How Much Can Chinese Stimulus Impact Sina’s Valuation?

With expectations that the U.S-China trade dispute may be trending towards a resolution, Chinese stocks have rallied this year. Following Sina‘s (NASDAQ:SINA) Q4 results on March 5, we noted that Sina’s expectation of growing 3-4x faster than GDP was noteworthy. Furthermore, the fall in the company’s share price in light of the trade dispute appears to be significantly leveraged to the perception of cross-border trade (as opposed to purely the performance of the Chinese GDP) and thus the company’s stock performance may not be impacted significantly by stimulus measures.

Estimating Impact On Sina’s Stock From Chinese Stimulus

Due to the expectations of Chinese GDP growth slowing down in 2018, the Chinese government has been embarking on a slew of fiscal stimulus measures including tax cuts and issuance of municipal bonds. The rationale for fiscal stimulus is that when the government releases $1 in the economy, due to the cycle of spending and tax collection, the likely actual impact of the money released to the overall economy is typically greater than the stimulus.

One way of estimating the impact of the stimulus is by using the marginal propensity to consume (MPC), or the quantification of an increase in consumer spending due to an increase in disposable income. For China, we estimate the MPC to be around 0.38. We also use a stimulus multiplier = 1/(1-MPC) (or 1.62 for China, based on our estimated MPC of 0.38), to determine the impact on GDP. Thus, for $1 in stimulus measures, Chinese GDP is likely to grow by $1.62.

We thus estimate the potential stimulus that the Chinese government could release in the economy, the consequent expansion in GDP and the percentage of this GDP expansion that is likely to occur in 2019. In addition, we also consider a base rate GDP growth (without the stimulus) to ascertain the total GDP growth.

Furthermore, since Sina’s business performance has been dependent on the Chinese economy, we looked at the stock price performance and growth in GDP for the last three years. Over 2016-2018, the change in Sina’s stock price has displayed a strong correlation – 94.5% – with GDP growth.

While a correlation level of ~95% implies Sina’s stock price has significant leverage to Chinese GDP, Sina’s correlation is actually lower than that of Alibaba and Baidu (over 99% for both). While part of this lower correlation could be partially attributed to microstructure issues, we estimate that the size of Sina relative to the other two also plays an important part in the stock being influenced by sentiment-driven actions. Consequently, using linear regression, we estimate Sina’s stock price could see an upside of over 42% by the end of 2019, implying a stock price of over $75. This is still lower than our $89 estimate based on the company’s fundamentals. You can modify any of the key drivers to visualize the impact of changes, and see all of our Technology company data here.

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