Buy chinese internet company sina?

Sina (nasdaq: sina) is the 2nd most popular internet portal in China right now and is 6th in the world for yearly web page views. Given that China's internet market is a young and rapidly growing one I was thinking of buying some Sina to hold (5-15 years) in the next couple of days. It can be compared to yahoo here while the number one company Baidu (bidu) is comparable to a google. However Baidu trades at something close to 116 times predicted 2006 earnings while Sina trades at about 21 times. The stock also took a slight dip recently after some bad advertising expenses but they have 288.6 mil in cash and investments and 100 mil in convertible debt.
Some quick stats from the stock quote-
Current stock price $25.4
P/E $31.36
Earnings per share Q4 2005 are expected to be $.23 and Q2 estimates for 2006 are steadily rising to $.25.

Anybody wanna give me a "yeah that sounds like a great thing to buy" or "man your stupid" analysis of this stock Im thinking about buying?

more info- dont think I can get most recent 10k because their website is in chinese..if there is a way around this I will try again

yahoo business summary for sina


SINA Corporation operates as an online media and information service provider primarily in the People’s Republic of China. The company offers a network of localized Web sites targeting Greater China and overseas Chinese. Its portal network consists of four destination Web sites to users in Greater China, including mainland China, Taiwan, Hong Kong, and overseas Chinese in North America, which consists of Chinese-language news and content organized into interest based channels, and offer community and communication services, and Web navigation capability through SINA search and directory services. SINA also provides mobile phone users with news and other content subscriptions, mobile dating service, picture and logo download, ring tones, ring back tones, mobile games, chat rooms, and access to music files. In addition, the company provides community-based services, including email, dial-up Internet access, instant messaging service, chat rooms, online games, alumni clubs, online karaoke, and other entertainment services; enterprise solutions, which include search and directory listings services, Web hosting, corporate email, and proprietary software products to government agencies and small to medium-sized businesses in China; and e-commerce services, including the online shopping Web site, online auction, and online and offline travel and hotel booking service. SINA is headquartered in Shanghai, China.

Competitors-none that I know of specifically in the completely chinese market but yahoo could gain ground over there.

As far as catalysts go..their third quarter failure to meet epected earnings was due to a splurge on advertising plan that has been restructured. They get less than half of their earnings from advertising i.e. yahoo. The advertising went towards Sms- short messaging services a cell phone feature that lets users do lots of cool stuff on their phone like games etc. The advertising worked- sms subscriptions grew 11% but the cost of acquisition was high but continuing subscriptions should make the campaign more than pay off. Another positive note for Sina is just the pure size of China and its rapidly developing/advancing economy. In 2000 1.74% of China used the internet and this number quadrupled by 2003 but that is still only about 8%. I am hoping that once internet really starts to catch on and become more mainstream in China, that Sina will cash in big.

Some numbers copied from yahoo finance

Market Cap (intraday): 1.35B
Enterprise Value (15-Dec-05)3: 1.16B
Trailing P/E (ttm, intraday): 31.40
Forward P/E (fye 31-Dec-06) 1: 23.96
PEG Ratio (5 yr expected): N/A
Price/Sales (ttm): 6.80
Price/Book (mrq): 4.44
Enterprise Value/Revenue (ttm)3: 5.85
Enterprise Value/EBITDA (ttm)3: 19.832

Profit Margin (ttm): 23.57%
Operating Margin (ttm): 25.07%
Management Effectiveness
Return on Assets (ttm): 7.10%
Return on Equity (ttm): 17.60%
Income Statement
Revenue (ttm): 198.50M
Revenue Per Share (ttm): 3.825
Qtrly Revenue Growth (yoy): -5.50%
Gross Profit (ttm): 138.38M
EBITDA (ttm): 58.54M
Net Income Avl to Common (ttm): 46.79M
Diluted EPS (ttm): 0.81
Qtrly Earnings Growth (yoy): -37.30%
Balance Sheet
Total Cash (mrq): 288.64M
Total Cash Per Share (mrq): 5.432
Total Debt (mrq): 100.00M
Total Debt/Equity (mrq): 0.329
Current Ratio (mrq): 8.27
Book Value Per Share (mrq): 5.716


Share Statistics
Average Volume (3 month)3: 1,145,220
Average Volume (10 day)3: 652,688
Shares Outstanding: 53.13M
Float: N/A
% Held by Insiders4: 12.16%
% Held by Institutions4: 31.10%
Shares Short (as of 10-Nov-05)3: 3.14M
Short Ratio (as of 10-Nov-05)3: 2.3
Short % of Float (as of 10-Nov-05)3: 6.10%
Shares Short (prior month)3: 3.20M



Hope this is enough info to spark any discussion of folks interested.
Thanks for any input as I will be making the decision to buy very soon,
Z.P.

[Evan]

Link to excel file of latest 10K financials: Here

Link to excel file of standardized financials from Thomson (easier to read): Here

Link to RTF formatted 10K (open in Word): Here

Link to 10Q from Thomson (in case anyone wants TTM numbers): Here

[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.

[Evan]

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their website is in chinese..if there is a way around this I will try again

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[buffett]

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was thinking of buying some Sina to hold (5-15 years)

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If this is an investment: What do you think the company is worth today? What kind of profits do you think they'll be earning in 5 (or 15) years? Based on that, what ballpark range would you guess the firm will be worth in 5 (or 15) years?
If this is a speculation: Good luck.