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Can SINA Corp (SINA)’s Business of Censored Free Speech Survive?

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The very existence of SINA Corp (NASDAQ:SINA), the Chinese Internet portal site that created microblogging site Weibo, is a paradox.

Weibo, which is widely regarded as “China’s Twitter,” depends on the rapid exchange of freely expressed ideas. Yet the company is based in authoritarian China, in one of its most highly oppressed growth industries — Internet technology. For every two steps Sina takes forward, it must take one back and censor its own channels in order to play nice with the Chinese authorities. Is this business model of “regulated and censored” free speech sustainable? Is Sina’s growth potential worth the risks of an abrupt shutdown?

SINA Corp (NASDAQ:SINA)Chinese Macro 101: Enough is Never Enough

First and foremost, Sina’s future growth is dependent on major macro factors in China. In the fourth quarter of 2012, China’s GDP rose 7.9% over the prior year quarter, and 2% sequentially, exceeding expectations. This alleviated some concerns that China was headed for the “hard landing” that brought down Brazil after years of feverish growth.

A strong and stable GDP is important to fuel Sina’s primary source of revenue — online display advertising. In 2012, China’s online advertising market grew 47.6%, an impressive figure that nevertheless failed to measure up to the 57.6% growth it reported in 2011.

This perceived slowdown has also dragged down its Chinese Internet peers, Inc. (NASDAQ:BIDU) and Inc. (NASDAQ:SOHU). Investors should remember that when investing in China, double (or triple) digit growth is not impressive — unless it exceeds the prior year’s growth.

A Frustrating Fourth Quarter

For its fourth quarter, Sina’s earnings plunged 74% to 14 cents per share, or $2.4 million. Meanwhile, revenue grew 4.3% to $139.1 million. However, those uninspiring results were still enough to top the Thomson Reuters consensus, which called for earnings of 5 cents per share on revenue of $133.9 million.

Wall Street had been expecting the worst from Sina and its Chinese Internet peers due to weakening online advertising numbers and shaky GDP growth.

Yet Sina’s advertising revenue rose 6.8% to $110.7 million, primarily boosted by strong results at Weibo. Non-advertising revenue, which includes other investments, slid 4.2% to $28.5 million as a result of failed equity investments and a related impairment charge.

Monetizing Weibo

Weibo has been the most popular microblogging site in China for several years now, but Sina had struggled in the past with monetizing its growth — a similar dilemma facing its western counterparts Facebook Inc (NASDAQ:FB) and Twitter these days.

Sina recently added a feature that allows advertisers to “tweet” to users not directly following them, a somewhat intrusive tactic similar to Facebook’s News Feed ads. It also started linking its most followed microbloggers to advertisers.

During the fourth quarter, Weibo’s daily active users grew by 82% over the prior year quarter to 46.2 million users — and 75% of these users accessed the site through mobile devices. Smartphone advertisements generated 30% of Weibo’s total revenue. Sina CEO Charles Chao expects this number to increase through 2013, as the adoption rate of smartphones and tablets continues to rise.

Tencent Takes Aim

Chao admitted that smartphone users were spending less time on Weibo, and more time using WeChat, a text and voice messaging application created by its rival Tencent Holdings. WeChat is available on all major smartphone platforms, and has a user base of more than 200 million. In addition to WeChat, Tencent also owns Tencent QQ, China’s most popular instant messaging desktop application, with over 670 million users.

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