NTES

[la-onda]

just fyi:
NTES: Smith Barney Ups to Buy from Sell; Ups Tgt to $23.5 vs $14; Analyst Notes
Tuesday , May 29, 2007 08:32ET
Issuer: Netease.com Incorated ADS (NasdaqNM: NTES)
Analyst Firm:  Smith Barney
Ratings Action: UPGRADE
Current Rating: Buy (from Sell)
Target Price Action: INCREASE
Target Price: $23.50 (+67.86% from $14.00)
Analyst Comments: The firm highlights that a year ago, with sentiment for NetEase peaking due to its past success, they looked to the future and saw a new game pipeline and strategy that were seriously flawed. They have now come full circle: Their once non-consensus views are now mainstream, and sentiment toward the NetEase stock is at an all-time low. At 15x 08E P/E, valuation looks cheap, and we believe the shares have largely bottomed. Any significant new license deals should re-rate the shares. The firm advises buying ahead of such news.

&

Sohu and Netease ordered to correct irregularities
Friday , June 08, 2007 04:39ET

BEIJING, Jun 8, 2007 (Xinhua via COMTEX) -- China's Ministry of Information Industry has ordered 265 IT Internet companies including Sohu.com Inc. (Nasdaq: SOHU) and Netease.com Inc. (Nasdaq: NTES) to correct their irregularities in operations within a prescribed time.
nteThe Ministry of Information Industry found that 265 IT Internet companies had problems such as irregular operation, failing to launch business on schedule or alternating shareholders without authorization during the annual survey of their trans-regional value- added telecom business licenses. The ministry ordered these companies to make corrections before June 24 2007. If these companies' improvement is still dissatisfying after June 24 2007, they will be labeled "disqualification" by the ministry. Once they are deemed "disqualification", most of the aforesaid companies' main business will be deemed as illegal operations.

http://www.knobias.com/story.htm?eid=3.1.dc6d601fd9019e517b04710e5b57f389420721edc607d92839c87bcd70859112

[David Randolph]

NTES: Smith Barney Ups to Buy from Sell; Ups Tgt to $23.5 vs $14; Analyst Notes
Tuesday , May 29, 2007 08:32ET
Issuer: Netease.com Incorated ADS (NasdaqNM: NTES)
Analyst Firm:  Smith Barney
Ratings Action: UPGRADE
Current Rating: Buy (from Sell)
Target Price Action: INCREASE
Target Price: $23.50 (+67.86% from $14.00)
Analyst Comments: The firm highlights that a year ago, with sentiment for NetEase peaking due to its past success, they looked to the future and saw a new game pipeline and strategy that were seriously flawed. They have now come full circle: Their once non-consensus views are now mainstream, and sentiment toward the NetEase stock is at an all-time low. At 15x 08E P/E, valuation looks cheap, and we believe the shares have largely bottomed. Any significant new license deals should re-rate the shares. The firm advises buying ahead of such news.

Thanks la-onda, perhaps this upgrade will be the catalyst to take NTES significantly higher. I fully agree with Smith Barney, the worst case scenario is priced in, there's only upside to NTES shares. They seem to know good news is coming ...

I'll keep holding NTES.

[David Randolph]

NTES down 1.93% today. Nothing new on the fundamental side. I don't know what can go wrong with online gaming in China, only if the Government forbids it, but I don't think so, several games are thought "educational" by the Ministry of Culture.

The future I see is these companies expanding to international markets and make games played worldwide, not just in China. That I see.

NTES trading at 15 times EPS, given its net profit margin, seems like an absurd. Because if revenue grows just a bit, 57% of that growth will go to the bottom line.

I'll keep holding NTES despite the short term weakness, losing 5% here.

[yukiii]

Triple bottom for NTES would be around 17.13

[David Randolph]

Triple bottom for NTES would be around 17.13

Hmmm, I think what's happening is more of an inverted head and shoulders pattern, take a look at my chart below. I know Ramsburg is going to say "that's not a valid pattern", but if we look for perfect technical patterns ... well, they're rare.

It's hard for me to understand why NTES doesn't go up like immediately, but if this is a bottoming process as I think it is, well, they're always hard to understand, as the stock goes back and forth trying to take all weak hands out of ship before initiating the ascending trend.

Keep holding NTES.

