Team 5 Student Research
Internet Software and Services
Industry
This report is published for educational purposes only by
students competing in the CFA Institute Research
Challenge.
Sina Corporation
Ticker: ● NASDAQ: SINA
Price: ● $56.27 (10/26/12)
Date
Recommendation: ● Hold
Price Target: ● $53.98
Earnings/Share

Mar.
Jun.
Sept.
Dec.
Year
2008A
2009A
$0.25
0.18
$0.40
0.25
$0.34
0.31
$0.45
6.55
$1.44
7.53
2010A
2011A
0.40
0.24
0.41
0.15
0.51
(5.10)
(1.62)
0.14
(0.31)
(4.64)
P/E
Ratio
N/A
N/A
N/A
N/A
Highlights
Sina’s revenue is driven mainly by online advertisement, with that making
up about 80% of their revenue. The rest of Sinas revenue is comprised of
services through MVAS.

Weibo dominates the Chinese micro-blogging and social networking
market with a user network of over 350 million people.

Sina and Weibo boosts its revenue from advertisements, rechargeable
games, rechargeable e-mail box, downloadable resource, online TV,
efficient search engine, management fee from Web Log and network
community, and income from renting online shops. All of these are based
on the high CTR and awareness. At the same time, the convenience and
quick way of payment on websites also attracts more users.

GIS Daily Stock Price
$60
$50
$40
$30
$20
$10
$0
Market Profile
52 Week Price Range
Average Daily Volume
$91.11$43.12
3,716 m
Beta
1.46
Shares Outstanding
66.3m
Market Capitalization
3758.5m
Dividend Yield
N/A
Average Volume
2.49
Book Value per share
17.07
Return on Equity
-24.4%
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Business Description
Sina Corporation was found in November 1998 through the merger of Beijing SINA Information Technology
Co. Ltd. and California-based SINANET.com. In April 2000, Sina Corporation went public and was listed on
the NASDAQ stock exchange in the United States. Sina Corporation offers differentiable Internet content and
services in each of its region-specific websites to target global Chineses communities. As the result, Sina’s
user bases increased tremendously becoming one of the top four online media companies. Sina Corporation
provides five main online services for Chinese commities around the globe— SINA.com, SINA.cn,
Weibo.com, MVAS, and other businesses and prodoucts. Among these services, Sina earns around 80% of its
revenue from online advertising and the remaining from the mobile value added services.
Sina’s Five Major Business Lines
SINA.com is an online media platform, serving China and the global Chinese communities. The platform
offers various online channels throughout the world, including SINA Sport, SINA Finance, SINA
Technology and etc… Each channel consist of Chinese-language news, contents and the built-in search
engine for users to experience various services. SINA.com also provides advertising services that allow
business to display their advertisement on pages within the website.
SINA.cn provides professional information and entertainment through its SINA portal via mobile users,
which is customized with Wireless Access Protocol (WAP). The instant news brings conveniency to the
people on-the-go, with key channels like SINA Finance, SINA Sport, SINA Technology and etc…
Weibo.com is a microblogging service, and is considered to be one of the most popular social media sites that
is used frequently by Chinese communities around the world. Since Weibo.com launched in 2009, registered
users continuously increased by the millions. Unlike other social networking sites, Weibo is widely used by
Chinese communites, celebrities, businesses and government entities. As a highly influential medium, Weibo
users are allowed to send a maximum 140 words of Chinese characters to discuss their valuable thoughts
online that were usually prohibited in the past.
MVAS (Mobile value-added services) is an online subscription service that enables subscribers to enjoy its
three main services— News and Information, Community, and Multimedia Download through multiple
platforms such as SMS, KJAVA, MMS and etc..
Other businesses and products such as SINA’s game channel, gives access to online games, email services,
which support both post office protocol 3 (POP3) and simple mail transfer protocol (SMTP) access. Plus antivirus protection, enterprise services that assist small businesses and government organization to interact with
their target audience efficiently, blog, eReading and classified Advertising.
Industry Overview and Competitive Positioning
Macro Economic Analysis:
GDP
In 2011 China’s Gross Domestic Product (GDP) was 7.3 trillion dollars. It is currently maintaining
a steady growth rate 2.2%, which ia indicating an above average growth rate when compared
amongst other nations. China’s Gross National Product (GNP) was 11.33 trillions dollars in 2011,
which suggest that in the next several years Chinas GDP has the capability of surpassing the
United States.
