Will Egypt Kill Sina Weibo?

Ongoing unrest in the Arab world already prompted China’s government to limit news on the unrest and filter searches and Tweets.

Beyond censorship, these actions now may have financial impact on China’s most prominent Internet properties. Deutsche Bank last night downgraded their outlook for Sina, based on potential government action against Sina Weibo.

Although filtered, Sina Weibo has evolved into one of the most open media platforms in China. There have been many open critiques of the government on Weibo. These have included questioning official statistics, condemning corrupt officials and arguing against policies like the recent measures requiring a Beijing ID card to  buy property in the capital.

Pressure via Weibo has brought change, since many of those using the service are high profile, including nearly 300 local and national delegates to the CPPCC, according to the People’s Daily. The People’s Daily cited Li Dongsheng, a delegate and board chairman of electronic device manufacturer, TCL gained 130,000 new Weibo followers last week after posting that he would listen to netizens’ ideas for inclusion in his motions. He now has 490,000 followers on Weibo. One example of legislation is a law protecting children that has been proposed in the wake of a Weibo-led campaign to save children from begging on the street.

Such high level users will do something to protect Sina Weibo, but the service may face constraints beyond censorship if the unrest carries on in the Arab world. Additional limits could include the slowing of speed to post (for government inspection) or limits to the number of re-tweets.

Deutsche Bank acknowledges Sina’s dominance, innovation and leadership, but expressed concerns big enough to warrant an investment downgrade.

As Deutsche Bank put it (emphasis is theirs):

Run-up on weibo enthusiasm may reverse
While we continue to recognize Sina’s dominance, innovation and leadership in the portal space, and view its weibo microblog service as a breakthrough in internet-based communications, we do believe that the risks of tightening government regulation around its “Twitter-like” service continue to mount. We believe the occurrence of (admittedly sparse and lightly attended) demonstrations across China over the weekend may move the authorities to disable aspects of microblog services that they view as destabilizing.  Further Mideast unrest could also lead to tightening.

Summary shutdown unlikely, paring back of service probable.
We would not expect China’s major microblog services to be shut down, but instead “handicapped” in some fashion (eg, inserting 5-7 mins of latency between tweet and receipt, prohibiting extensive “retweeting”, etc.)

Downgrade on valuation.
We downgrade to Sell (from Hold) as Sina now stands at USD85.52, well above our PT of USD58. Our valuation methodology is based on 1.1X PEG using a 3-yr CAGR. PT implies 27x 2011E PE. Upside risks include lenient government regulations and strong weibo monetization. We aim to re-evaluate our assumptions going forward.

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