[yukiii]

C.E. Unterberg, Towbin

NTES 1Q07 top and bottom line results beat consensus. Net
revenue of $69.1M (up 4% Q/Q and 9% Y/Y) was higher than
consensus of $65.1M while EPS of $0.29 beat consensus by two
pennies. As indicated in 4Q06, management will not be
providing guidance going forward. 
1Q07 Actual Consensus Estimates
Gross Rev $71.8M $67.8M $72.4M
Net Revenue $69.1M $65.1M $69.6M
Net Online Game $60.3M  $60.2M
Net Advertising  $6.7M  $7.6M
Net WVAS $2.1M  $1.7M
EPS (GAAP) $0.29 $0.27 $0.28
Solid 1Q07 gaming revenue - 1Q07 net gaming revenue of
$60.3M was up 8% Q/Q and 11% Y/Y due to the expansion
packs, strength in FWJ2 (1.5M PCUs reported), strong
seasonality and the Valentines Day holiday event. 
1Q07 advertising revenue fell 21% Q/Q and 5% Y/Y to $6.7M
due to weak seasonality. As a point of reference, SINA and
SOHU reported 43% Y/Y and 41% Y/Y advertising growth,
respectively. We believe that NTES continues to experience
challenges in developing its online advertising business. 
1Q07 EPS estimate of $0.29 was 2 pennies above consensus -
We believe it is attributed to the decline in S&M and G&A
expense of 11.8% in 1Q07 vs. 17% in 4Q06. 
Expect slight decline in 2Q07 – Our 2Q07 net revenue estimate
of $68.6M (decline 0.6% Q/Q and 0.7% Y/Y) assumes 2% Q/Q
decline in gaming, 12% growth in advertising and flat SMS
revenue. Our 2Q07 EPS estimate of $0.28 is in line with
consensus of $0.28. 
Pipeline uncertainty remains in the NT – While NTES
announced that it expects to open beta test WWJ3 in 2H07 as
well as release an expansion pack for WWJO2 in 2H07, the
timing for the commercial launch of its next blockbuster title,
Tianxia II, remains elusive as the game remains in development
stage. We remain cautious for the time being as there are few
near term positive catalysts. 
Valuation & Price Target – Our estimates have been revised
downward because of uncertainty relating to Tianxia II. NTES is
trading at 14.0x our 2008 EPS of $1.31. We believe it will
continue to trade at a discount to its peers until there is greater
visibility in its pipeline. We recommend that
investors stay on the side lines and maintain
our Market Perform rating. 

Key Data 
52-Week Range $15.05 - $23.10
Shares Outstanding (MM) 127.2
Float (MM) 68.7
% Held Institutionally 1%
Market Capitalization (MM) $2,330
Average Daily Volume (000) 1,026
Revenues – LTM (MM) $274.1
Total Debt (MM) $88.7
Cash per Share $3.82
Long-Term Growth Rate 25%

Fiscal Year Ends: Dec. 2006A 2007E 2008E
Revenue (MM) $268.5 $283.1 $317.9
Prev. Revenue   $303.1 $355.2
Earnings per Share   
Q1 $0.26A $0.29A $0.29
Q2 $0.28A $0.28 $0.30
Q3 $0.29A $0.30 $0.34
Q4 $0.30A $0.29 $0.37
EPS $1.12A $1.16 $1.31
Prev. EPS  $1.24 $1.47
P/E 16.3x 15.8x 14.0x
Diluted Shares (MM) 139.9 136.8 137.8

[Ramsburg]

Hmmm, I think what's happening is more of an inverted head and shoulders pattern, take a look at my chart below. I know Ramsburg is going to say "that's not a valid pattern", but if we look for perfect technical patterns ... well, they're rare.

Hum… heheh… let me put some short term TA over your pick

Let me see… The pattern is still developing, but I think its a valid Inverted H&S Project for now, ascending neckline (no problem), distance between shoulders is tolerable (assuming NTES is just doing the S2 now), neckline is around $18.60, so if this is going to turn into an effective Inverted H&S play the stock needs to break that level up during the next 3 to 5 sessions (recent volatility / trading range corroborates that option), if that happens, a target of $19.80 will be in play.

There’s an ascending support around $17.25, the last relative lows (since April) had been successively higher with volume present during these reversal sessions (bullish).

In general I would say there is a very strong support level between $17 and $17.50, with nice odds for an upside breakout in the short term, something like the April’s move, but now it would create a real technical signal. NTES trading below $16.89 would invalidate this technical scenario.

Regards

[la-onda]

  Ramsburg is back in town posting again

cheers from Singapore
Oliver

[David Randolph]

Thanks for those analyst's comments and your chart Ramsburg

Well, NTES closed just barely above the "second shoulder scenario". Of course, the H&S pattern will only be completed if the stock closes above the neckline, which currently stands at about $18.4. Let's see what the future holds for NTES.

In fundamental terms, if we read la-onda's post, basically people think there's not a lot of upside, but also no downside potential either. They don't expect anything new over the short/medium term. But valuation already reflects that.