Inflation
The inflation rate of China between the years of 1994 and 2012 has averaged around 4.3%. This
number is quite sustainable considering the fact that in 1994 the inflation rate hit an all time high
of 27%. Currently in China the inflation rate sits at about 2%, which is about the same rate the we
face here in the United States.
Political Restrictions
Government in China controls almost all aspects of life, and political restrictions are found playing
a major role in the economy. China has the largest and most vast Internet cencorship. It has over
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sixty internet regulations and is more extensive and more advanced than any other country. A
broad overview of some of these regulations include: making falsehoods, distorting the trth,
spreading rumors, destroying the order of society, promoting feudal superstitions, sexually
suggestive material, gambling, violence etc… Marketing in China is another major political
restriction. The Chinese government has put in place specific rules that protect their domestic
industries. By not allowing companies to compare their products with domestic companies, nor
should they be allowed to have any superlatives in them.
Industry Analysis:
Political Restrictions in China
With an estimated 485 million or more Internet users, China dominates the largest Internet
population in the world. Since Facebook, Twitter and most of the social networks are banned in
China where media has proven insufficient, Weibo.com has widely been used in China.
(Bloomberg: Janco Partners)
Internet Software and Service Industry
Companies in the Internet Software and Service industries, such as Sina, develop and market
internet software, and provide internet services including: online databases, interactive services,
web addresss registration services, database construction and internet design services. This
industry belongs to the Information Technology Sector which is currently one of the largest ten
sectors in the S&P 500 with a sector weight 20.13%.
There are five main external factors that affect sales and profitability in the IT sector. These five
factors are technology, government, social changes, demographics and foreign influence. The
technology of the product is the most important factor that affects consumers demand. In other
words, the tastes and preferences of consumers are an important determinant of the demand in this
industry.
The Internet software and service industry is the fastest growing segment of the software industry.
In the short-term, economic growth encourages new companies to enter into the market; on the
other hand, the firms can easily exit the industry since the fixed costs are low when economy goes
downward. In the long run, the firms are making exctly zero economic profits. Therefore, Sina is
within an industry that is rather unpredictable or benifitial. For instance, Google makes people
easy to search information online, while sina make people easy to communicate with each other by
its well-known social newtwork— Weibo.
Online Advertising Industry
Sina has a strong online advertising business. During the third quarter of 2012, Sina generated a
stable online ad business compared to other competitors. Such success might be due to increasing
contribution from Weibo, strength in FMCG, Internet and Olympic campaigns. Furthermore,
video ads continued to grow 126% year over year. Overall, China’s social ad market (3.5% of
online ad in 2012) is still in the early stage compared to US’s (7.6% of online ad in 2011). (Sina
Corp: Weibo monetization emergin in shap)
Social Network: Weibo Dominates Chinese Social
Sina launched Weibo.com, which is the largest micro-blogging network within Chinese
community globally. Registered users continuously increased to 368 million at the end of quarter
2, 2012. Weibo contribution and multiple monetization channels have Company expects Weibo
advertiser number to double by end of 2012. Weibo’s monetization channels include promotion
tweets, non-ad Weibo revenue from third party apps and games sharing, self-service ad platform,
and paid membership. (Sina Corp: Weibo monetization emergin in shap)
Competition Analysis:
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SWOT Analysis:
By examining Sina Corporation through SWOT Analysis, Sina tends to favor Chinese social networking
users with its unique and successful microblogging site called Weibo, which generate more than 10 % of its
total advertising revenue and has established a strong brand image in the social networking market.
Furthermore, Sina is an Internet based company with no inventory concerned, and has a continuously
increasing revenue, which have built up its internal strength. However, Sina’s recent stock share price has
droped dramatically that might mainly caused by an unstable management team, negative net income and
earning per share. Although the revenue growth eventually have helped boost Sina’s earning per share, the
company has also generated large amount of expenses that have made its net income negative since 2010.
These unfavorable situations become Sina’s biggest weaknesses and slow down its business growth.
