NTES ==> The Houston Winner

[mrmarket]

I bought NTES yesterday at 53.37. Write up to follow later today.

[Renegade]

Good Pick

I got in at $53.19 .
Thanks for the update - and I look forward to seeing you're write up. Thank you Mr Market!

[mrmarket]

Here's the write-up

First of all I wanted to apologize for the delayed write up. I had planned to issue it during my trip to Houston, but instead of doing the write up I decided to drink 1000 beers at a crawfish boil. For those of you who’ve never been to a crawfish boil, please put it on your to do list.

Never mind all that. When I get home, I am sure the first thing I see when I get home is my youngest son, Fuffrey, playing a video game. Now I’ve tried to sit down and understand this game but usually it’s a lot of chatter and noise and then a bad soldier with a gun shoots someone and you get something that looks like blood all over the TV screen. Don’t get me wrong. I’m all for good clean fun. However Fuffrey likes to play this game a lot. I mean he forgets to eat, sleep, and talk to other humans. So it got me to thinking – someone is making money off of my brainwashed and addicted child. And if that is indeed the case, well then it might as well be $$$MR. MARKET$$$.

Yesterday I bought Netease.com (NTES) at 53.37. I will sell it in 4 – 6 weeks at 61.56. Here’s why I like NTES.



The stock is up over 40% since the end of last year. Its stock price is going up because the company is doing well and lots of people like it. Now I like it too.
I’m going back to China again (with my investments, not my feet – I can’t sit in a plane that long). This country is going to grow their middle class by 500 million people in the next several years. That’s 500 million people with families that have Fuffreys wanting to play video games day and night. China’s GDP grew almost 10% last quarter. That means all of these people will have money to buy video games for Chinese Fuffreys.

There are many high growth investment opportunities in the Chinese tech sector but Netease.com is one of the best investments in the Chinese technology sector because it is still trading at low fundamental valuation measures. I do like growth for obvious reasons but I also like value. Did I tell you I used to sit on the floor at Spags? Netease’s growth rate is at 20% and it is going to grow like this for the next few years. I’m getting this growth at a GREAT price. NTES has a P/E of 19 and forward expected P/E of 13 (the industry average P/E is around 40!).
Netease has exclusive rights to oodles of popular domestic and American imported video games. Netease has a leg up on the classic gaming companies because these companies make the games and ship them. Then they endure sales erosion because these games are illegally copied and pirated without any money flowing back to the game manufacturer. Netease has none of these worries because they bypass retail entirely and sells its games through online downloads. Most of games that NTES sells are also online games that have multiple players participating in them. This means that if the Chinese $$$MR. MARKET$$$ told the Chinese Fuffrey to go to bed and stop playing the game, the Chinese Fuffrey’s friends would persuade him to continue playing and playing. Yup…it gets addictive and the gamers pay a monthly users fee. That’s virtually 100% profit with almost no variable cost associated…. just the cost of sending out the monthly bill.

Now I don’t know all of these games, but I have heard they are quite good….they go by the names “Starcraft II”, “World of Warcraft”. They are best sellers in the US and Europe and there is no reason they won’t continue to be equally popular in the enormous Chinese demographic. This online gaming is over 80% of NTES’ revenues and surely that’s where the growth will continue to come from.

The balance sheet also looks great. Netease has no debt and owns $10 to $11/share of cash. That’s a lot of cash when you look at the $53.37 share price. The ROI is over 25%. These are all lovely numbers. Oh yea…they get ad revenue and sell ring tones too.

Netease has been around for over 10 years, but only recently is enjoying the China boom

Annual revenue went from $303 million in 2007 to $550 million in 2009 and the 2010 annual revenues were $857 million. That's right…BOOM! Net profit for fiscal 2010 was $339 million, up from $173 million in 2007. See, this isn’t a tiny niche internet company. You’re looking at a billion dollar company with some ridiculous margins that is basically unchallenged at this point. Can you say…ATM machine?

Gross profit margin for the online game business for the fourth quarter of 2010 was 71.8%. Where else can you get these kind of margins? Not in the oil business..that’s for sure.

The significant increase in online game revenue in 2010 was principally attributable to the full year operation of World of Warcraft as well as the Company's self-developed flagship games such as Tianxia II, Heroes of Tang Dynasty, Westward Journey Online II and Fantasy Westward Journey. All that cash on their balance sheet will most certainly be used to grow their portfolio somehow.

NetEase said per-share profit minus items jumped 30% to 83 cents last quarter from 64 cents a year ago, using the currency conversion rate of Dec. 31. Analysts polled by Thomson Reuters had expected 70 cents. That’s right ANAL-ysts…wrong again and you’re way wrong on 2011. You’re going to blow this one like a vuvuzela at a World Cup game.

$$$MR. MARKET$$$ sees 2011 revenues of $1.36 Billion which will generate EPS of $3.45. These great earnings will continue to propel the stock price. The math works too. Take my prediction of $3.45 per share and multiply it by the PE of 18 and you get a share price of $62.10. That’s past my sell target which means I have just picked another $$$MR. MARKET$$$ winner.

