Shares of SINA Corp. (SINA - Free Report) declined 6.76% ($3.49) to $48.15 on Apr 25, 2014, after the company announced that the Chinese regulatory authorities have decided to withdraw two licenses related to Internet Publication and Online transmission of Audio-Visual programs.
The withdrawal follows a crackdown on pornographic content by the Chinese authorities. Reportedly, the regulatory authorities found pornographic content on SINA’s online reading channel and website. Beijing Municipal Cultural Market Administrative Law Enforcement Unit has also proposed to levy fines on SINA for the violation.
China has been very sensitive regarding Internet content over the years and has imposed significant restrictions on online search and other social-networking activities. The Chinese government has already blocked Twitter (TWTR - Free Report) , Google’s (GOOGL - Free Report) YouTube and social-networking website Facebook (FB - Free Report) .
Being one of the largest Internet companies in China, SINA also faced the brunt of these excessive regulations. The company has been pressurized to impose restrictions on user content, particularly political. Its micro-blog service Weibo Corp. (WB - Free Report) was blamed by the government for creating instability in the society.
Although SINA has been somewhat lenient regarding content compared to other websites, the recent violations of government rules did not leave any room for the company, in our view.
Although the two license cancellations are not expected to hurt SINA’s core business, it will dent its goodwill in China. The proposed monetary fines will also hurt SINA’s profitability. Moreover, intensifying regulation can create panic among investors resulting in further sell-off.
Year-to-date, SINA shares have fallen 43.2% compared with a 1.7% increase in the S&P 500. To support its falling share price, the company recently approved a new share repurchase program worth approximately $500.0 million. In the second half of 2013, SINA raised $700.0 million through a convertible bond offer that it can use now for the buyback program.
Moreover, Weibo’s unimpressive initial public offering (IPO) negatively impacted SINA’s share price, in which the company holds a controlling interest. Low demand for Chinese Internet stocks was primarily blamed for Weibo’s blotchy IPO. As compared to its original expectation of $500.0 million, Weibo finally raised $286.0 million in the IPO.
Although Alibaba’s upcoming IPO is expected to boost the demand for China-based Internet stocks such as SINA, we believe that excessive government regulation remains a major impediment for their growth in the near term.
We further believe that a significant part of SINA’s growth is now tied with Weibo, in which Alibaba has a considerable stake. Weibo contributed approximately 35.0% of SINA’s advertising revenues in the fourth quarter of 2013. However, Weibo is expected to face significant competition from Twitter that may affect its revenues, going forward.
Currently, SINA has a Zacks Rank #5 (Strong Sell).