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INSIDE	                                                          INSIDE 	                                                N...
INSIDE	                                               SUMMARY	  NetEase.com, Inc was founded by Mr. William Lei Ding in 1...
INSIDE	                                                 BUSINESS STRUCTURE	                                               ...
INSIDE	                                                                       GAMING INDUSTRY OVERVIEW	                   ...
INSIDE	                             ADVERTISING INDUSTRY OVERVIEW	    Portal Market	       40000	                         ...
INSIDE	                                                                                                                 RE...
INSIDE	                                                                                                             PROFIT...
INSIDE	                                                                                                                   ...
INSIDE	                                                                                             BUSINESS ANALYSIS	  80...
INSIDE	                                                                               BUSINESS ANALYSIS	  MMORPG	  (Self	 ...
INSIDE	                          MANAGEMENT	  Current CEO Mr. William Lei Ding founded NetEase in 1997, and holds a 45%  ...
INSIDE	                                                                               VALUATION	                          ...
INSIDE	                                     RISKS	  Though NetEase has a broad range of portfolio projects, over 86% of r...
INSIDE	                            WEB PORTAL	        Email                 Micro-        Online-        Login            ...
INSIDE	             WESTWARD JOURNEY IIWESTWARD JOURNEY IS NETEASE’S LONG-RUNNING FRANCHISE)
INSIDE	                GHOSTGHOST IS A NEW MMORPG UNDER DEVELOPMENT)
INSIDE	      WORLD OF WARCRAFTNETEASE IS THE OFFICIAL OPERATOR OF WOW IN   CHINA)
INSIDE	                               ABOUT ICHINASTOCK	   Snowball Finance is a financial media platform that includes two...
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Inside NetEase

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NetEase (NASDAQ: NTES) is an online gaming and web portal firm. NetEase has 3 revenue sources: online-game services (87.4% of revenues), advertising services (11.2%), and value-added services (1.5%). By iChinaStock.com.

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Transcript of "Inside NetEase"

  1. 1. INSIDE INSIDE NETEASE NASDAQ: NTES ONLINE-GAMES AND WEB PORTAL REPORT BY iChinaStock.com profiles Chinese firms that are publicly-listed or may list soon in overseas markets © July 2011 iChinaStock
  2. 2. INSIDE SUMMARY   NetEase.com, Inc was founded by Mr. William Lei Ding in 1997 and wentpublic on the Nasdaq in 1999. As of July 8, 2011, its market cap was $6.1billion.   NetEase has 3 revenue sources: online-game services (87.4% ofrevenues), advertising services (11.2%), and value-added services (1.5%),   Westward Journey II came into operation in 2002, and PCU (PeakConcurrent Users) reached a record 1.19 million in May, 2010.   NetEase gained exclusive licenses to operate the popular games Worldof Warcraft and Starcraft II in China from the US-based firm ActivisionBlizzard, Inc. in 2008.   NetEase operates an Internet portal www.163.com, that ranked first inview rates by iResearch in 2009.   NetEase owns eight email server centers, with userbase totaling over 360million, as of April, 2011.   NetEase also operates self-developed search engine, Youdao, a micro-blogand WAP mobile services.
  3. 3. INSIDE BUSINESS STRUCTURE NetEase Online games Portal Mail WVA (revenues via virtual goods (revenues via ads) (revenues via VAS and and premium services) ads) (revenues via ads) Games Games Content Community Search Engine developed licensed from Blizzard Communicate Micro-blog in-house Source: NetEase Inc. F-1 SEC Filling Disclaimer: This is not the firm’s official structure, but rather iChinaStock’s representation of the firm’s key properties
  4. 4. INSIDE GAMING INDUSTRY OVERVIEW Market  Share  2010   Introduc6on   Tencent   Gaming  is  the  most  developed  industry  on  the  Chinese   NTES   Internet.  Web  games  and  MMORPGs  operate   23.7%   29.0%   GAME   predominantly  on  a  freemium  model  whereby  games  are   4.0%   6.8%   PWRD   free  to  play,  but  virtual  goods  cost  real  money.  Many  of   7.3%   15.3%   13.9%   China’s  listed  tech  companies  are  gaming  companies.     CYOU   GA   Others   A  hit-­‐driven  and  top-­‐heavy  industry     In   2009,   321   new   online-­‐games   were   produced   in   China.   NTES  Market  Share   But   less   than   5   games   reached   over   600,000   average   30.0%   concurrent  users.   25.0%     20.0%   The  6  players  held  76%  of  market  share  in  2010.  Netease   was  in  second  place  with  15.3%  of  the  market.     15.0%   10.0%   5.0%   0.0%   Challenges   2006     2007     2008     2009     2010     Games  face  increasing  R&D  costs  in  a  compeYYve  industry   where  hits  are  difficult  to  come  by.  Growth  has  leveled  off  Source: CGIGC, China Online-game Industry Report in  recent  years..  
