Sina:2Q17results beat on rapid revenue growth and continuous margin expansion

2Q17 results beat. Total non-GAAP revenue was USD356m, up 29%/48% QoQ/YoY, 4%/5% higher than our estimate/consensus of USD341m/USD339m on higher-than-expected non-advertising revenue. Non-GAAP EPS was USD0.70, beating our estimate/consensus of USD0.60 by 16% on the operating leverage from Weibo business. Driven by rapid revenue growth of Weibo ad business, gross margin/non-GAAP operating profit margin of Sina increased by 5ppts/9ppts on a QoQ basis, and 10ppts/18ppts on a YoY basis.

    Weibo saw steady traffic growth, rapid revenue growth and continuous operating leverage. Weibo revenue was USD253m, up 27%/72% QoQ/YoY, beating the higher-end of management guidance. Non-GAAP net profit of Weibo was USD87m, implying a non-GAAP net profit margin of 34%, compared with 29%/24% in 1Q17/2Q16. By cooperating with domestic smartphone manufacturers such as VIVO, OPPO and Huawei, Weibo further penetrated into 3/4th-tier cities, with MAU/DAU reaching 361m/159m, up 28%/26% YoY, and 92% of MAU were from mobile. Weibo also saw improvement in user time spent and user engagement, by cooperating with TV stations, popular variety shows, online video sites, and sport institutions such as NBA for content/IP acquisition.

    By providing strong social engagement, Weibo showed stronger monetization capability, driven by ad budget shift from both branded and SME customers. Weibo ad revenue was USD218m, up 29%/72% QoQ/YoY, contributing 86% of total Weibo revenue. The growth of Weibo ad revenue was driven by continuous ad budget shift from both KA customers (mainly branded advertisers in FMCG, auto, internet, and entertainment sectors) and SME customers (comprising customers in O2O, e-commerce sectors). Revenue from KA and SME customers saw 81% and 78% YoY growth during 2Q17, respectively, showing stronger monetization capability. As the leading social platform, Weibo is providing improved value proposition to branded advertisers to get more brand awareness and social impact, and more targeted ad solutions to SME customers especially for local marketing campaigns. Weibo is testing a new ad system which is expected to be fully launched in the next quarter to further improve the bidding efficiency for advertisers, which is likely to improve eCPM next year.

    Portal business was steady, where growth from mobile was offset by the decline in PC. Portal advertising revenue was USD77m, down 1% YoY. Driven by traffic growth and improvement in monetization capability of Sina News app, mobile portal revenue increased by 28% YoY, contributing 57% of total portal ad revenue. PC portal ad remained soft, with revenue continuing to decline.

    Valuation. We lift 2017E/2018E revenue estimate by 3%/4%, on higher-than-expected revenue from non-advertising businesses including Weibo membership. We lift 2017E/2018E bottom-line estimate by 6%/3%, given higher gross margin estimate, partially offset by higher S&M spending estimate for Weibo’s user acquisition and higher estimate for equity loss from investment in Leju. Based on 10-year DCF model for 2018E-2027E, we adjust our valuation for Weibo and Sina portal business and adjust TP from USD 134 to USD135, implying 40x/35x 2018E/2019E PE and maintain Buy rating. Downside risks: 1) slowdown in Weibo user expansion; 2) intense competition in feed ad; and 3) Yizhibo’s monetization capability being still in early stage.