China's Tweet Smell of Success

06/14/2013 9:45 am EST

Focus: STOCKS

A combination of Twitter and Facebook, this Chinese company is growing by leaps and bounds, says John Persinos of Personal Finance.

China is home to 718 million Internet users, more than the combined populations of the United States, the United Kingdom, Canada, and Germany.

As China's middle class rapidly expands and flocks to the Internet, among the biggest beneficiaries will be Sina (SINA) and its microblogging service Sina Weibo, which was launched in August 2009.

During the first quarter of 2013, the number of Sina Weibo's registered accounts reached 536 million, an increase of 6.6% compared to the year-ago quarter. Sina Weibo's daily active users also grew to 49.8 million.

Sina.com is an online brand advertising portal that draws visitors by offering a bundle of news, weather, sports, games, e-mail, mobile services, affinity groups, and specialized content. The company sells space on SINA.com to advertisers, a straightforward business model that generates about three-quarters of Sina's revenue.

The rest of Sina's revenue derives from fee-based, value-added services such as those on its Sina Weibo platform. The company also offers corporate e-mail services and operates a gaming portal that provides users with downloads and access to popular online games.

Sina's most sophisticated and promising service is Sina Weibo, which adopts many features from Twitter, such as a 140-character limit for posts, as well as the uploading abilities of Facebook (FB).

The official Twitter is banned by the Chinese government, which worries that it would stoke subversive sentiment and facilitate anti-government demonstrations. Twitter now claims 200 million active monthly users worldwide. The removal of this social media giant from China provides Sina Weibo a huge and rare opportunity.

Sina Weibo is given more leeway by the authorities because it's homegrown and the government applies strict rules regarding content. Sina Weibo is shrewd enough to apply self-censorship, a requisite for success in China's state-run mercantilist economy.

Sina Weibo clearly dominates the Chinese microblogging realm, with a 56.5% market share based on active users and 86.6% based on browsing time. About 76.5% of Sina Weibo's daily active users access the server through mobile devices.

Alibaba Group, the largest e-commerce company in China, recently paid $586 million for an 18% stake in Sina Weibo, with the right to eventually increase its ownership to 30%. This deal should cement the microblogging service's lead over its competitors and generate at least $380 million in advertising revenues during the next three years.

Sina reported first-quarter 2013 revenue of $126 million, an increase of 19% compared to the same quarter a year ago, and higher than management's growth estimates of 13% to 17%. Advertising revenues—about 75% of total revenue—hit $94.3 million, an increase of 20%.

Sina's non-advertising revenue, which includes revenue share from web games and membership fees on Sina Weibo, increased 17%, to $27 million, higher than management's estimates of $21 million to $23 million.

Meanwhile, Sina is edging closer to the black, reporting a loss from operations of $9.9 million, compared to $18.1 million in the same period last year. Management expects second quarter revenue of $143 million to $147 million, for an annual growth rate of between 13% and 16%.

With a forward price-to-earnings (P/E) ratio of 31.43, Sina's valuation compares favorably to the forward P/E of 59.8 for its sector. The company also enters the second quarter with $1.14 billion in cash and equivalents.

Sina offers outsized growth over the long haul for aggressive investors seeking to profit from China's growing infatuation with Western-style social media.

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