Chinese micro-blog “weibo” provider, SINA Corp. (NASDAQ:SINA) recently acquired a 9.05% stake in Shanghai-based video company, Tudou Holdings Ltd. Tudou offers movies, TV series and self-produced content it produces itself, as well as third-party videos similar to Google Inc.’s (NASDAQ:GOOG) YouTube platform.

In a regulatory filing with the Securities and Exchange Commission (SEC), SINA reported that it has acquired 1.075 million American depositary receipts (ADRs) of Tudou at its initial public offering held in this month, for $31.2 million. Post Tudou’s listing, SINA bought another 1.49 million ADRs for $35.2 million.

SINA’s primary revenue source is online-advertising. However, the competition within the Chinese advertising market is fierce, as popular Internet search companies such as Baidu Inc. (NASDAQ:BIDU), AirMedia Group, Microsoft Corp. (MSFT) and Google have attracted a lot of advertising clients. SINA is a relatively small company compared to its peers and hence encounters numerous hurdles in the advertising market.

We believe the acquisition of the Tudou stake will help SINA gain market share going forward, as the latter is the #2 website in terms of advertising revenue (14.0% market share in the second quarter) in the online-video market, according to research firm Analysys International,. Youku.com Inc (YOKU) was the leading company (23.0% market share), while Sohu.Com Inc. (NASDAQ:SOHU) was #3 (13.0% market share) at the end of the second quarter.

SINA is adding video, social-networking and electronic commerce to its website to attract users in China, the world’s biggest Internet market.

The company is also aggressively pushing its micro-blog service “Weibo” and has total registered users of more than 200 million at the end of June, 2011. Although management expects to spend more on Weibo ($100.0 million in fiscal 2011) to incorporate features such as virtual currency and games, we believe that increasing advertising revenue from the monetization of Weibo will drive top-line growth going forward.

Our Take

We maintain our Neutral rating over the long term (6-12 months). We believe SINA remains a premier company due to its strong product pipeline, continuous investment in product development and marketing and a robust user base for its E-Commerce and Weibo offerings.

However, higher operating expense, a sluggish macro environment and increasing competition from Tencent Holdings and Sohu.com Inc. will hurt profitability over the long term. Moreover, we believe that more stringent government regulation will hurt the company’s subscriber growth and monetization efforts going forward.

Currently, SINA has a Zacks #5 Rank, which implies a Strong Sell rating over the short term.