remaining $140 is classified as available for sale securities. Of which, $112 mil is in Youku, another listed ADR. Of the entire $527 mil, $337 mil are in traded securities and their valuations are directly observable. 

 

Catalysts

 

Sina's all-time lows from the last few years put the technical floor in the mid 40's range. The near term catalysts include the impending Alibaba IPO. Weibo is tiny in relation to Alibaba and the soon-to-be-minted Alibaba shares are just as good if not better than cash. Alibaba has strong motivation to forge closer alliance if WeChat gains additional user momentum. As Weibo options and short borrows become widely available, the large discrepancy in SINA and its SOTP make another great catalyst.

 

[thepupil]

So to summarize:

Sina MCap: $3.2BN

Interest in weibo: $2.2BN

Short out weibo to create $1B stub, which you believe is worth $2-$3B for a potential 100-200% return on net capital deployed.

 

I like the trade.

 

I would just caution you in sizing because holdco/investee relationships can get out of wack and stay there for a long time particularly when the investee is a high flying internet name so you have a little basis risk from a mark to market perspective, and you run the risk of them doing something dumb with the cash or destroying value while weibo short rips in your face.

 

Cool idea.

[yadayada]

the 586 million is included, this sale happened last year. Also valuing alibaba at 250 million is rich. more like 150-200m. Also Weibo isn't THE twitter of China.

 

Weibo.com is ranked nr 6 in china, while QQ.com is ranked nr 2. So there is a competitor that is doing better apparantly.

 

Also I thought it wasn't possible to short Weibo?

 

And I wouldnt forget Sina's underlying business, they might generate a lot more then 50 million in a few years? Margins went up more then revenue.

[PatientCheetah]

Thanks guys

 

thepupil - WB's float is indeed tiny

 

yadayada - the 18% is already in the cash balance, the additional 12% is not. So Sina still has a $390 payable from Alibaba. QQ and WeChat are from the same parent company

[antao]

Anyone monitoring the SINA / WB spread? It has become unsustainably high

[awindenberger]

Anyone monitoring the SINA / WB spread? It has become unsustainably high

 

I was going to post a recent SA article on this spread...then noticed that you wrote it. Looks like a solid paired trade at first glance.

[Green King]

I always wondered why people think they have edge just because they can do math. If you want to invest in these you should buy them at 10 to 15 times earnings with small allocation so you get the tails for free. Any price other than that you are speculating.True value of this business is unknowable and risky at current prices. 

[antao]

Anyone monitoring the SINA / WB spread? It has become unsustainably high

 

I was going to post a recent SA article on this spread...then noticed that you wrote it. Looks like a solid paired trade at first glance.

 

Thanks awindenberger. Cheers

[writser]

Thanks for bringing up this idea. I don't want net long exposure in Weibo so I'd have to set up a spread. Unfortunately that is a proposal with limited upside that can take a few years to work out. In the meantime the position just eats capital and/or borrow fees (and is not completely without risk, given the low free float of WB). Also, for me personally it is very frustrating to trade such a spread. what do you do if the spread moves from 35% to 20%? Close half your position? Wait? In my experience it's almost impossible to capture the complete discount. For me, at least ..

 

The flipside is that the discount is getting ridiculous at this rate. Also, SINA is actively distributing WB shares to shareholders - if they continue doing that the gap will close at some point. However, at the current rate that would take a decade or so. Also, SINA just bashed an activist pushing for more aggressive buybacks and/or a sale of the Weibo stake.

 

This idea has potential but for now I'm on the sidelines.

[Voodooking]

Looks like Li Lu (Charlie Munger's mate) / Himalaya Capital has a decent sized position in this one now... Well done to those who spotted it early. Looks like it's been at least a double for Lu, so I'd be wary about getting in now in case the party is over.