[Evan]

Warning: VERY informal analysis done VERY quickly


A good test to see if a company is even worth looking at is to see what it's value is if you assume only nominal GDP growth into perpetuity. A standard assumption for this rate is 3.5%.

First I calculated the FCFF (Free cash flow to firm, as opposed to free cash flow to equity). FCFF = EBITDA - Tax - CapEx - Change in NWC. NWC = Non-cash working capital = non-cash current assets - non-debt current liabilities.

FCFF for FY04 came out to $98,899. Since this is current (actally historical, but I didn't have time to do TTM) its present value factor is 1.

The value of an asset is the present value of all teh future cashflows it will produce. If you assume constant growth, PV = CF/(r-g) where CF = Year0 cash flow, r = discount rate and g = growth rate.

We have two of these numbers given already, CF = $98,899 and g = 3.5% (for the time being, this is EXTREMELY low in reality). For this back-of-the-napkin analysis I usually impute the discount rate from the value instead of the other way around (which I do later on).

Since we're valuing only the equity, we have to set PV(FCFF) + Cash - Debt = Market Cap. Current market cap, according to yahoo, is $1.35B. Cash = $275.635M and Debt = $100M (this is convertible debt, but for the sake of simplicity and the fact that it's an immaterial amount relative to the market cap we're going to treat it as straight debt for the time being).

So PV(FCFF) = $1.35B + $100M - $275.635M = $1,174.365M (simple arithmatic here). So $1,174.365M = $98,899M/(r-3.5%) (PV of constant growth cash flows shown above, this is also the dividend discount model, for those familiar with that). Do a little math and sole for r....you get r = 11.92%.

Since this company has very little debt (7% debt to equity) I'm going to assume for the time being that r (also known as WACC) is equal to their cost of equity. This is actually another conservative assumption (cost of debt is lower than cost of equity, so if we used their actual WACC instead of assuming Ke = WACC we would find a higher imputed beta which gives us a bigger margin of safety).

Cost of equity = Rf + beta*risk premium (capital asset pricing model)

Rf = 10 year risk free rate = 4.36%
Equity risk premium = 5.5% (standard)

NOTE: These are probably slightly lower than they should be since I think this company's revenue are Yuan denominated and I should be adding a country risk premium onto this to account for China's risk in excess to the U.S...again, this is a VERY rough analysis


So we have one missing veriable, beta (beta is a metric of systematic risk relative to a chosen market benchmark). We can solve for beta by setting up the equation 11.92% = 4.36% + beta*5.5%. We get beta = 1.37.

According to Aswath Damodran, the average unlevered beta for firm's in the advertising industry (which seems like the best description of what these guys do) is 1.14. When we lever that, Beta(L)=Beta(U)*(1+((1-t)*D/E)), we get a beta of 1.22 (D/E = 7%, Effective Tax Rate = 5%).

Basically what all this says is that with nominal GDP growth and a cost of equtiy of 11.92% SINA is fairly valued at today's price. If either of those assumptions are too conservative, it is undervalued. The growth rate is certainly too conservative. I will need to do more research before I can make an informed opinion regarding any discount rates, but with an implied beta of 1.37 and a built-up beta of 1.22 is looks like we may have a margine of safety on that front as well.




I will come back to this later today after I eat breakfast and maybe after I take a nap.