Chinese micro-blog “weibo” provider, SINA Corp. (SINA) is expected to face stiff regulatory control over Internet content, according to a recent report by Chinese newspaper Beijing Daily.
Beijing Daily, which is backed by the Communist Party of China, quoted party leader Liu Qi, who warned Chinese Internet companies including SINA to tighten control over online material, particularly sensitive information that spreads dissent among the general public. The Beijing Internet Media Association, a government-sanctioned industry group, also called on its 104 member companies to filter Internet content.
China is very sensitive regarding the Internet and imposes significant restrictions on online search and other social-networking activities. The Chinese government has already blocked Twitter, Google Inc.’s (GOOG) YouTube and social-networking website FaceBook.
China’s censorship rules prompted Google to close its search engine in the country last year. Users can access Google’s Chinese-language search site in Hong Kong but there has been a compromise in terms of speed and the company's market share in China has shrunk considerably since then.
According to a latest report published by China Internet Network Information Center (CNNIC), China has the world's biggest online population, which was 485 million Internet users at the end of June 30, 2011.
However, China’s social network market is shrinking, as the number of social network users decreased to 5.16 million in the first half of 2011. The decline can be primarily attributed to strict government censorship. Chinese search engines and online video sites, microblogging services also require appropriate licenses to operate and are subject to censorship. Politically sensitive posts are often removed while searches involving sensitive keywords show no results.
However, these tough regulations did not deter the micro-blog market, which soared 208.9% year over year and accumulated 195 million users (40.2% of the total Chinese Internet population) at the end of the first half of 2011. The primary beneficiary of this tremendous growth has been SINA, which has registered users of more than 140 million as of June, 2011.
Such has been its popularity that Baidu Inc. (BIDU), which is the largest search engine in China, closed its micro-blog platform Shuoba, as it failed to gain market share in the highly competitive Chinese social-networking market. Analysts also estimate that Shuoba's stringent real name verification criterion was another reason behind its failure.
SINA’s nearest competitor Tencent has approximately 80 million registered users, whereas Sohu.Com Inc’s (SOHU) micro-blog is a distant third with 30 million users.
According to a recent report by Hong Kong-based internet market researchers, the strict censorship by the Chinese government has helped Internet companies like SINA and Sohu.com, as the closure of a number of websites have significantly reduced competition, thereby leading to higher traffic and soaring revenues.
According to the Chinese Academy of Social Sciences, there has been a 41% drop in the number of websites over the last year, with 1.91 million websites closing operations by the end of last year. Tighter regulations and the blocking of sensitive forums have contributed to the decline.
SINA recently reported second quarter 2011 earnings of 14 cents per share, which missed the Zacks Consensus Estimate by 4 cents. Total revenue increased 20.6% year over year to $114.3 million in the reported quarter, in line with management’s guided range of $112.0 million to $115.0 million. However, total revenue missed the Zacks Consensus Estimate of $120.0 million. For further details please see SINA Reports Disappointing 2Q.
Our Take
We believe SINA remains a premier company due to its strong product pipeline, continuous investment in product development and marketing and a robust user base for its E-Commerce and Weibo offerings. SINA’s online advertising business has a competitive edge based on its popularity in China, superior brand recognition and persistent marketing innovations.
SINA has been more or less lenient with its weibo content compared to some other websites. The company deletes some of the more inflammatory posts but allows the majority to stay on the site. The new restrictions will curtail this tendency, which will hurt subscriber growth going forward.
We also believe SINA’s monetization efforts such as launch of virtual currency “Weibi” for its Weibo microblogging service may also see regulatory pressure due to restrictions imposed by the Chinese government on the use of virtual currency over the Internet. If this happens, it would be difficult to monetaize its services, which could in turn, be a significant headwind for SINA’s profitability going forward.
We maintain our Neutral recommendation on the stock over the long term. Currently, SINA has a Zacks #3 Rank, which implies a Hold rating over the short term.
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