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Does Sina Face A Credibility Crisis With Investors?

In the first hour of trading Monday Sina dropped over $10, hitting a new 52 week low. The stock recovered a bit, closing just under $60.

The proximate cause of the decline was a rumor that Muddy Waters is going to release a report on Sina ($SINA). The source of that rumor appears to be either a misunderstanding or an intentional distortion of a Wall Street Journal Chinese column by fund manager Eric Jackson. Jackson explains what he actually wrote:

In the article, I point out that Carson Block has decided to go after a much larger and politically well-connected target in Focus Media compared to his past reverse-merger targets. I also suggest that, judging from Carson’s recent public statements, he will probably continue to go after other large targets…I do point out that Focus Media is linked to Sina as Sina’s CEO, Charles Chao, has served on the Focus Media board since 2005. The bulk of Carson Block’s accusations against Focus Media are for the pre-2007 period when Chao was on the board. In the post, I said:

It’s likely that Chao will now be put on the defensive to explain what he knew about Focus Media’s acquisitions. Sina’s stock price immediately dropped 14% on the afternoon when the Focus Media report was published.

In June I wrote If Sina Is Cooking Its Books I’ll Eat This Blog. I still believe Sina’s books are clean, though they do have issues with making bad investments, as detailed in Sina Buys 9.05% Of Tudou. Should Investors Cheer? | DigiCha.

Sina investors increasingly seem to think Sina has a credibility problem. I have spoken with several hedge funds in the last month who said they will not touch Sina shares because they do not trust management. That lack of trust may have contributed to the precipitous share price declines yesterday and last week when Muddy Waters released its Focus Media ($FMCN) report (see Muddy Waters Shatters Focus Media | DigiCha.)

To restore credibility Sina management should consider some of the following suggestions:

1. Cancel the New Wave Investment Holding Company Limited management buyout investment group plan to sell shares in Sina (see “Red Flag”: Sina Management Selling Off Its Shareholdings From 8.7% to 0% | iChinaStock June 2010 for background);

2. Start buying shares in the open market, individually and through the MBO group. If management really believes Weibo is the Twitter+Facebook of China then they should prove their belief in that massive potential by buying a material amount of shares and re-aligning their interests with outside investors;

3. Hire a top-flight investor relations firm;

4. Revamp their investment process to avoid both the appearance of conflict and, where possible, deals that lose more than half their value in a few months;

5. Start monetizing Weibo. One of the concerns I have heard in the market is that Sina has tested several monetization schemes for Weibo and none have gained traction. The company needs to convince more investors that Weibo can be monetized at scale:

6. Clarify intentions about the long-rumored spinout of Weibo.com, and specifically give investors comfort that if there is a spinout they will be treated properly.

In a less constructive move, Sina could also announce that it is delisting from the US and returning to China, as it is “misunderstood” by foreign investors and “mistreated” by evil, “anti-China” short-sellers. We may see more companies making that choice, but I believe Sina’s management is far too serious to take that approach.

There is a lot of value in both Sina’s core business and in Sina Weibo. I am not smart enough to know if the current share price is cheap, especially in the current turbulent macro environment and with the approaching holidays, but at some point Sina shares could be a terrific bargain, assuming management can rebuild confidence with investors.

In the interim, expect volatility and a lot of opportunity for day traders.

You can follow me @Niubi on Twitter, @Bill on Stocktwits and @Billbishop on Sina Weibo.

Note: I will always disclose if I have a position in any of the companies mentioned. At the time of publishing this post I have no position in either Focus or Sina, nor have I in many months. (Yes, I missed the Sina runup. Don’t look to me for investment calls…)