NTES

[David Randolph]

I covered NTES yesterday with a video analysis, and I believe the stock is quite attractive:

A video Analysis from 3StocksOnFire.org

We also have this article from Motley Fool that explains why NTES is undervalued:

Fun: China's Endangered Species

The article compares NTES with Phillip Morris a few years ago, when everybody was very worried about those warning labels on cigarettes and lawsuits, remember? Well, those times represented a wonderful buying opportunity of MO's shares.

My take is the government regulations the article talks about will harm NTES a lot less than what the market is discounting, and this is the right time to buy the stock for long term purposes. NTES has the highest net profit margin I've ever seen, and $504 M in cash and equivalents, for a $2.4 B market cap company.

On the video analysis I have just 10% revenue growth expected for the next 3 years, but I'm going to raise it to 15%, and the valuation model says the following:



NTES isn't a bombastic pick, but I believe there's room for upside on the estimates I have. Even if actual results end up being on the low side, I still see the stock as attractive, so I believe there's nowhere to go but up for NTES over the long term.

Trading Plan:

Buy NTES, 6.66% of capital as always.

[David Randolph]

Technically perhaps NTES needs to go down a bit to close the gap opened at $18.06, but you know I don't care about the first +5% or -5%.

NTES revenues grew 150% in 2003, 68% in 2004, 83% in 2005 and 39% in 2006. I'm expecting just 15% average annual growth for the next 3 years, do you think I'm an optimist? I don't think so. And even with just 15% revenue growth NTES is attractive, according to my valuation model:



I'll continue holding NTES.

[David Randolph]

Nothing new on NTES today, the stock still didn't close that minor gap it has at $18.06 - $18.08 (now I see it is just a 1 cent gap, the stock probably will be able to ignore that).

Fundamentals remain quite attractive as you can see on my valuation model and the initial analysis on this thread. I'll continue holding NTES.

[David Randolph]

Finally NTES closed that micro gap at $18.06, since yesterday's low of the day was $18.05. I'm curious to see if the stock reacts positively today, but this analysis is just short term technical noise that is meaningless for our long term capital appreciation purposes.

In 2006 Q1 results were out on May 17, so probably this year results will be out around that date.

We have plenty of time to think about analysts estimates for this quarter, but as we can read on this thread, probably they're too much pessimistic for the future, given the past fundamental trends.

I'll continue holding NTES.

[ravenquork]

Hi David,

I was reviewing NTES and noticed an apparent discrepancy in the share count between your analysis and the financial statements posted on the Netease web site. You report 06 count of 132



http://corp.163.com/eng/investor/pdf/2006/fsQ406_en.pdf

NETEASE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS Dec 06

Weighted average number of
ADS outstanding, basic 06

129,273,280

Weighted average number of
ordinary shares outstanding, diluted 06

3,498,405,110

Weighted average number of ADS outstanding, diluted 06

139,936,204

Where did you get your numbers?   

[David Randolph]

Hi David,

I was reviewing NTES and noticed an apparent discrepancy in the share count between your analysis and the financial statements posted on the Netease web site. You report 06 count of 132

http://corp.163.com/eng/investor/pdf/2006/fsQ406_en.pdf

NETEASE.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS Dec 06

Weighted average number of
ADS outstanding, basic 06

129,273,280

Weighted average number of
ordinary shares outstanding, diluted 06

3,498,405,110

Weighted average number of ADS outstanding, diluted 06

139,936,204

Where did you get your numbers?   

I got them from the latest income statement published, at a company's press release dated February 26, 2007:



The initial share count I'm using on my valuation model is 130,523,762, which is the weighted average number of ordinary shares outstanding, basic. But probably I should use the fully diluted number of 143,224,228. Let me change that right away:



The share price CAGR was reduced from 41% to about 37%. Still attractive.

Technically NTES bounced back higher after closing that micro gap, as expected. I'll keep holding NTES.

[David Randolph]

Nice bullish breakout above the 50 days SMA on NTES yesterday. Even though I find the stock attractive, the expected share price CAGR is just 35.4%. I bet there are more powerful stocks outthere. I'll keep holding NTES for now, but will start working hard to replace it for a more attractive holding, probably a smaller company, since NTES is already a ... wow, I just saw the stock was up 3.13% in after hours trading, on 362,071 shares traded.

