NetEase.com: "Game On" in China?

NetEase.com’s (NTES) revenue and earnings for the second quarter exceeded market expectations due to strong growth from its online games and advertising business and business tax refund.

We think NetEase’s results demonstrate that it has the ability and experience to expand the life cycle of its online games despite the fierce competition in the Chinese online gaming market. However, we are concerned that NetEase’s current games have gotten long in the tooth, and new games may not be as successful as its current popular games. We need more time to confirm whether its growth momentum in the fourth quarter is sustainable in the future. Therefore, we are maintaining our Hold rating on NetEase.

The factors in the company’s favor are online gaming and advertising revenues. The potential opportunity for online usage in China is huge, with 253 million internet users. This means only 19% of its 1.3 billion citizens use the Internet as of June 2008.

Based on our estimate for fiscal year 2008 earnings per ADS, the stock is trading at 19.1x, which is well below the industry average and similar to its Chinese peers. Based on our estimate for fiscal year 2009 earnings per ADS, the company is trading at 17.4x, which is far below the industry average. Using a P/E multiple of 18.3x our fiscal year 2009 earnings per ADS estimate yields a target price of $25.25 which we believe reflects the company’s prospects.

Read the full analyst report on NTES

Read the full analyst report on NTES