Sina Still Cautious On Ad Spending But Weibo Monetization Shows Promise

Backed by strong growth in advertising revenue, Sina (NASDAQ:SINA) returned to profitability at the operational level in Q3 2012. Higher advertising revenue due to the London Olympic games as well as increased acceptance of the newly-launched Weibo advertising platform contributed to a 19% y-o-y increase in Sina’s advertising revenue. Though the company continues to incur increasing marketing and product development costs, the higher revenue base contributed to net income in excess of $10 million.

Sina is an online media company which also offers mobile value added services in China. It provides services mainly through Sina.com (online news and content), Weibo.com (microblog) and Sina Mobile (MVAS). Sina derives most of its revenue from advertising, and we estimate it to contribute over 66% to the company’s valuation.

While the advertising growth rate might not hold this quarter, we believe the increasing investment in Weibo will start paying off as the company witnesses higher monetizing benefits from the platform 2013 onward. We expect Weibo to be a significant driver in stabilizing Sina’s declining share in the Chinese online advertising market.

Check out our complete analysis of Sina

Advertising Market Cools Down In Q4

Due to macro headwinds and the slowdown in China’s GDP growth, the overall Chinese display ad market registered a decline in the first two quarters of 2012. However, as evident from strong growth in Sina’s advertising revenue, the Chinese advertising market registered positive growth in the third quarter. Sina’s advertising revenue marked a 19% y-o-y and 17% q-o-q increase backed by strong growth in automobiles, FMCG, IT and telecommunication. Additionally, the London Olympic Games was a prominent factor driving growth in online advertising.

However, Sina claims to have witnessed weaker conditions since September 2012 as advertisers cut back their marketing activities on account of weaker macroeconomic conditions in China as well as a lack of any comparable media events that occurred in Q3 2012. Nevertheless, it expects to register growth in advertising revenue this quarter as well, though it estimates the growth rate to decline.

In 2012, the company stepped up its efforts to develop the Weibo platform and continues to focus on increasing the monetization of the online platform. We expect the same to be a significant revenue driver 2012 onwards.

Focus On Monetization of Weibo

Analogous to a hybrid of Twitter and Facebook, Weibo has been increasingly gaining popularity among users in China and is estimated to be used by 30% of Internet users in the country by 2013. ^[1] In Q3 2012, advertising revenue from Weibo almost doubled from Q2 2012, accounting for close to 16% of Sina’s total adverting revenue. Strong growth in the number of customers and a marginal increase due to higher spending for Olympic games were the prime forces driving growth.

Weibo continues to attract an expanding user base and register higher user activity. In Q3 2012, the total number of registered users on Weibo increased to 424 million, a 15.2% increase from 368 million at the end of June 2012. Additionally, the average number of daily active users increased by 16% in Q3 2012, reaching 42.3 million.

Weibo played a prominent role in news reporting, content distribution as well as user participation for Olympic-related topics and events. Thus, in the absense of a comparable event, the contribution might come down this quarter. However, with the upcoming version 5 for Weibo and other additional features, we expect the revenue contribution from the platform to only increase thereon.

Decline In The MVAS Business

On account of further tightening in the operating environment of the mobile value added services (MVAS) business, the division registered a 11% decline in revenue in Q3 2012. Anticipating the tight environment to persist in the future and considering the increasing shift of the user base to smartphones, Sina expects this business to further scale back in the future. However, since MVAS is a low margin business, the decline will not have much impact on the company’s bottom line.

Q4 2012 Outlook

– 3% to 6% increase in net revenues: 6%-8% increase in advertising revenue & 4%-12% decline in non-advertising revenue.

– MVAS revenue could decline by $8-$9 million, due to new operator policies to curtail customer complaints.

– Expect to derive a positive net income in Q4 as well.

– Net revenue and advertising revenue exclude the recognition of $4.7 million in deferred license revenue.

We are in the process of updating our current price estimate of $72.61 for Sina.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. China’s Weibo vs US’s Twitter: And the Winner Is?, Forbes, May 17, 201 [↩]