Government Clampdown Trips up Sina

It's been a roller coaster ride this past week for leading Chinese web portal Sina , which has just fallen victim to a government clampdown targeting illicit content like pornography on the Internet. The clampdown sparked a sell-off in Sina's shares, reversing gains from an earlier rally fueled by the strong performance of its newly listed Weibo microblogging unit, often called the Twitter of China. But Sina should be accustomed to this, and its shares could easily bounce back in the next week or two as investors realize this latest crackdown is largely meaningless and won't have any impact on the company's business.

This kind of government crackdown is fairly common in China, often targeting pornography, spam, and excessively violent content on the Internet and mobile phones. Sina took a big hit after one such crackdown nearly a decade ago that targeted mobile spam, which at that time was one of its main businesses. By comparison, this latest crackdown is aimed at Sina's online literature and video services, neither of which is an important contributor to its revenue or profits.

According to the latest reports, Sina had its publishing and audio-visual content licenses revoked after pornographic content was found on its online literature and photo sharing sites. A government announcement stated that more than 20 cases of pornographic literature were found on Sina's online literature site, and another four cases of illicit content were found on its photo-sharing site. It said Sina would be banned from the two areas and could face fines of five to 10 times the revenue it derived from the illicit content.

Roller coaster session
Sina's shares tumbled as much as 8% during the trading session after the reports, though they clawed back much of that ground and closed down a more modest 3%. The company's shares have been all over the map over the last two weeks, largely due to the spotty record for Weibo's IPO.

Weibo fell far short of its initial fundraising target, which was ultimately cut by nearly half, from an original $500 million, due to weak demand. As that happened, Sina shares lost nearly 7% of their value. But then Sina's stock recovered most of those losses after Weibo rose nearly 20% on its first trading day. Weibo's shares would go on to rally as much as 40% from their IPO price, helping to lift Sina's shares as well. But a week after the debut, Weibo's shares have given back some of the gains, and Sina's shares have moved in tandem.

After all that news, including the latest sell-off, Sina's shares are down about 15% from their levels at the beginning of this month. To be fair, it's worth noting that the recent longer-term sell-off is in line with other Chinese Internet stocks, which have been falling out of favor with U.S. investors in recent weeks.

The Foolish bottom line
So what's the bottom line from this latest pornography crackdown? It's probably fair to say that Weibo's performance over the months ahead will have a far bigger impact on Sina's shares than the loss of its video or publishing licenses. At the end of the day, this new crackdown is part of a regular cycle from Beijing.

In this case, the move looks largely symbolic, since it attacks a big name like Sina but is aimed at inconsequential parts of the company's business. The company could suffer from negative publicity for the next few days due to the clampdown, but any impact beyond that is likely to fade and the whole incident will be quickly forgotten.

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Douglas Young has no position in any stocks mentioned. The Motley Fool recommends Sina. The Motley Fool owns shares of Sina. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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