China's Social Media

10/15/2013 10:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

There is a tremendous appetite in China for social media, but the government is leery of allowing foreign platforms like Twitter and Facebook free access, partly because these companies may be resistant to the monitoring and censorship the government requires, notes Mike Cintolo, editor of Cabot Top Ten Trader.

This has created huge opportunities for companies like YY Inc. (YY), the wildly popular Chinese online social platform that's still evolving.

The core of YY's appeal is software that allows users to interact online in real time without any downloads or installations.

The flexibility of the platform allows innovative ideas (like competitive karaoke and tie-ins with popular TV shows) that attract new users and drive revenue growth.

YY Inc. has booked 14 consecutive quarters with triple-digit revenue growth and annual earnings have jumped from four cents per share in 2011 to an estimated $1.16 per share in 2013. Analysts like the idea that the firm's relatively low monetization of users leaves big room for growth.

The big story underlying investors' enthusiasm is the enormous growth in Smartphone ownership in China, which is creating an opportunity for Mobile YY, raising the service's advertising rates. Despite already large growth, YY Inc. looks to have a bright future.

In addition, Sina Corp. (SINA) is one of the most successful Internet portals in China. And its unit, Weibo, a microblogging service, is at the top of Chinese social media.

Sina is turning 20 this year, but it's still acting like a young company. The company has always been profitable, using its mix of content (news, weather, sports, business, etc.) and services (search, email, games, social networking, etc.) and specialized forums to build a huge user base.

Weibo's 500 milion users is probably what motivated Alibaba, China's largest e-commerce Web site, to pay $586 million for an 18% stake. (Alibaba will likely come public in the US in the next six months.)

Besides the cash, Sina gets a boost from the Alibaba endorsement implied by the sale. Sina Weibo has thrived in China, in part, because the Chinese government blocks Twitter and Facebook.

But the company has made its mark against determined domestic competition, getting Weibo to the lead position among online social media. Investors see a bright future for Sina, Weibo, and the business of running a rich online content and service provider in China.

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