At first glance, Weibo Corp (ADR) (NASDAQ:WB) seems like it is an up-and-coming play in Chinese social media. However, anything involving China needs more than just a quick glance. There are tremendous problems with Chinese public companies. First, however, let’s see what Weibo is and how it is allegedly performing.
Weibo is a microblogging service, kind of a cross between Twitter Inc (NYSE:TWTR) and Facebook, Inc. (NASDAQ:FB). WB stock has 313 million monthly active users and 139 million daily active users.
The company description makes it seem like content is all unicorns and glitter, claiming Weibo “allows [people] to be heard publicly and exposed to the rich ideas, cultures and experiences of the broader world.” However, like all content in China, the speech is closely monitored and censored.
WB earnings have allegedly gone from a $65-million loss in FY14 to a $108-million profit in FY16. Free cash flow has allegedly improved from negative $34 million in FY14, to $171 million in FY15, to $223 million in FY16. The balance sheet appears strong with about $400 million in cash. Alibaba Group Holding Ltd (NYSE:BABA) owns about a third of the company.
Corruption in China
As it is, WB stock trades at 200x earnings, and so I would avoid it anyway. WB earnings don’t support the stock price, assuming Weibo earnings are even real. However, why do I use the modifier “allegedly” with all the financials?
It’s because investors cannot trust any data coming out China or businesses located there. China is opaque. Corruption is rampant.
One film producer I know in China says that Chinese box office data is completely wrong. The movie theaters are required to report certain numbers by the government. So the theater owners skim money off the top, and report the numbers they are supposed to hit.
I have another friend who arranges events in China. He had a dental convention planned for a year, and a few days before it began, some bureaucrat canceled it without any explanation. My friend never learned the reason why it was canceled nor will he ever find out.
The reason is that the Chinese government only has one thing on its mind: caring for over 1 billion people. They fear a revolt.
Thus, a bureaucrat who only wants to save his job and care for his family is going to do whatever is necessary to keep his superiors happy. For all anyone might know, the conference was canceled because his boss had a cavity filled and was in pain for a week, so he spiked the convention so his superior wouldn’t be angry.
At any moment, any Chinese business could blow up.
Confusing Organizational Structure for Weibo
Here’s another reason to stay away from Weibo: the company’s organizational structure.
WB stock was incorporated under the laws of the Cayman Islands and is headquartered in Beijing, China. Weibo Corporation owns 100% of Weibo Hong Kong Limited, which in turn owns 100% of Weibo Technology, its wholly owned subsidiary in China. WB is a holding company which conducts business in China through Weibo Technology and Weimeng.
Confused? It gets worse.
Weimeng holds the permits needed for operating Weibo’s business in China. Now, Weibo has contracts with Weibo Technology, Weimeng and Weimeng’s shareholders for control of Weimeng.
Weibo says: “The shareholders of Weimeng are four non-executive PRC employees of our company or SINA, Y. Liu, W. Wang, W. Zheng and Z. Cao, holding 30%, 30%, 20% and 20% of Weimeng’s equity interest, respectively.”
Head spinning? Here’s the clincher. The annual report states: “We rely principally on dividends and other distributions from Weibo Technology for our cash needs, including the funds necessary to pay dividends to our shareholders or service any debt we may incur.”
Bottom Line on WB Stock
If this circus structure doesn’t scare you, it should. Do not buy WB stock. Sell it now.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