Hmm, but it was due to perhaps small fish reaction to a few blocks that were traded just after the close: NTES Extended Trading

The optimal selling price for NTES is $30.45:



I'll continue holding this $2.44 B market cap, for now.

[soxguy]

This morning the bid is at 19.32. Can ntes be going up in sympathy with BIDU,which is really rocking?

[David Randolph]

This morning the bid is at 19.32. Can ntes be going up in sympathy with BIDU,which is really rocking?

Wow, now that I look at BIDU, I'm glad I closed that short sale with a small profit, what a jump

And BIDU reported Q1 EPS of $0.32 on a fully diluted basis. If we multiply this by four quarters we get EPS of $1.28 and an EPS multiple of $124.57/$1.28 = 97.3. By comparison, NTES is trading at a trailing earnings multiple of 16.8. If NTES were to trade at BIDU's earnings multiple it would then be a $111 stock.

But expected rates of growth are different, since analysts are very optimistic for BIDU and quite pessimistic for NTES. I don't any reason to be that pessimistic on NTES and I believe the company will easily surpass analysts for 2007 and beyond.

I'll keep holding NTES.

[soxguy]

Press Release Source: NetEase.com, Inc.


NetEase to Extend Game Development and Beta Testing for Tianxia II
Monday April 30, 8:00 am ET


BEIJING, April 30 /Xinhua-PRNewswire/ -- NetEase.com, Inc. (Nasdaq: NTES - News), one of China's leading Internet and online game services providers, today reported that the Company plans to extend development and beta testing for its next generation online 3-Dimensional MMORPG (massively multiplayer online role-playing game) Tianxia II.
ADVERTISEMENT


Based on results from the Phase II unlimited open beta testing of Tianxia II commenced on March 1, 2007, NetEase has determined that additional time for game development and design is needed to address feedback from gamers. Consequently, during this extended development phase, NetEase's Tianxia II research and development team will focus primarily on improving hardware functionality, enhancing group play and player advancement features, and reducing game complexity for beginners.

William Ding, Chief Executive Officer and Director of NetEase stated, ''We will continue the unlimited open beta test until our extended research, re- design and re-development work is completed. Accordingly, the commercial launch of Tianxia II will be postponed until satisfactory results from our forthcoming round of open beta testing are achieved. We appreciate the feedback from the gamers who have taken part in the closed and open testing of Tianxia II. We believe our development and testing extension is an invaluable investment in the long-term marketability and player appeal of our new next generation game and will position it to follow in the footsteps of Fantasy Westward Journey and Westward Journey Online II to become a market leading MMORPG title.''

Additional details on the extended game development and open beta testing for Tianxia II will be provided when the Company reports financial results for the first quarter of 2007.

[David Randolph]

Thanks for posting the news soxguy

I guess yesterday's sell off in NTES had more to do with a general selling of China related stocks than that specific news item. I remain confident in my NTES long term outlook and will continue holding the stock.

[yukiii]

i believe ntes will retest $17 if it breaks support of 17.80, but won't go back to the $15 range, since the company is still growing easily at double digit. A buy in the $17 teensssssss long holdhttp://stockcharts.com/h-sc/ui?s=NTES&p=D&yr=0&mn=1&dy=0&id=p57556816012

[David Randolph]

i believe ntes will retest $17 if it breaks support of 17.80, but won't go back to the $15 range, since the company is still growing easily at double digit. A buy in the $17 teensssssss long holdhttp://stockcharts.com/h-sc/ui?s=NTES&p=D&yr=0&mn=1&dy=0&id=p57556816012

Yes, $17 is a strong ascending medium term support. I hope it doesn't get that low, but it's possible. Or else it will just push higher and breakout above the descending trendline, coming down at $21.14 now. NTES is too cheap, trading at 15.6 times earnings, I'll keep holding the stock.

[David Randolph]

I don't know how this NTES trade can go wrong, since this is a $2.3 B market cap company with $503 M in cash and equivalents, a 57.7% net profit margin and it is trading at 15.7 times 2006 EPS.

I'll keep holding NTES.

[David Randolph]

NTES 1st quarter results will probably be released on May 17. Estimates look benign for a positive surprise:



Like it has been happening:



I'll keep holding NTES.