What does the head of Netease have to say about all of this?
William Ding, Chief Executive Officer and Director of NetEase, stated, "We ended 2010 with strong fourth quarter results in both online games and advertising services, delivering solid sequential and year-over-year revenue growth. Fourth quarter online game revenues increased 13% quarter-over-quarter and 31% year-over-year, driven primarily by the Wrath of the Lich King(TM) expansion pack launched on August 31, 2010 for World of Warcraft(R), a game licensed from Blizzard Entertainment, and the outstanding performances from our fastest growing self-developed games, Tianxia II, Heroes of Tang Dynasty and Westward Journey Online II. The combination of the first full year of operation of World of Warcraft and the impact of successful large scale promotions for Fantasy Westward Journey, Tianxia II and Westward Journey Online II, as well as the launch of Heroes of Tang Dynasty in April 2010 and its first expansion pack in August 2010, drove annual online game services revenue growth up by 47% for 2010. During the fourth quarter of 2010, we were pleased to see that revenue from Westward Journey Online II reached a new high.

"Game expansion and pipeline development is proceeding well in the new year beginning with the release of the tenth expansion pack for Fantasy Westward Journey in January 2011. The latest expansion features a new story line and setting and adds new characters that enhance the game's visual appeal and challenge for players. We have on schedule numerous other expansion packs in process for release in 2011. These will include updates for Tianxia II, Heroes of Tang Dynasty, Westward Journey Online II and III, Legend of Westward Journey, Ghost and Westward Journey: Genesis, among others. Overall, our top strategic priorities in online games this year include accelerating our product development time-to-market and further enhancing our highly competitive and innovative technology and commercial appeal.

"In advertising services, revenue growth was consistently strong throughout 2010, underscored by quarter-over-quarter and year-over-year increases of 44% and 27% for the fourth quarter, respectively, and an increase of 65% for the full year," Mr. Ding continued. "Our improved internal organizational structure supported excellent sales execution and customer relationship development in 2010. We integrated a number of new products, services and channels into our portal that have drawn a substantial number of new users and improved user traffic statistics. In 2010, our large investments in promotional activities through sponsorship and support of major Chinese national events and programs paid off well, which we believe successfully raised our portal's standing and delivered outstanding value-for-money advertising services to our advertisers."

Mr. Ding concluded, "In conjunction with our online games strategy for 2011, for our portal business, we will focus on new product applications in mobile phones and will explore new advertising formats and marketing models to attract premier advertisers and stimulate ad spending. We are working to achieve healthy growth across our business in 2011 in line with anticipated market expansion in order to maintain our leading position in China's burgeoning Internet community."
Well…that was long winded. But then again, he has a lot to say. But all I can say Mr. Ding is….”DING DING DING DING!! Like a slot machine!” All I know is that as long as Chinese kids are playing video games, $$$MR. MARKET$$$ will make money. So kids, if you’re listening – put down those books. Forget about college. Keep playing those games.

I am HUGE!!


$$$MR. MARKET$$$

www.mrmarketishuge.com

[billyjoe]

Mr.Market,
One of my children played World of Warcraft so much he wore the letters off the keyboard. Well........it keeps the kids off the streets.

-----------billy

[em26jamie]

Mr.Market,
One of my children played World of Warcraft so much he wore the letters off the keyboard. Well........it keeps the kids off the streets.

-----------billy

I used to play it's predecessor, Everquest, religiously for 5 years. We called it EverCrack because it was so addicting. It got me out of the bar, though. I spent $13/mo to play instead of $100 a night getting drunk. I quit to have a life again in the real world and now I'm married with a child and another one on the way. But I don't get me wrong, I do miss it sometimes.

Online gaming is big, but not as huge as $$$Mr Market$$$.

[jiesen]

I'm in!

Great pick, and excellent writeup, $$MM! I got in at 52.9 on Friday.
See ya at 62!

[nwinvestor]

Good write-up. I got in at 51.9
Thanks

[Skrumpa]

I'm in too!!!

I'm in too!!!

[Chips]

I'M intoo!

[meelthon]

Checked in too

I got in at 51.8 on Thursday
Thanks

[smaskell]

Ouch!

Looks like NTES got dragged down by the Citron Research report slamming MOBI. Too many Chinese companies with suspect reporting practices. Bummer. Anyone have any idea what happened to TQNT today?

[billyjoe]

Tqnt

smaskell,
Maybe this had something to do with it.

http://www.fool.com/investing/general/2011/05/03/if-you-see-this-are-you-ditching-triquint-semicond.aspx

------------billy

[smaskell]

Ah.

Maybe this had something to do with it.

http://www.fool.com/investing/general/2011/05/03/if-you-see-this-are-you-ditching-triquint-semicond.aspx

------------billy

Probably so. I hadn't seen that article. Thanks for the update. Reading the article it seemed the trend about which he was complaining peaked in Q4 of last year and was reversing when Q1 reported. Guess it's just another bump we'll have to ride out...

[Deaddog]

NTES featured in IBD Daily Stock Analysis:
May 6 2011:

Of concern:
The sudden drop on heavy volume below the 50 MA.
Chinese companies with suspect reporting practices.
Number of Funds owning the stock dropped in the last quarter.
Earnings growth while still at 35% has slowed in the last year.

OK so the stock is dropping but so is the rest of the market.
Here’s something to consider. NTES hit its high on Apr 19th then started to sell off. Its competition (SOHU and CYOU) continued to go up until the end of the month when the market in general started to sell off. On the days it sells off the volume is much higher than on the days it makes small gains.

Earnings are due on May 19th so hopefully this will turn the stock around. A surprise to the upside would give the stock a much needed a kick in the butt.

[Renegade]

Update

Hey guys - I've been watching this thread - thanks for the info. Are there any updates on NTES?

Thanks,