I see only upside for NTES in fundamental terms, new games may come sooner or later, but no doubt they'll come and they'll produce growing revenues and profits, and I mean profits, since net profit margin is 57%

[David Randolph]

NTES isn't behaving well, going down while the general market rose. It seems that what's affecting the stock is the following news release:

• NetEase to Extend Game Development and Beta Testing for Tianxia II
PR Newswire (Mon, Apr 30)

My take is the game may take less or more time to be ready to enroll subscriptions, but it will be ready sometime in the near future. The longer they take to make the game, probably the better it will be and the more it will last, in terms of consumer addiction.

NTES is trading at 15 times trailing earnings, and I can only see upside to its revenues and principally profits, because net profit margin is 57%.

I'll continue holding NTES, despite the short term technical weakness.

[David Randolph]

Ok, forget about the H&S pattern, the stock closed below the shoulder 2 possibility. But it touched the ascending support and bounced a bit ... perhaps that was the low, only time will tell. Well, I can say that NTES was really getting on my nerves today, going down like that. It made my head started thinking something like "maybe low valuation isn't enough, I should also look for a catalyst".

Anyway, when there's a catalyst, it will probably be a bullish one, because the worst case scenario, that is, no growth whatsoever seems to be priced in already.

I'll keep holding NTES.

[David Randolph]

NTES reacted a bit to the ascending support line. I believe the worst case scenario is priced in now, as I've written throughout this thread. I'll keep holding NTES.

[David Randolph]

First of all, hats off to BigSully1, he made 3% on NTES, I'm currently losing 7.75% on the stock.

The market sees NTES as the big elephant of online gaming, a company that isn't growing or innovating all that much lately, that's why it trades at 14.5 times earnings. But I don't think they're resting on past performance:

« William Ding, Chief Executive Officer and Director of NetEase stated, "Fantasy Westward Journey's record PCU during the first quarter, driven in part by major weekend events and the Chinese Valentine's Day holiday, is a strong indicator of the popularity and long lifecycle of this game. We continue to have positive expectations for Fantasy Westward Journey and plan to release an expansion pack in the second half of the year to capitalize on this game's momentum. In addition, Westward Journey III, the upgraded version of Westward Journey Online II entered internal closed beta testing on May 20, 2007. We are confident in our ability to migrate the existing players to the upgraded version and will launch our marketing campaign concurrent with the internal closed beta. Clearly, we were not satisfied with the results of the open beta testing for Tianxia II in March. We are therefore delaying the commercial launch to allow time to correct certain design issues that will gear the game toward a broader audience of both experienced gamers and beginners."

Mr. Ding continued, "We plan to increase our marketing spending around each of our MMORPGs (massively multiplayer online role-playing games) as necessary in order to stay ahead of the competition and promote our games in an increasingly competitive market. Despite a temporary setback with our Tianxia II testing, NetEase continues to benefit from a number of core competitive strengths in the MMORPG market including game self development, ample resources and funding for sales and marketing investment and superior customer service."

"Marketing for our new proprietary search engine will begin at the end of the second quarter of 2007, and with regard to our portal strategy, we are continuing to see positive trends as we continually enhance the quality of our content," Mr. Ding added.»

Expect a positive press release when they launch their new proprietary search engine. What are they up to with it, competing with BIDU?

Technically the stock closed right around the medium term ascending trendline. Let's see what the future holds for NTES. I'm not prepared to let go of it, I'll keep holding whatever happens over the short term.

[BigSully1]

I just bought back again. Regardless of current sentiment on the stock right now, I have to agree with David in that I see great value here, and there may never be a better time to buy. I will likely hold some of it for the LT now.

[yukiii]

I just bought back again. Regardless of current sentiment on the stock right now, I have to agree with David in that I see great value here, and there may never be a better time to buy. I will likely hold some of it for the LT now.

The two legacy games are aging. FWJ's server utilization levels for April and May show a decline from the levels registered during the first quarter.

Furthermore, Tianxia II, the most anticipated game in the company's pipeline failed to capture gamers' interest. Netease was forced to postpone the game's release and send the game back to the development department. In an already crowded Chinese gaming market this is definitely not positive.

Absence of any positive new developments, and given the current lack of visibility into the company's future earnings growth, I don't expect the stock to resume its upward trend anytime soon.

NTES    $ 17.05
Netease.com Inc.   -0.20
Shares Short   5,874,000
Days to Cover (Short Ratio)   6.4
Short % of Float   8.55 %
Shares Short - Prior   5,024,500
Short % Increase / Decrease   16.91 %