Why Did Sina Shares Plunge 15% Tuesday?

• Posted by bbishop
• on September 21st, 2011

On Tuesday Sina ($SINA) shares dropped 15%, the most since an 11% plunge in early June, just ahead of an announcement that management was starting to sell down its stake to zero (see “Red Flag”: Sina Management Selling Off Its Shareholdings From 8.7% to 0% | iChinaStock ). Other Chinese Internet stocks like Baidu ($BIDU), Youku ($YOKU), Renren ($RENN), Sohu ($SOHU) et al also fell Tuesday, but nowhere near as much as Sina did.

Readers of Digicha, Reuters, the Financial Times and the Wall Street Journal know that there is rising regulatory uncertainty and risk for Sina Weibo (see many recent posts about Sina here), and it seems strange for investors to suddenly run for the exits on no specific, public news. Then again, who really understands market psychology?

I have heard several explanations for Sina’s drop last night, including: Weibo license issues; real name registration policy coming; uncertainty about the validity of the variable interest entity (VIE) structure; fears of increasing Weibo regulation overall, and investor realization that Sina monetization is further away and has less potential than the hype had suggested.

I think those are all factors, and the catalyst might have been the rumor, which Sina denied on an official Weibo, that the government has issued four Weibo licenses and that Sina did not receive one. iChinaStock wrote about this rumor in Sina Refutes Licensing Rumors to Soothe Investor Panic:

Sina today refuted earlier rumors that it had failed in getting one of the four licenses that the government would soon require the Chinese Internet companies to continue their Twitter-like services.

Earlier reports said the Chinese government plans to issue four Weibo licenses, as part of its recent efforts to tighten control on all the micro-blogging services in China. It was reported that two of the licenses will go to the Internet departments of Xinhua News Agency and People’s Daily and the other two to commercial companies. Sina, tough running one of China’s most popular weibo services, would not be granted the license, reports said.

Sina said today through its official account “Weibo Piyao” that the earlier licensing reports are pure rumor. But it did not specify on which part of the reports are rumors.

If the government is going to introduce Weibo licenses Sina will get one, and if this rumor triggered the selloff then brave traders might have a buying opportunity.

There is another possibility, and the reason behind the 11% plunge in early June. The Sina management buyout group is selling its stake to zero in several tranches over time, and another tranche is due to be sold in September. Perhaps, as appears to have been the case in June, someone learned of an impending large insider sale, decided to get out, and a large sell order paired with the current regulatory jitters spooked shareholders and killed the stock. But in the current regulatory environment, if management is dumping shares why should investors stick around?

As I wrote two weeks ago in Could Regulatory Winter Be Coming For China Internet Investors?:

Clearly investors should be factoring in more regulatory risk, though it is unlikely that we will see major services like Sina or Tencent Weibo shut. But do not be surprised to see new microblog restrictions that reduce some of its vitality and increase Weibo content management (aka censorship) costs for Sina and Tencent. However, I would be shocked if Weibos were neutered to such an extent that they are no longer viable products. As Keso argued months ago in Three Reasons The Government Is Unlikely To Shutdown Sina Weibo:

1. People need an outlet for their views and emotions, and a visible one is safer than an invisible one;
2. Sina Weibo is controlled by people the government trusts, and the risks from shutting Weibo are greater than the risks from not shutting it;
3. The government can use Weibo to its advantage. (See China Media Project-China’s Leaders Embrace Social Media.)

A bigger risk to Sina investors may not be a Weibo shutdown but a Weibo restructuring, along the lines of Alipay’s “conversion” to a 100% locally owned firm. Microblogs are at least as important to national security as are online payments, so it is not inconceivable that the government could “encourage” a Weibo spinout into a foreign shareholder-free firm. It is also possible that Sina management might not be too unhappy with such a scenario, as they have almost sold off their entire Sina stakes and appear to have already allocated shares for themselves in a Weibo subsidiary. Remember, I am speculating here about possible scenarios, not actually saying this will happen.

The new M&A rules that appear to question the validity of the Variable Interest Entities (VIEs) could also be problematic for any of the Chinese Internet IPOs in the overseas pipeline. I hear it may be getting difficult to get a Chinese law firm to bless the structure now, a prerequisite for being able to list shares.

I hope these regulatory rumblings are just a temporary chill. But hope is not an investment strategy, and given the current political climate, including the buildup to the 2012 leadership change, investors would be justified in wondering if something bigger is going on.

Winter is coming to Beijing, it appears to be coming to the Chinese Internet, I have heard rumblings of a coming Internet “rectification campaign” in October, and so investors should be careful. People say buy when there is blood in the streets, but when it comes to Chinese Internet stocks there is always the chance that there will be blood AND Internet company body parts in the streets before the regulators are done.

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Related posts:

1. “Rumors are a Cancer that Threatens the Internet and Society”. Sina Shorts Rejoice?
2. China’s Internet: The Invisible Birdcage
3. 6th Plenum Report Suggests China Will Strengthen Internet Management
4. Happy Days Ahead For Sina And Tencent Weibos?
5. Chinese Internet Firms Pledge Self-Discipline, Again

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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