As a one of the top leaders in the Internet software and services industry, Sina apparently has significant
advantages over its competitors while they try to overcome with its competitive disadvantages. Indeed, Sina
successfully dominates microblogging market in China and Chinese communites around the world as social
network uses increased globally. As a result, Weibo becomes Sina’s opportunity to continuously stand on top
of the competitive Internet market. To be able to sustain its competitive advantage, Sina must develop
solutions to eliminate the external threats such as governemt controls over its online services. Yet Sina leads
the trend of social network in China, however, the government regulations in China have made the Internet
based business more difficult to operate under government censorship. Moreover, the threats may also come
from its competitors, such as Sina appears to be less competitive in providing online games, search engines
and some other services compared to the major competitors like Baidu.
Porter Five Forces Analysis:
Additionally, we use Porter Five Forces to analyze Sina Corporation in order to determine profibility level of
the company.
“Moderate” Threat of New Entrants
In the Internet software and services industry, the companies are able to reach customers (or in other words,
the online users) in any distance easily without large costs, that indicates low economic of scale to the new
entrants. Since Sina Corp. mainly operates within Internet industry in China, there will be other concerns over
government regulation barriers, which make it harder to enter the Internet market.
“Low” Bargining power of suppliers
Suppliers in the Internet software and servies market are large in numbers, and offer smiliar enterprise
solutions that are substitutable; moreover, the switching costs of suppliers are relatively low, so they have
low bargaining power over Sina.
“Low” Bargining power of Buyers
Buyers in this industry are considered the Internet users. Although the switching cost from Sina to other
Internet service providers are almost zero, Sina still holds huge power over the buyers (or Internet users)
since they have a high customer loyalty on its social networking service— Weibo.
“Moderate to High” Threat of Substitutes
Internet users have the power to choose the online services and sites that are most attractive and benifitial to
them with low or zero cost of switiching between the services. One of the biggest advantages Sina has is that
millions of Sina Weibo users have already adopted to its uniqe microblogging services. Therefore, it’s
unusual for them to look for substitutes.
“Moderate” Intensity of rival
Among numerous competitors in the Internet software and service industry, Sina has sustained competitive
advantage by its Weibo, which highly differentiate from other social networking sites and possess majority of
the social network users in China. Look into Sina’s internal business, however, they tend to
Numerous competitors
*Moderate expenses and zero storage cost
*High differentiation for certain products but low switching costs.
Investment Summary
Sustainable business model
The business model of Sina is the information model. It is mainly through different kinds of free
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information, hot news and the service to attract a lot of visitors and then form a fixed customer
base. Sina keeps a high CTR and awareness so that it attracts enterprises to advertise on Sina to
advertise their products continuously. And the great income of advertisements is far more than the
cost of free information, news and the service. This business model causes the three win situation
including Sina’s profit, the enterprises’ increasing awareness and the viewers’ free service.
China is rapidly growing
The GDP in China increases continuously, from 39,798,300 millions in 2010 to 47,288,200
millions in 2011. The increasing in economics in China allows more enterprises to advertise their
products by using internet. It is a huge chance for Sina to increase its clients and income. In the
end, Sina increases its profitability from the rapidly growing economics indirectly.
Revenue boosted
Sina and Weibo boosts its revenue from advertisements, rechargeable games, rechargeable e-mail
box, downloadable resource, online TV, efficient search engine, management fee from Web Log
and network community, and income from renting online shops. All of these are based on the high
CTR and awareness. At the same time, the convenience and quick way of payment on websites
also attracts more users.
Losing money
Although Sina has a high total revenue, its investment impairment is 281,548,000 USD. The major
of the investments is the company restructured its real estate and home decoration channels and
related business into a new subsidiary.
Government role and political restrictions
All of the companies in China can be controlled by the government besides Sina. Now Chinese
government does not allow people to use facebook and twitter in mainland. So, Sina has few
competitors. If the government changes the rule, Sina will face a difficult change because
facebook and twitter are used by people all over the world and only Chinese use Sina Weibo.
Now Sina operates its main businesses through companies with which it has contractual relationshi
ps but in which it does not have controlling ownership. If the government determines that
Sina’s agreements with these companies are not in compliance with applicable regulations, Sina’sb
usiness in could be adversely affected.
