A Blessing in Disguise for SINA

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Strict rules imposed by government authorities in China on social media websites have stirred up a debate about its negative effects. SINA (Nasdaq: SINA  ) was recently given the task of verifying the identity of all its users. Now while this might sound like a huge negative, it actually unlocks more value for the company. How? Well, let's take a closer look.

The benefits of regulation
The logic is simple: If SINA verifies all the accounts on its Weibo platform, it will be able to provide key information regarding its users to advertisers and marketing agencies for a fee. Moreover, the process would filter out spam, along with duplicate and fake accounts, improving the quality of its user base and thereby driving the advertisers' interest even further.

Better yet, SINA announced that it would start monetizing its Weibo platform later this year. And its current application could generate a lot of revenue -- possibly a lot more than if the restrictions were never loosened. But that's not all.

At the beginning of this year, the Chinese government also made it more difficult for advertisers to buy airtime from television broadcasters such as CCTV by banning commercial breaks during dramas. This inadvertently made online advertising a lot more attractive than it already was.

SINA's Weibo is the fourth-largest advertising platform. With around 250 million users, SINA would be the biggest beneficiary from these regulations, although not the only one. Online media company (Nasdaq: SOHU  ) also stands to gain from these developments through its microblogging platform. Sohu has an added advantage, given that Baidu (Nasdaq: BIDU  ) has started including microblog posts in its search results. Baidu, often touted as the "Google of China," also stands to gain immensely from the trend toward online advertisements.

The flip side 
While precise user information could make any marketing executive salivate, the rules and restrictions being imposed could reduce the number of active users. Anonymous Weibo users would not be able to express themselves as freely as they did before, so the verification process could drive people away.

However, analysts believe that the loss of users would only occur in the short term. The unique real-time nature of a Twitter-like platform would surely bring back people and would have little impact on the number of users in the long term. I think that's a fair assumption.

The Foolish bottom line
You may not see it as yet, but rules that make users register using their real names could make any platform a potential goldmine for companies such as SINA (and for advertisers, as well). Having said that, I aim to keep a close watch on SINA until the money actually starts rolling in.

Sound interesting? There's more for you. There are currently about a dozen Chinese growth stocks recommended in the Rule Breakers newsletter service. If you want to discover the next rule-breaking multibagger, check it out here before it's gone.

Fool contributor Keki Fatakia does not hold shares in any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of, SINA, and Baidu. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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10/26/2016 1:11 PM
SINA $77.78 Down -0.07 -0.09%
Sina CAPS Rating: ***
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SOHU $38.88 Down -0.05 -0.13% CAPS Rating: ***