  5. 5. INSIDE ADVERTISING INDUSTRY OVERVIEW Portal Market 40000   36,000   Top  Portals   NetEase   is   among   China’s   top   5   Internet   30000   portals,   though   it   has   fallen   behind   and   now   holds  only  3%  market  share  in  adverYsing.     20000   7,900   6,500   6,400   5,900   10000   190   150   130   260   73   0   Sina   Sohu   NetEase   Tencent   iFeng   UV   PV   Microblog Market NetEase,  3%   Sohu,  6%   Tencent,   Micro-­‐blog   21%   Sina   and   Tencent   together   occupy   78%   of   Sina,  57%   market  share.       Baidu,   13%     NetEase   recently   invited   200   presYgious   local   economists  to  its  Micro-­‐blog.     Sina   Baidu   Tencent   Sohu   NetEase  Source: iMeigu
  6. 6. INSIDE REVENUES 6,000     300     Growth  Rate     5,000     250     7-­‐year   CAGR   of   Total   Revenues,   Online   Game   4,000     200     Services,   AdverYsing   Services,   and   Wireless   Value-­‐ 3,000     150     added  Services  is  38.8%,  57.8%,  33.0%,  and  (16.1%)   2,000     100     1,000     50     respecYvely.   0     0     2003     2004     2005     2006     2007     2008     2009     2010     Total  Revenues   Online  game  services   AdverYsing  services   Wireless  value-­‐added  services   100.0%   2.4%   1.9%   1.5%   Netease  Segmenta6on   13.6%   10.0%   11.2%   The   Online   Game   Services   Department   is   the   cash   90.0%   cow   of   NetEase,   contribuYng   87.4%   of   total   80.0%   84.0%   88.1%   87.4%   revenues   in   2010.   Netease   has   not   been   able   to   reduce   its   dependence   upon   gaming   revenues   in   70.0%   2008     2009     2010     recent  years.   Online  game  services   AdverYsing  services   Wireless  value-­‐added  services  Source: NetEase Inc. F-1 SEC Filling
  7. 7. INSIDE PROFITABILITY 90.0%   Profit  Margins   84.8%   80.0%   80.2%   75.1%   78.9%   80.4%   78.0%   Gross   Margin   saw   a   15%   decrease   from   around   73.4%   70.0%   65.5%   80%  to  65%  during  the  past  7  years.   60.0%     56.7%   55.0%   56.1%   54.8%   53.6%   50.0%   46.1%   48.4%   Net   Income   Margin   also   saw   the   same   trend   as   40.0%   39.5%   Gross  Margin.     30.0%     20.0%   10.0%   Looking   forward,   management   expects   the   margin   0.0%   will  remain  at  the  same  level  as  in  2010.   2003     2004     2005     2006     2007     2008     2009     2010     Gross  Profit  Margin   Net  Income  Margin   In  Millions  of  RMB   Primary  Factor   As   Netease   signed   a   3-­‐year   contract   to   operate   Online  game  revenues  2008-­‐2010 14,009   Warcraa   with   Blizzard   ,   the   cost   associated   with   royalYes,   amorYzaYon   of   license   fees   and   technical   Warcraa  Total  Expenses 2,200   consultancy   service   fees   amounted   RMB   2,200   million,   bringing   down   gross   margin   by   roughly     NegaYve  Impact  to  Gross  Margin  (aprx.) 15.7% 15%.    Source: NetEase Inc. F-1 SEC Filling
  8. 8. INSIDE BALANCE SHEET 10,000     9,620     9,000     8,000     7,000     7,141     Leverage   6,000     5,613     NetEase   sits   on   huge   amounts   of   cash   and   keeps   5,000     very  low  financial  leverage.   4,000     3,938     4,159     3,378       3,000     1,688     2,289     Cash  /  share   2,000     828     839     In   2010,   the   company   has   RMB   9.6   billion   in   cash   1,000     818     792     and  deposits,  $11.1/share.   0     10     0     2003   2004   0     35     2005   2006   2007   2008   2009   2010   Cash   Debt  Source: NetEase Inc. F-1 SEC Filling Disclaimer: This is not the firm’s official structure, but rather iChinaStock’s representation of the firm’s key properties