SINA Corporation-Share Pricing
Source: www.capitaliq.com
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aliquam pharetra. Duis elit odio, iaculis id fringilla ac, dapibus sed purus. Sed ornare consectetur nibh eu
fermentum. Quisque quis elit justo, non pulvinar quam.
Valuation
Five-Year Projected Cash Flow Assumptions
EPS is forecasted to be positive as a result of increasing sales, increasing margins, and the losses of
investments may not as large as the losses in 2011.
Sales forecast
The five-year projected cash flows are derived from increasing sales, from its increasing Weibo ad revenue.
The number of people who use Weibo grows from 100 million in 2011 to 300 million in 2012. The large
amount of users will attract more companies’ investments which lead to the rising of Sina ad revenue. And the
number of people who use Weibo users may grow slow down in the next several years. Therefore growth is
expected to continue, albeit may more quickly from 2012 and more slowly from 2013-2016. The risk of Sina
comes from the competitors because they can vie for the investors. As a result, sales are expected to grow at
the rate of 28.03% CAGR over the next five years.
SG&A Decline while Sales Growth
SG&A to sales revenue is expected to decline within the next 5 years. This is possible because
Sina’s revenue is growing with a 12-13% growth rate, and expenses will remain stable and may
even decrease. This is possible because Sina is a web based company.
Gross margins
Gross profit exhibits a steady and stable strong fundamental. Because of the huge number of users, the Gross
profit may increase over the next five years. At the part of advertising, the changes in advertising gross
margin in 2011 and 2010 were due to increases in advertising revenues without proportional changes in costs.
Sina expects to increase its investment in absolute dollars terms in web content, Internet connection and
production costs to maintain its market position. At the part of non-advertising, non-advertising gross margin
decreased as a result of declining MVAS gross margin, which decreased 6% in 2011 and 10% in 2010. The
year-over-year declines in MVAS gross margin in 2011 and 2010 were due to decreases in MVAS revenues.
But, MVAS providers are willing to accept lower revenue shares to acquire marketing channels and MVAS
content and operators are increasing their revenue share for new MVAS offerings.
Cost of Equity
To measure the Cost of Equity, we use CAPM model with 20 years government bond risk-free rate of 2.55%
(Data from Bloomberg), risk premium of 6.35% (Data from Damodaran) and the company’s beta of 1.46
(Data from Capital IQ). The Cost of Equity will be approximately 11.82%.
Financial Analysis
Earnings
E
2009
2010
2011
a
Gross profit
55.86%
58.32%
55.41%
r
Earning is considered to be of high quality if it is likely to be persistant in the future. One method of assessing
earning quality is the comparison of earnings with cash flow from operations. High reported earnings that is
not accompanied by high cash flow from operations is in general unlikely to persist; Comparing with 3 years,
the highest cash flow from operations appears in 2010 and the lowest cash flow from operations appears in
2011. In 2011, the major reason of low cash flow from operations is the buildup in its accounts receivables
and the decline in its net income. In 2010, the major reason of high cash flow from operations is the decline in
prepaid expenses and other assets and the buildup in Income taxes payable. Sina would have to be highly
profitable if the company had been able to grow is net revenues without high Operating expenses and
investment impairment.
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Cash Flow
Operating
In Millions
Net cash flow from
operating activities
Influences:
-industry features
-stage of development
-business strategy
-related transactions
2009
2010
2011
98.1
116.6
66.5
2009
2010
2011
111.7
-235.9
-218.2
Investing
In Millions
Net cash flow from
investing activities
The Net cash flow from investing activities decrease. The major reason is high Purchases of short-term
investments and Investments and high prepayments on equity investments.
The Influences of cash flow from investing activities are:
-The change of the market share
-The processing of fixed assets
Financing
In Millions
2009
2010
2011
Net cash flow from
155.3
12.0
13.5
financing activities
The Net cash flow from investing activities decrease. The major reason is Repurchase of ordinary shares and
Proceeds from issuance of ordinary shares pursuant to private equity placement are zero.
