The following is a sample equity research report, presented here for illustrative purposes only.
Company Background
Sina Corporation is a Chinese internet company that engages in the business of online and mobile media services. Its services include Mobile Value-Added Services (MVAS), online video, music streaming, online games, online search, blog, email, classified listings, fee based services, and ecommerce/enterprise services. To give investors a context for comparison, Sina Corporation is the Chinese equivalent of Google/Yahoo with elements of Youtube, Craigslist, Amazon, and Twitter. Sina is the mother company of Weibo (54.7% shareholding), which is the Chinese version of Twitter.
Capital Structure Considerations
As of June 30, 2016, SINA has cash and equivalent of 0.84B, short term investments of 1.3B, and convertible debt of 0.8B. Hence, the net cash position is 1.3B.
Assumptions
No acquisitions will be made, and the capital structure will remain fairly constant.
Investment Thesis
SINA is undervalued from a sum of parts valuation perspective because the market has failed to fully take into account its ownership in Weibo. This is because the market is still unsure of how the value of WB could be unlocked, and has built in a conglomerate discount. Although the market has rerated SINA due to the rapid appreciate of WB, the current valuation of SINA implies that the fair value of WB is $24.50 per ADR, even without taking into account SINA’s core operations that generated $20.8 million in net income in 2Q 2016. As explained below, the value of WB is more than $24.50 per ADR. On a per user basis, WB is valued below TWTR. WB is also on a path of monetizing its user base, and if FB is used as a benchmark for comparison, WB is also worth significantly more than $24.50 per ADR.
The catalyst for SINA to appreciate further is a recent announcement by the company to distribute dividends through shares in WB. Every 10 shares of SINA is entitled to 1 share of WB. This implies a yield of 6.8%. Although this distribution decreases SINA’s ownership from 54.7% to 51%, the reduction in shareholding only represents a shift in ownership from SINA to SINA’s shareholders. SINA is aware of the conglomerate discount, and is taking an active stance to helping shareholders realize the true value of the company. I do no discount the possibility that SINA may eventually spinoff a larger stake to shareholders to further bridge the valuation gap, especially if the valuation gap increases further.
Explanation of Weibo
Weibo is the Chinese version of Twitter that has achieved something that Twitter has not: profitability. Just like Twitter, Weibo started as a character platform where users have 140 Chinese characters to express themselves. They subsequently added pictorial functions. However, Weibo differs from Twitter by allowing users to post videos, which propelled it to a new level of popularity. As a result, Weibo’s 2Q 2016 net profit (GAAP basis) improved by more than 600% YoY from $4.2M to $25.9M. Investors now view Weibo as the Chinese version of Youtube (in addition to its image as China’s Twitter), and have rerated the stock. Weibo ADR is now trading at $50.14, a 195% increase from its IPO price of $17.
Valuation of WB from a profitability perspective
Since TWTR is still unprofitable, and is still has a relatively small presence in the Asia Pacific region, TWTR may not be a good comparison against WB’s future profitability. WB is profitable, and is ahead of TWTR in terms of monetization of user base. Hence, a better comparable may be FB, given that it has a much larger user base in Asia Pacific, and has successfully monetized its user base in Asia Pacific. Although FB has zero users in China, its Asia Pacific user base is the more appropriate comparable to WB given that the region has both very developed economies with high technology and mobile penetration, and developing economies where technology and mobile penetration is still growing. China’s current economic status quo where there are both very developed areas along the coasts in first and second line cities, and developing regions in third/fourth line cities and inland provinces is similar to the economic profile of the Asia Pacific region.
Based on FB’s 2Q 2016 results, ARPU (average revenue per user) in the Asia Pacific region on a TTM basis is $6.32. WB’s current ARPU on a TTM basis is $2.17. The gap between WB and FB APAC ARPU is $4.15. This gap is due to FB’s innovative ability to help advertisers better target their customer base. As a global social media platform, FB may also enjoy cross border operating, and marketing synergies. However, I do believe that WB can eventually close the gap with FB as WB improves its advertising platform through better understanding of advertiser needs, and more effective use of technology to better understand its users. WB’s willingness to squeeze in more ads than FB, given that user experience is not as big of a concern in China means that there is more effective use of online user’s real estate. WB can squeeze in much more ads than FB can as Chinese users are used to a more cluttered, and ad filled online environment.
Conclusion on WB’s valuation
The purpose of explaining WB’s valuation is to show that the current valuation for WB is reasonable using two different comparables, and different metrics. Current analyst consensus is $43.92 per ADR, with a low at $34, and $70. The wide range of estimates shows a wide range of growth expectations among the analyst community. The above estimates value WB between $70 and $125 per ADR. Given the potential growth in WB’s share price, owning WB (trading at sub $50) through SINA adds another layer of margin of safety. The first layer is buying WB’s share price below its potential future value, and the second layer is a built-in discount from SINA’s conglomerate discount.
- Gugnir and Partners