Give NetEase a Second Look
, On Thursday February 24, 2011, 3:00 pm EST Amid all the recent attention that major Chinese Internet companies have been receiving, one has been left out of the discussion: NetEase.com. That is, until last night. The company announced some very strong results that propelled the stock to a big jump this morning. Here's what you need to know about the company and why you might want to take a second look. NetEase.com is one of the first-generation Chinese portals from 10 years ago, along with Sina and Sohu -- China.com never made it past the dot-com bubble. NetEase.com, which actually uses the URL "www.163.com" in China, has quietly been growing its revenue over the last few years, benefiting from the growth of the Chinese Internet market. Annual revenue went from $303 million in 2007 to $550 million in 2009. In last night's earnings report, we learned that annual revenue in 2010 went up to $857 million. That's quite a nice ramp. Net profit for fiscal 2010 was $339 million, up from $173 million in 2007. In other words, net margins were 40% last year on a billion-dollar business. The top-line fourth-quarter numbers for NetEase were 12% higher than what Wall Street analysts were expecting. This growth came from a boost of 13% from growth in online games quarter on quarter and 44% from online advertising in the quarter. This surge in advertising growth was apparent in Sohu's results a few weeks ago. That surprise from Sohu led to a one-month gain of 22% while the Nasdaq has basically been flat. This growth in online advertising will likely take center stage next Tuesday when Sina announces its quarterly results. It would be hard to believe that it won't ride the same rising tide to a strong quarter. NetEase said that for the rest of 2011, it expects strong advertising demand to continue. The company specifically called out the auto, Internet services, consumer electronics, apparel and food and beverage industries as areas where it is seeing the greatest demand. The company will continue to push its games. It is preparing to launch Starcraft II and Cataclysm. It also hopes to make inroads in online air ticketing (although this is never a business with great margins). NetEase doesn't have a shiny new microblogging tool like Sina's Weibo site. It's also not nearly as well known in the U.S. as Sohu. However, its anonymity is part of the reason you might want to take a closer look here. The stock jumped 10% this morning, as the Street was caught off guard by the positive results. However, even with that gain, NetEase is up 25% in the last year. Even though that beats the Nasdaq's return of 22% over that same period, it vastly trails the 66% one-year return from Sohu and the eye-popping 112% return from Sina. NetEase -- again, with this morning's move included -- is selling at a forward price-to-earnings ratio of 15x for a company that has grown its earnings by 25% a year for the last three years. Sina's forward P/E ratio is 38x. NetEase also has an enterprise value to EBITDA ratio for the last 12 months of less than 11x. Sina's is 44x. The low-profile nature of NetEase -- and its lagging stock price compared with its peers -- is a reason you might want to own the stock. In the worst-case scenario where it continues to lag its peers, you still have a good chance of beating the U.S. market's returns. But you might want to use these positive results to also re-examine Sohu. Despite its 66% move in the last 12 months, Sohu is still very "cheap" compared with Sina, with a 15x forward P/E and a trailing enterprise-value-to-EBITDA of less than 9x. Also, Shanda Interactive is announcing its quarterly results on Wednesday. Shanda is another value-play Chinese stock like NetEase. Shanda was once a leader in the online gaming space, but it has since been forgotten. Expectations are low, and the stock is cheap and has been bumping along $40 for several months. An upside surprise would give a boost to the stock. NetEase's 12% increase in online gaming revenue is a good sign for Shanda. Finally, don't forget BitAuto, which will release its earnings on March 3. It has an auto listing revenue model, rather than a heavy portal advertising model, but it might also benefit from a healthy auto space in China. Please note that due to factors including low market capitalization and/or insufficient public float, we consider BITA to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices. Eric owned SINA and SNDA at the time of publication.
