Sina.com's Delicate Balancing Act

By Douglas C. McGill

(Virtual China, May 23) Sina.com (ticker: SINA), currently the star of the VC-30, is one interesting stock.

Only a month ago, SINA had one of the most nerve-wracking IPO's ever. It debuted at 17 on Black Friday, April 14, when the NASDAQ fell nearly 10%. Internet stocks had been dropping like flies all week. AsiaContent.com lost 21% on its first trading day, two days before Sina.com launched.

On Thursday night, April 13, the SINA executives huddled, sucked it up, and forged ahead. They probably felt they had to. They had just finished an arduous year of corporate infighting, suffered some resignations from their board, and most importantly had been lobbying the necessary government agencies in Beijing for permission to list their company on an overseas exchange. If they had postponed, it might have been a long time until they had a chance to raise the public money they desperately needed to build on their position as China's most-visited portal on the Web.

All Your Chips

They gambled and they won. The stock hovered scarily just above 17 for a few days and then took flight and didn't look back. It closed yesterday up 223% at 55.

"We caught the last train out of the station," said Hurst Lin, the company's general manager of U.S. operations.

Now here's a question: how come SINA is virtually the only stock on the VC-30 that's gone up in the past month? Three reasons, I'd say.

One is that for all the hype that surrounds the China Internet sector, the fact is that the winners are few and far between. Once you sort out the penny and small-cap stocks that soar and crash, it seems there's only one real favorite of the broader market at any given time. Last year it was China.com (ticker: CHINA). This year it's Sina.com.

Yet if it's true there's room for only one China stock in investors' minds, there's also a basis in observable fact for putting all your chips on one portal per continent at a time. In the U.S., for example, after five years of more than a dozen companies duking it out in the portal wars there are only two big winners left: AOL and Yahoo.

Dark Days

Sina.com, with 1.7 times the monthly page views as its closest competitor, Netease, looks by far the best positioned for a shot at securing the title of China's Yahoo!

Which leads to the third reason for Sina.com's good fortune of late: Morgan Stanley Dean Witter, the lead manager of its IPO, has done a bang-up job. The success of the road show speaks for itself. During dark days for the broader tech market, Sina.com's managers, with MSDW's help, painted a convincingly sunny picture for investors, who bought at 17 and hung tough. Analysts' reports published by Morgan Stanley on May 12 and May 16, called "A Winner in the Making" (on Sina.com) and "Winner Takes All" (about Asian portals) underlined the road show story and gave the stock the kick it normally would have had only hours or days, instead of weeks, after the opening IPO bell.

What I find interesting about Sina.com right now is how it's become the bellwether for investor opinion on the state of U.S.-China relations.

The stock's steady ascent over the past two weeks, for example, tells me that investors made up their mind a long time ago that the Congressional vote on PNTR, scheduled for this Wednesday, will pass. So I therefore fully expect that when PNTR does pass, the stock will drop a bit, as investors who bought on the rumor sell on the fact.

A Western Star

As the numbers in the two MSDW reports make clear, there is still plenty of risk in SINA shares. The average of three different methods of valuing the stock (discounted cash flow, discounted equity value, and trading value) was 32 - well under the current price of 55.

The Sina.com report doesn't go into much detail on risk, other than to say that Sina's failure to execute is the biggest one, an obvious point.

Again the most interesting point to me is that Sina's strength, namely its leadership position now, is also potentially its greatest weakness. As the #1 China portal and a star in the Western securities market, bad luck caused by some oversight could make Sina the first target Beijing puts in its sights. This is especially in true in two areas: compliance with rapidly changing Internet laws and regulations, and politically or culturally sensitive content published on Sina.

Sina's done a good job on the former so far, it seems, but shifting political winds in the PRC could leave the company in the cold through no fault of its own.

Then there is the question of sensitive material that could get published on Sina, even inadvertently, that might upset censors in Beijing.

Balancing Act

Two weeks ago, Li Fuxiang, the director of China's State Administration of Foreign Exchange, jumped out of his 7th floor hospital window, killing himself. The suicide was reported and discussed in chat rooms on Sina.com several days before China's official press confirmed Li's death.

On the one hand, it could be argued that chat room rumors are no different than the gossip that's echoed through China's hutongs and alleyways for 5,000 years. On the other hand, a distinctly Chinese Internet phenomenon is the presence of certain repeat posters to Internet chat rooms whose reports, written under pseudonyms, are sometimes being received by Chinese readers exactly as a journalist's writings in the West would be received -- as credible and authoritative.

"There's no question about it," Hurst Lin said at a Sina.com presenation in New York yesterday. "People in China are going to want to talk about things." He said Sina.com had a "working relationship" with China's Public Security Bureau and said that chat rooms served a kind of pressure valve to relieve pent-up feelings among the populace.

"It's a balancing act," Lin said. "We're playing that role, to let people talk about sensitive issues but also to help the government manage the flow of ideas."

In that very sentence, Lin navigated the tightrope beautifully.

If Sina.com can do that every day, day after day, for a decade or so, they'll be worth 55 and a lot more.

To discuss this article with me and others, or to air your views about the Panglossian* business of making money on China concept stocks, please stop by the China Stock Forum.

To reach Douglas McGill email: dmcgill@virtualchina.com

To see the complete list of the Virtual China 30, click here.

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