Thursday, November 17, 2011 3:52:12 PM
by: Investing Hobo November 17, 2011
http://seekingalpha.com/article/308713-netease-s-q3-earnings-increase-to-record-levels
Long before U.S. investors heard about Baidu (BIDU), NetEase (NTES) was one of the first cash generating internet juggernauts listed in the U.S. markets. While NetEase started off as a mix of an internet portal and wireless services company, it was the success of its first self developed game "Westward Journey Online" which provided the enormous cash flow the company would use to expand. With economies of scale starting to kick in for NetEase, both revenues and net income soared to record levels in the third quarter of 2011.
For the third quarter, consolidated revenues grew by 12.9% sequentially and 39.5% annually to $307m. NetEase’s core online gaming business made up the bulk of its revenues with a $275.3m contribution or over 87% of total revenues. The growth and high margin nature (71.5% in Q3) of its gaming unit helped expand operating margin to 47% from 42% a year ago. Unlike peer rivals such as Perfect World (PWRD) that have spent heavily on internal development but have not witnessed equal proportionate revenue growth, scale is significantly benefiting NetEase. U.S. GAAP net income during Q3 grew to a record $129.5m, or 0.99 in earnings per share.
Using any historical gauge, NTES still remains extremely cheap at roughly 11-12 times annualized earnings especially compared to its 41% annual earnings growth. Granted given the extremely pessimistic sentiment overhanging all U.S. listed Chinese stocks in general, NetEase much like other Chinese internet leaders such as Baidu, Sina Corp. (SINA), and Sohu.com (SOHU) actually trade at a premium to smaller peers. Direct Chinese online gaming peers Perfect World and Changyou.com (CYOU) currently trade at only 4.8 and 6.5 times trailing earnings, respectively.
Valuing NetEase solely on earnings is deceiving because the company possesses other assets which arguably reduce its market multiple. After nine years of operation and still amazingly going strong, Westward Journey Online along with succeeding games have generated a cash hoard for the company. At the end of the third quarter, NTES held almost $1.9b in cash equivalents, or roughly 14.50 per share of its stock value is cash vs. zero debt. At a recent share price of 45.00 and subtracting the company’s cash, NetEase’s “enterprise” multiple is further reduced to below 8x annualized earnings.
Perhaps more significant among the company’s assets are not quantifiable. Given the market’s appetite for social media which caused a surge in SINA’s share price in the past year due to its micro-blogging phenomenon Weibo, NetEase is not without a hand in this arena. The company’s own micro-blogging efforts generated a 68.6% sequential surge in user base to 88.5m users in the third quarter. Although well under Weibo’s over 200m user base, its sequential growth is worth keeping an eye on. Clearly given the valuation spread between NTES and SINA, the market is discounting any potential success NetEase may experience in the realm of micro-blogging.
Much like micro-blogging currently, NetEase’s email user base doesn’t contribute much if anything to the company’s bottom line. However at 430m registered users vs. the last official count of 485m total internet users in China, the company has an extremely large reach. If synergies can be created between internet service offerings, higher degrees of realized monetization could occur in the future. Once again with the company’s current valuations barely factoring its successful online gaming division, NetEase’s other initiatives could eventually provide a catalyst for incremental earnings growth moving forward.
While it is currently too early to factor NetEase’s other offerings, they are nevertheless assets which could provide material benefits in the future. With a strong balance sheet and a dominant position in China’s online gaming industry, NetEase remains a conservative play on China’s social media whether it is gaming related currently or micro-blogging related in the future. NetEase’s long operating history has generated retained earnings to date of almost $1.7 billion which has provided a huge war chest for the company’s expansion outside its core gaming business. NTES’s returns may not equal BIDU’s in recent years, but its 1500% move since early 2003 is not bad either and yet due to the company’s growth current valuations still remain attractive.
If at first you don’t succeed, try, try again. Then give up. There’s no sense being a fool about it.
Recent NTES News
- NetEase to Report First Quarter 2024 Financial Results on May 23 • PR Newswire (US) • 05/06/2024 08:30:00 AM
- Cloud Music Inc. Adds Expansive K-Pop Portfolio with JYP Entertainment Agreement • PR Newswire (US) • 04/30/2024 01:00:00 AM
- NetEase, Inc. Announces Filing of Annual Report on Form 20-F for Fiscal Year 2023 and Publication of 2023 Environmental, Social and Governance Report • PR Newswire (US) • 04/25/2024 10:20:00 AM
- Pixelworks Brings New Mobile Gaming Experience to "Diablo Immortal", a Co-developed Game by Blizzard Entertainment and NetEase • PR Newswire (US) • 04/11/2024 01:00:00 AM
- Delta Generates US$37 Million Profit in Q1, Google and Intel Unveil Cutting-Edge AI Chips, and More News • IH Market News • 04/10/2024 11:13:48 AM
- NetEase Experts Spotlight Cutting-Edge Game Technology at GDC 2024 • PR Newswire (US) • 03/18/2024 11:00:00 AM
- Cloud Music Inc. Reports Fiscal Year 2023 Financial Results • PR Newswire (US) • 02/29/2024 08:50:00 AM
- NetEase Announces Fourth Quarter and Fiscal Year 2023 Unaudited Financial Results • PR Newswire (US) • 02/29/2024 08:30:00 AM
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- NetEase to Report Fourth Quarter and Fiscal Year 2023 Financial Results on February 29 • PR Newswire (US) • 02/07/2024 08:30:00 AM
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- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 10/26/2023 10:04:35 AM
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- NetEase Cloud Music Takes the Stage at ADE 2023: Debut as Speaker on China's Dance Music Trends • PR Newswire (US) • 10/20/2023 12:10:00 PM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 09/11/2023 10:04:36 AM
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- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 08/24/2023 10:14:59 AM
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