Share of Sina plunged 15% yesterday on investor concerns over regulatory uncertainties such as licensing issues and VIEs investment structure. But I think these regulatory risks, if under closer scrutiny, are overblown. And here is why. 1, Almost all the oversea-listed Chinese companies, including Sina, Baidu and Tencent, are using the VIEs structure. It is hard to image that the Chinese government would make any bold move to destroy all these companies that are valued billions of US dollar in foreign markets. No one will do that, unless there are some people want to pull China back to an isolated country as it is 30 years ago.
2, China will never ban foreign investment. The Chinese government’s possible regulation on VIEs may increase difficulties for Chinese start-ups to recieve foreign venture capitals. That means foreign investment may need more time to be approved. But such investment will never be banned. The government will never reject any foreign investments as well as the job opportunities, taxes and the innovation benefit that they brought about.
3, Banning VIEs will hurt China’s recent effort to win international recognition of its market-economy status. With China’s recent efforts to launch international board and its involvement in the global market, no top Chinese leaders would make decisions that will inevitably invite strong International criticisms.
4, When one door is closed, another needs to be opened. VIEs has long been outside the radar of the government regulation and it is like a grey market. The government may find ways to make it in accord with current laws and regulations, rather than simply shut it down. Even though the door of VIEs was to be closed, another door needs to opened. For those who have already listed in foreign markets, there is nothing to be worry about.
5, Censorship is always there for Chinese media. Whether they are newspapers, new media, portal websites or Weibo, Chinese media are always under some form of censorship. It is not brand new or something specifically designed for Weibo. It will still last for a long time, of course.
6, If Sina Weibo is to hurt, others will suffer too. It is nearly impossible for the government to shutdown Weibo directly. The more feasible way is to gradually tighten its controls on Weibo. That will increase Sina’s costs in dealing with the censorship system and hurt users experience. But a tightening system will applied to everyone, including Sina’s competitors.
7, People need a channel to complain. In fact, Sina did a good job in self-censorship. Among other Chinese Internet companies, Sina Weibo runs the world’s most advanced and efficient censorship system. If Sina Weibo was to be shutdown, the outspoken users will go somewhere else that are less guarded. And if all the channels were to be closed, people’s anger will turn into real actions, which is not what the Chinese government want to see. As the government has noted, “people need a channel to complain”.
8, Shutting down Weibo will have huge political consequences. Sina Weibo is not only a platform for individual Chinese netizens, but also for people with different backgrounds, government organisations and even foreign institutions to communicate with each other. More than 10,000 Chinese government departments and institutions have opened official accounts on Sina Weibo and even United Nations, US and Hong Kong government also have their official accounts.
For regulators, the risk of shuting down Weibo is much bigger. Even if some top leaders have decided to make the order, he needs to take the risks of a formidable aftermath and ready for possible attacks from his political enemies. No smart politicians will trigger the bottom that may put an end to his political career.
9, licence is a protection, rather a risk, for Sina Weibo. It is still a rumour that Chinese government will require licenses for Chinese Internet companies to run Weibo. But I think even if that is what government plans to do, Sina is very unlikely to miss the licence.
It is very possible that Sina would be asked to make some adjustments in its services in order to get a licence. And once it got the licence, it is under the government protection. That means no other companies will be allowed to enter the Weibo business.
10, Take a look at QQ. If the government think it should shut down Sina Weibo due to its outspoken users, just take a look at Tencent QQ, which I think should be closed for 100 times under its criteria.
Is it a good time to long Sina?
If Sina’s share drop on Tuesday is just investor’s overreaction to an overblown regulatory risk, is now a good time to long Sina? I don’t know.
The problems is how much do you value Sina Weibo. After all, the business is still in its earlier stage and has yet generate any real revenue. Just the contrary, Sina needs to invest almost all its profit into Weibo to keep its lead over competitors.
Sina’s market cap is US$5.7 billion and I believe its traditional business should be valued at US$3 billion at most. According to a April report from Goldman Sachs, Sina Weibo should be valued between US$1.8 to US$7.5 billion, depending on whether it will become just a media platform or a social networking site more like Facebook.
So can Sina Weibo become another QQ, the Chinese Facebook or will soon lost its popularity, you need to do your own maths.
By Nick Liang, iMeigu.com. Translated and edited by Wang Xing, iChinaStock.com
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