The Influences of cash flow from investing activities are:
-Financing environment
-Financial ability
Balance Sheet & Financing
2009
2010
2011
Crrunt ratio
4.09492
4.065296
4.125561
Quike ratio
4.09492
4.065296
4.125561
Total liability/total assets ratio
24.23%
24.19%
23.64%
ROE=Net income/SH
33.70%
-1.54%
-28.43%
Profit margin
1.15
-0.05
-0.6
Totle Assets Turnover
0.247131
0.318932
The ROE of Sina has declined significantly in 2010 and 2011. On examining the three component ratios of
ROE(profit margin, assets turnover and financial leverage), we see that the decline in profit margin seems to
be the biggest contributor to the decline in ROE. This decline in profit margin is most likely due to the
investment impairment. Sina net revenues had been growing rapidly in the prior years, and so the
management may have expected that the sales would grow at the same rate in 2012. Since Sina does not have
debt, the buildup in assert turnover may be a result more efficiently.
Potential Competitive Advantages of Sina Corporation
Sina contracts with many partners for rights to display their content on Sina websites. Some of
Sina’s leading providers include the International Olympics Committee, NBA, English Premier
League, National Football League, PGA Tour, Associated Press, and many more. Sina has also
established partnerships with certain International record companies to provide image and music
downloads.
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Sina Corp. has also made an agreement with Apple as of 2012 providing that Sina Weibo be
integrated in Apple’s new iOS 6 software. This is a big move considering Sina is not thought to be
common among English speakers, even though SINA does have an English setting.
Investment Risks
Operational Risks:
Internet system and potential risks of disasters
Since Sina Weibo became one of the powerful social networking services within Chinese community, any
technical problem and disrupted system may cause serious losses to Sina corp. and other businesses that
depend on its Weibo ads.
Security measure of confidential personal information
While Internet security and privacy are always two biggest concerns from Internet users, potential risk of Sina
may be leak of users’ online information. With over 300 millions of Weibo user accounts in the system, Sina
is responsible for safeguarding personal information. Once Sina’s databases get hacked, millions of users’
information may leak out; and may result in losing trust by Sina’s users.
Competition Risks:
Rising social networking companies
Sina has competitors across different areas of Internet service providers. Every competitor tends to provide
similar online services in such competitive industry. Fortunately, Sina dominates social networking market
within Chinese communities by its successful microblogging services called Weibo. Registered users of
Weibo have increased dramatically, and other rivals started to imitate and unveil their own social networking
services. One of the biggest competitors of Sina Weibo is Tencent’s Weibo. Since Tencent is known as the
largest provider of messaging computer program in China who currently holds over 771.7 million active user
accounts, they try to link its messaging computer program with the new Tencent Weibo to inform millions of
users about its new microblogging site. As a result, Sina Web users who also have a messaging program
account with Tencent may switch to Tencent Weibo, due to convenient purpose and zero switching costs.
Regulatory Risk:
On the Index of Economic Freedom China has a score of 51.2 for 2012, ranking as the 138th freest economy
in the world. Its overall score is down .8 points since 2011 reflecting worsening performance because of
business freedoms. It is ranked 30th out of all 41 Asia-Pacific nations, and is ranked lower than their global
and domestic counterparts score averages.
In China the Judicial system is very vulnerable to political influences and Communist party directives.
Because of this vulnerability, intellectual property rights are not protected effectively, and infringements on
copyrights, patents and trademarks are quite common.
The government in China also owns all financial institutions which allow the government to monitor and
control all transactions that take place with any business. They also favor lending according to state priorities,
directives and large state enterprises.
Macro Risks:
Chinas economy is growing rapidly with a 10 percent growth rate, but is unstable at times because of
government interventions.
Macro-control is a policy introduced in 1993 by Zhu Rongji and refers to the use of direct government
intervention by the control of direct government to cool down the overheated economy. The policies include
constrains to monetary policies, suppress real estate and stock markets, control inflation, lower supplies of
raw materials and reduce domestic consumption.
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Appendix:
Appendix 1: Revenue Growth Rate
Appendix 2:WACC
Appendix 3: Ebitda Multiple Method
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Appendix 4: Perpetuity Growth Method
Appendix 5: Implied EBITDA Terminal Multiple
Appendix 6: Implied Perpertuity Growth Rate
Appendix 7: Five Major Business Lines
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Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company.
The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or
publication of this report. [The conflict of interest is…]
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does [not] act as a market maker in the subject company’s securities.
Ratings guide:
Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater
over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index.
A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over
the next twelve months.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but
the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used
as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of
an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society Name], CFA
Institute or the CFA Institute Research Challenge with regard to this company’s stock.
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