Two weeks after reporting a disappointing $10 million loss for its fiscal first quarter (a loss that was at least less bad than expected), China’s Sina Corp (NYSE:SINA) is giving investors something less ambivalent to cheer about this week.
Specifically, on Monday, SINA issued a press release announcing that its Chairman and CEO, Mr. Charles Chao, has entered into a share purchase agreement with the company he runs. Under the terms of the “subscription” agreement, SINA will issue 11 million new shares and sell them for $456 million to a “special purpose vehicle” owned and controlled by Chao.
In effect, therefore, SINA’s CEO has agreed to directly pay more than the going rate for SINA shares, and to acquire roughly 16% of (what will soon be) the company’s outstanding share count. Furthermore, as part of the agreement Chao has confirmed that he will not resell the shares in question for at least six months after the transaction closes.
What does it mean to you?
Just prior to Chao’s announcement, SINA shares were trading for $40.73 per share. The CEO’s offer to pay $41.49 for the shares therefore speaks strongly of the value he perceives in his company’s shares. The size of the purchase — again, about 16% of shares outstanding-after-the-issuance — tells us he thinks the shares are even more undervalued than the price he’s paying for them.
Outside shareholders seem convinced that the CEO knows what he is doing — and pretty enthusiastically convinced, as we can see from the fact that SINA shares rocketed well past $50, and well past the price the CEO paid, in response to the news. After gaining more than 23% in the wake of the announcement, Mr. Chao’s purchased shares have generated more than a $104 million “paper profit” for him in just a few hours.
They could go higher still. Even after Monday’s run-up, SINA shares sell for only 16.5 times trailing earnings — despite analyst estimates (as reported on Yahoo! Finance) that earnings will grow at nearly 40% annually over the next five years. If that growth rate turns out to be anywhere near correct, both Mr. Chao, and the investors following his lead, may have struck upon an incredible bargain.
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