I did a write-up on SINA/WB arb. I hope to hear some feedback 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 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. I am confirming this with Sina’s IR. 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.
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