A leading online media company and a provider of mobile value-added services in China, Sina Corp. ( SINA - Analyst Report ) announced that a contract which allowed it to use Google Inc.’s ( GOOG - Analyst Report ) search engine has expired. Currently, Sina uses its own proprietary technology instead of Google’s service.

Sina’s move is not surprising, as many Chinese companies such as Tom Online Inc. has dropped its partnership with Google in the world’s biggest Internet market, in terms of users. Tom Online Inc. stopped using Google’s service from March 2010.

China is very sensitive regarding the Internet and imposes significant restrictions on online search. The Chinese government has blocked Google’s YouTube site as well as social-networking websites such as FaceBook and Twitter.

Google has been battling with the Chinese government over Internet censorship for some time. In early 2010, the company moved its Chinese services offshore to a site in Hong Kong. Most recently, Google alleged that China is blocking its e-mail service, a claim fiercely opposed by the Chinese Government.

According to research firm Enfodesk, Google’s market share in China fell to below 20.0% in the fourth quarter ended December, 2010, while local player Baidu.com ( BIDU - Snapshot Report ) saw its search market share reach 75.5%. As Google’s Chinese business shrinks, we believe Sina has the potential to grow its market share.

Our Take

According to CNNIC, China’s total Internet users reached 457 million in 2010, up 19.1% compared with 2009. However, Internet penetration rate of 34.3% is low compared to 70.0% in the United States, which reflects the potential of the market.

We believe Sina is well positioned to take advantage of this potential, based on strong growth in the education and Internet e-commerce market. Moreover, SINA is well positioned to take advantage of the growing trends in the wireless service field in China, as it can attract more users to its wireless services than its competitors through its popular website.

However, the competition within the Internet business in China is fierce, as the industry is crowded with Internet portals such as Sohu.com Inc. ( SOHU - Analyst Report ) and Tencent Holdings and popular Internet search companies such as Baidu, AirMedia Group ( AMCN - Snapshot Report ) , Microsoft Corp. ( MSFT - Analyst Report ) and Google that have attracted a lot of advertising clients. Sina is a relatively small company compared to its peers and hence, encounters intense competition in the advertising market.

We maintain a Neutral recommendation over the long term (6-12 months). Currently, Sina has a Zacks #3 Rank, which implies a Hold rating in the short-term (1-3 months).