The 51% Chinese Stock Rout That Analysts Never Saw Coming

Analysts had high expectations for Sina Corp. last year, forecasting a 19 percent stock rally in the Chinese Web portal operator.

It hasn’t quite worked out that way.

Sina plunged 51 percent $38.32 in the 12 months through yesterday, creating a 70 percentage-point gap between forecast and performance. That’s the biggest buy-rating blunder by analysts covering the 55 largest Chinese companies traded in New York.

The stock sank to a four-year low last week after Sina’s portal advertising business, which accounts for half its revenue, turned unprofitable this year amid a user shift to other platforms. While analysts had in part been drawn to Sina because of its controlling stake in the microblogging site Weibo Corp., that stock has slumped 24 percent since Sept. 11 as rival platform WeChat grew and the government stepped up control over social media.

“People were too enamored of the power and upside of Weibo,” David Riedel, president of Riedel Equity Research in New York, said by e-mail yesterday. The company “will have difficulty monetizing, will always have the concern over government censorship hanging over them and will have slowing growth, all bad for stock price performance.”

Riedel was one of three analysts who had sell ratings on Sina last November, when 25 recommended buying and four advised investors to hold the shares. His price target was $55.94 when the stock was trading above $70, while his current recommendation is hold with a price estimate of $45.

Quarterly Losses

Analysts at Brean Capital LLC and Jefferies Group LLC were the most optimistic a year ago, setting 12-month price targets of $120 and $107, respectively. While their bullish calls on Sina were wrong, investors who followed the analysts’ recommendations to buy Baidu Inc. would have made money. The operator of China’s biggest search engine has gained 54 percent in the past 12 months.

Brean Capital analyst Fawne Jiang didn’t respond to an e-mailed request for comment on her Sina recommendation. Cynthia Meng at Jefferies pointed out that she changed her rating to hold from buy in January, citing increased competition and tighter government oversight.

Sina, which has a market value of $2.6 billion, fell 0.1 percent to $38.30 at 11:51 a.m. in New York. Analysts 12 months ago forecast that shares would be selling for $92.31. It’s the biggest negative surprise in that time period among the most-actively traded Chinese companies in the U.S. with a market value above $1 billion, according to data compiled by Bloomberg.

E-Commerce Focus

Shanghai-based Sina said this month that it lost $10.9 million on operations in the period July through September as expenses jumped 43 percent. It was the third straight quarterly loss. Revenue growth of 8 percent was the slowest in almost two years amid a shift in usage from the Sina.com website to other platforms such as mobile.

“On the portal side, we’re facing challenges as more marketing dollars from brand advertisers have been shifted to video, vertical sites and mobile,” Sina’s Chief Executive Officer Charles Chao said in a call with analysts on Nov. 13.

Cathy Peng, Sina’s Beijing-based head of investor relations, didn’t respond to an e-mail seeking comment on the stock performance.

Investor attention is shifting to Chinese Internet retailers such as Alibaba Group Holding Ltd., which has rallied 68 percent since its September debut in New York, because portal websites like Sina and Sohu.com Inc. are declining in popularity, according to Eric Jackson, the founder of Ironfire Capital LLC.

“It’s hard to get excited about user growth in these businesses compared with e-commerce companies like Alibaba,” he said in a phone interview on Nov. 17.

Weibo Stake

While analysts were overly optimistic about Sina last year, the drop in its shares may have been excessive, according to Chiheng Tan, a Boston-based analyst at Granite Point Capital Inc., which invests in U.S.-listed Chinese Internet companies.

“If you add up Sina’s ownership of Weibo, Leju, Tian Ge, and its cash balance, the number should be bigger than its current market value,” Tan said in e-mailed comments on Nov. 19.

Sina’s retreat over the past year compares with a 2.8 percent advance in the Bloomberg China-US Equity Index. The company holds stakes in Tian Ge Interactive Holdings Ltd., a social video platform, and home-listing website Leju Holdings Ltd. besides owning about 54 percent of Weibo.

Analysts had estimated the value of Weibo would be $5.1 billion before its April IPO. It’s now valued at about $3.7 billion. China’s has stepped up efforts to rein in online defamation, with the nation’s top court saying last year that Web users could face jail time for defamatory rumors.

WeChat Competition

Weibo had 167 million monthly active users in September, compared with 468 million on WeChat, the mobile messaging application owned by Tencent Holdings Ltd., China’s second-largest Internet company.

“A lot of people have noticed the change of interest from Weibo to WeChat,” said Jackson, who sold his holdings in Sina before the Weibo spinoff. “They are not interested in putting advertising into Weibo, because it is less popular now.”

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