Why This Chinese Stock Is Worth the Risk

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These days you can't open the newspaper or turn on the news without being bombarded by Facebook (Nasdaq: FB  ) headlines. Facebook's stock has continued to fall since its botched IPO on May 17, despite its position as a key player in a booming market. While the social network continues to win the attention of the press, I think a better play in the social-media space is in online portal SINA (Nasdaq: SINA  ) . Let's take a look at the challenges this company faces and why I think its worthy of your investment dollars.

SINA's new initiative
Shares of SINA opened more than 4% higher on Wednesday, with the stock trading at $54.91. This may be surprising to some investors as the Chinese online media company recently introduced new censorship rules on its Twitter-like site, Weibo. My fellow friend and Fool Rick Munarriz warned that traffic to the microblogging site could begin to slip as a result of the new rules. He may be right. But I have a different perception of the new "Weibo Credit" system and the company's new business-to-business monetization plan.

Similar to Facebook, Weibo users can create profiles, add pictures, and share information online with friends and family. However, fierce government regulation in China puts companies like SINA, which promote the open sharing of information, at risk. Flash back to 2009, when Chinese authorities shut down Facebook in the country. Google (Nasdaq: GOOG  ) shared a similar fate in 2010, when the search giant backed out of China and moved its operations to Hong Kong. Google's partial withdrawal was the result of the country's harsh censorship. Conversely, SINA has been able to thrive by appeasing the censors. 

A balancing act 
SINA needs to be aggressive in its strategies to keep the balance between user stickiness and government satisfaction. And this is exactly what I think the company is doing by implementing a points system. Under the new Weibo Credit guidelines, users lose points for spreading false information or making personal attacks on other users.

Reminiscent of the "honor code" from my high school, in which students swore to turn in other students for cheating, Weibo users are expected to report the wrongdoings of their fellow users. According to The Wall Street Journal. Chinese investor Wang Gongquan said on his Weibo account: "Sina, you shouldn't be scared into this state. You are a listed company."

But I don't think Weibo's new guidelines are as much about being a government watchdog as they are a way for SINA to expose censorship to public scrutiny. SINA walks a narrow plank. On one hand, the site's raging popularity in the nation is largely due to its candid style. On the other hand, the company's future success lies in its ability to succumb to government regulations.

The hunger games of social media
When a user posts potentially harmful content on the Chinese site, that player is docked a certain number of points. The infraction is then posted online for all to see, listing the account name of the snitch along with the account name of the accused. It doesn't get more transparent than that -- at least not in China.

The way I see it, SINA is doing what it must to survive in a highly regulated environment. However proactive as this may be, it does increase the risk that users will cancel their accounts. SINA is finally revving up plans to monetize the business, and a steep decline in user volume could hurt those prospects. That's because part of this strategy includes a stronger focus on B2B advertising, and these businesses are paying for their ads to be viewed by SINA's massive collection of users.

However, monetizing the social-media market is a relatively new model, and there are a lot of kinks that still need to be worked out. Chinese social-networking platform Renren (Nasdaq: RENN  ) offers a good example. In Renren's latest quarter, revenue generated from advertising saw only a modest 15% increase from the year-ago period. Going forward, fears of an economic slowdown in China could also hurt SINA and Renren's chances of hauling in ad profits.   

A gamble worth taking
Despite the many headwinds, SINA is dominating the Chinese market. Without Facebook in the equation, that leaves a lot of opportunity on the table for local names like SINA and Renren. I'm taking a chance on SINA and adding the stock to my profile in Motley Fool CAPS with a three-year outperform CAPScall.

Clearly, this is not without risk. Luckily, you can still cash in on the global social-media craze without putting on all your chips on Facebook or SINA. How? Get your free special report from The Motley Fool, titled: "Forget Facebook -- Here's the Tech IPO You Should be Buying."

Fool contributor Tamara Rutter owns no shares of any companies mentioned in this column. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services have recommended buying shares of Google and SINA. The Motley Fool has a disclosure policy. We Fools don't 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.

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 11, 2012, at 12:13 PM, BabyBeluga2 wrote:

    This article is refreshing in light of the many articles that have treated SINA to very rough treatment and that have key points. The Chinese censorship system is one of the least understood points in the U.S. The real question surrounds successful monetization of Weibo, as user growth and user stickiness continue to increase despite censorship, like it or not.

    China requires some additional work that many investors are not willing to do. Thank you for the thoughtful article.

  • Report this Comment On June 11, 2012, at 12:21 PM, BabyBeluga2 wrote:

    Correction: word omitted in first sentence: ". . . and that have ignored key points."

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