What is the “Chinese Twitter” .. and will the share price spike on November 15?

By Travis Johnson, Stock Gumshoe, November 2, 2010

Here’s the top of the tease that I just got in my email from Nicholas Vardy, trying to get me to subscribe to his Global Bull Market Alert ($995/year, in case you’re wondering):

“On November 15th, a Top Chinese Internet Company’s Announcement Could Send Its Stock Soaring

“While China’s economy levels off, its Internet sector is SURGING… And the ‘Chinese Twitter’ is just days away from an announcement that will spike its share price…”

Sounds pretty enticing, right? I thought so too — but of course, I don’t want to shell out a thousand clams for a subscription, so let’s sniff out the rest of the clues so I can share the stock with you, shall we?

Vardy does tell us that this company has what he terms the “Chinese Twitter” (if you don’t know Twitter, then God bless you — it’s a hugely popular microblogging service that allows you to broadcast short comments to the world, and which is still trying to figure out an advertising model that will make them profitable). Here’s how he puts it:

“This opportunity is coming from a huge government-favored Internet “Portal”… the equivalent of America’s Yahoo!

“And with this company’s new social networking phenomenon – dubbed the ‘Chinese Twitter’—it is rapidly capitalizing on the largest group of Internet users in the world… with more than 384 million users online… and growing fast!”

So that’s part of their business, at least — some more clues beyond the “November 15” announcement stuff?

He says that the “Chinese Twitter” biz has about 40 million users, which is pretty impressive, but that’s apparently just part of their business:

“It is the dominant Chinese provider of integrated online media content: online searching, news, social media, mobile services, and entertainment”

And it has high insider ownership, certainly not unusual in tech stocks or in China:

“A management-controlled entity is the largest shareholder, giving directors a huge stake in the company’s success.”

So why November 15? I’m glad you asked. Here’s Vardy’s explanation:

“On November 15th, this company will announce it Q3 earnings and it will have overwhelmingly good news to share. That’s exactly why you have to get in before the announcement is made.

“You see, right now, the company is operating so far outside of the spotlight that only a few people are talking about it.”

They make money from advertising, no surprise, and Vardy throws in a few more clues about the revenues expected and about their big name clients:

“… like most Internet giants, they are among the shrewdest advertisers today. In fact, they’ll rake in a massive $82 Million in ad revenues this year.

“And advertising revenue is growing, as the trend in China is for more advertisers to continue moving their spending online.

“But now, the big multi-nationals are also knocking on this company’s door.

“To gain access to the consumer wealth in China, and build brand-loyalty with Chinese users, General Motors, PepsiCo, and BMW are buying up advertising real estate on this company’s site.”

He also says that the profit should grow, in part because they haven’t yet started monetizing their “Twitter” business, and we get one more specific tidbit to chew on:

“The NBA just announced the company will operate the league’s Web site in China… giving it access to the country’s 300 MILLION basketball enthusiasts!”

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So … that’s far more than the mighty, mighty Thinkolator requires to spit out an answer … this is Sina (SINA)

Sina is one of the somewhat overlooked Chinese web portals, though it has for a long time been the most popular one and the one that’s well-known for being a quality news source. Sohu is the closest analogue in China, a very similar portal company, and both of these “Yahoo-like” companies are in the shadow of Baidu, which is to China what Google is to most of the rest of the world. Sina, like Yahoo!, depends on brand advertising on its popular pages, mostly big display ads, while Google and Baidu are focused on the more democratized and arguably sexier search advertising business.

And Sina has announced that their earnings will come out on November 16, not the 15th, but we can forgive Vardy’s copywriters for fudging a bit to try to throw us off the scent. The conference call will be at 8pm EST on that Tuesday, the press release of basic earnings details will probably be a couple hours earlier if they follow past practice.

Their display and brand advertising business is by far the majority of revenues — and the only part that’s really growing at this point, since their mobile services division and search business are relatively small players in a very competitive environment. Mobile services, particularly, has been taking a hit in recent years with new entrants and changing behavior from the dominant cellular companies (China Mobile, etc.).

They have provided guidance of $82 million, but again this is either a copywriter’s mistake or an attempt to confuse — the guidance is that they will have $80-82 million in advertising revenue this quarter, not this year. That’s roughly 80% of overall revenue, probably, and it would represent about $10 million more in ad revenue than in the last quarter (and that June quarter was a huge leap from a year ago, in part thanks to their World Cup coverage). You can see the details and that business outlook in their last quarterly earnings press release on their website here.

So they are growing quite nicely in their core business, though their revenue is dropping in their other, smaller segments … and they are also reportedly the leader in the microblogging sector in China as one of the first to build a big network of users to mimic Twitter, though I have no idea how or when they will build any advertising revenue on the back of that system — the original Twitter is now experimenting with more sponsored tweets by a core of blue chip advertisers, though I don’t know if it will work well and Chinese consumers are, I’m sure, quite different than US consumers in terms of their response to advertising.

For what it’s worth, all of the social networking systems seem to have trouble monetizing their business and inserting advertising, because the really valuable advertisements would be those that use the personal information and preferences of their users to target them precisely … and that tends to piss people off in a social setting, even if they accept it with much more equanimity from Google ads (and as I said, I have no idea how Chinese consumers might respond). There was a good article about Sina’s microblogging plans over the Summer from Caixin, you can see that here.

Will Sina return to prominence when they release their earnings? Beats me — analysts think they’ll end up earning $1.67 a share this year and $2.01 next year, so at $56 a share they’re trading at about 26X next year’s expected earnings. You’ll see it sometimes listed as “cheap” — this stock pops up in some “low PE” value screens and gets attention for that, but the low trailing PE of 8 is a bit misleading — that includes the fourth quarter last year, when they had a one-time gain of about $5.70 from spinning off their real estate information business — without that, their trailing PE would be in the 40s. That puts them as cheaper than Baidu (BIDU) or Tencent (HK:0700) or Alibaba (HK:1688), but more expensive than the more gaming focused Sohu (SOHU), which is also growing ad revenue quickly… just to put that in some perspective, the far more mature (ie, more predictable and slower growth) Google (GOOG) and Yahoo! (YHOO) trade in the range of 18-20X next year’s earnings and a bit more on trailing earnings (GOOG 25X, YHOO 21X).

Sina has clearly done a lot of its turnaround already, and has recovered nicely — the shares are up about $20 from their summer lows this year, and are approaching their China-bubble highs near $60. So it’s not ignored or unknown (it was even featured in Investors Business Daily a few weeks ago), and investors have noticed that they’ve beaten and raised earnings expectations in the last couple quarters, but it is certainly true that they get less investor love than mighty Baidu, and they’re still a small company (market cap is about $3.4 billion, about a tenth the size of Baidu or Tencent) that can potentially grow quite rapidly and has good name recognition and a strong brand in China. And they’re definitely not in any financial trouble, they do have strong insider ownership (and control, of course), and they have about 20% of their market cap in net cash.

And though the markets are very different, I’d imagine that the Yahoo! comparison probably keeps SINA cheaper than it might otherwise be — Yahoo! has a dominant web portal and a strong brand in the US, too, and management hasn’t been able to get that company out of its own way for years.

Full disclosure: I own shares of Google, and this site hosts advertising from Google’s system. I don’t own shares of any other company mentioned above, and will not trade in any stock written about for at least three days.


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