  9. 9. INSIDE BUSINESS ANALYSIS 800   11.5%   700   11.1%   11.0%   Online-­‐game  Market  Growth   600     10.5%   10.5%   500   1)  Paying  Online  Game  Player  Growth   400   10.0%   The   Internet   User   base   grew   by   28.6%   annually   300   9.6%   9.5%   during   2006   and   2010,     the   Paying   Online   Game   9.4%   200   Player  expanded  by  20.4%  correspondingly.   9.0%   100     0   8.5%   2)  ARPU  (Average  Revenue  Per  User)  Growth   2006   2007   2008   2009   2010   5-­‐year   CAGR   of   ARPU   during   2006   and   2010   was   Internet  User   Paying  Online  Game  Player   14.4%.   ARPU    as  a  %  of  Internet  User   35,000   30.0%   28.4%   NetEase  Market  Share   30,000   25.0%   As   compeYYon   increased   over   Yme,   NetEase   lost   25,000   20.0%   market   share   during   2006   and   2009.   However,   20,000   18.3%   15.3%   15.0%   market   share   will   remain   stable   as   NetEase   has   15,000   13.6%   13.1%   10,000   10.0%   very  strong  pipeline  underway.   5,000   5.0%   0   0.0%   2006   2007   2008   2009   2010   Revenue  of  Online  Game  Industry   Online-­‐game  Revenue  of  NetEase   Market  Share  of  NetEase  Source: NetEase Inc. F-1 SEC Filling
  10. 10. INSIDE BUSINESS ANALYSIS MMORPG  (Self  R&D) Revenue  Model Game  Status Westward  Journey  Online  II Time-­‐Based Launched  2002.8 Pipeline   Fantasy  Westward  Journey Time-­‐Based Launched  2004.12 NetEase’s   Westward   Journey   series   has   had   an   Datang Time-­‐Based Launched  2006.7 outstanding  track  record.   Westward  Journey  Online  III Time-­‐Based Launched  2007.9 Tianxia  II Item-­‐Based Launched  2008.6   Legend  of  Westward  Journey Item-­‐Based Launched  2008.9 NetEase   has   had   a   gap   of   new   games   2009-­‐2010,   New  Fly  for  Fun Item-­‐Based Launched  2008.11 but  plans  to  release  3  new  games  in  2011.   Westward  Journey  Genesis Time-­‐Based Close-­‐beta  TesYng  2011.3 Ghost Unknown Close-­‐beta  TesYng  2011.4 Legend  of  Fairy Unknown Close-­‐beta  TesYng  2011.5 40   3.5   35   R&D  Expenses   3   30   NetEase  is  a  R&D  driven  company.   2.5   25     2   Developing   new   games   incurs   considerable   R&D   20   15   1.5   expenses.   10   1   5   0.5   0   0   2003   2004   2005   2006   2007   2008   2009   2010   Average  Annual  Stock  Price   New  Game  Source: NetEase Inc. F-1 SEC Filling
  11. 11. INSIDE MANAGEMENT   Current CEO Mr. William Lei Ding founded NetEase in 1997, and holds a 45% stake in the company. Mr.  Ding holds a Bachelor of Science degree in Communication Technology from the University of Electronic Science and Technology of China.   Mr. Ding maintains very tight control over NetEase.   NetEase has closed only one M&A deal in its history, when it spent RMB 10 million to acquire GuangZhou TianXia Technology in 2001.
  12. 12. INSIDE VALUATION NetEase’s P/E and EV / EBITDA relative to other Chinese gaming firms P/E   EV  /  EBITDA   As  of  June  18,  2011,  P/E  of  NetEase  was  14.1.     As  of  June  18,  2010,  EV  /  EBITDA  of  NetEase  was  8.6.   June  18,  2011 Trailing  P/E June  18,  2011        EV/EBITDA Tencent  (HK) 37.7 Tencent        N/A NTES 14.1 NTES        8.6 GAME 8.6 GAME        5.1 PWRD 7.4 PWRD        4 CYOU 5.2 CYOU        6.6 GA 12.3 GA        N/A   ATVI 24.6 ATVI        8.7 ERTS  (Forward) 22.0 ERTS        483.7Source: Yahoo Finance
  13. 13. INSIDE RISKS   Though NetEase has a broad range of portfolio projects, over 86% of revenue comes from online games. Increasing competition in the online-game market might negatively impact NetEase.   COO Zhonghui left NetEase in May, 2011. His departure might negatively impact the Online-games Service Department.   Regulations are still subject to change in China’s online gaming industry. GAPP (General Administration of Press and Publication of the Peoples Republic of China) and MCPRC (Ministry of Culture of the Peoples Republic of China) both overlook the industry.
  14. 14. INSIDE WEB PORTAL Email Micro- Online- Login blog paymentsGames
  15. 15. INSIDE WESTWARD JOURNEY IIWESTWARD JOURNEY IS NETEASE’S LONG-RUNNING FRANCHISE)
  16. 16. INSIDE GHOSTGHOST IS A NEW MMORPG UNDER DEVELOPMENT)
  17. 17. INSIDE WORLD OF WARCRAFTNETEASE IS THE OFFICIAL OPERATOR OF WOW IN CHINA)
  18. 18. INSIDE ABOUT ICHINASTOCK Snowball Finance is a financial media platform that includes two sites. One is iMeigu.com, a Chinese-language site that covers all US-listed stocks. The other is iChinaStock.com, an English-language site that covers Chinese stocks listed in the US.  Each site provides stock quotes, business news, and analysis. Snowball Finance has also established my.iMeigu.com, a Web 2.0 platform for global investors to share news and insights on stocks they follow.  Snowball Finance also publishes the  iChinaStock 30 Index, a representative sample of Chinese stocks on the NYSE and NASDAQ. © March 2011 iChinaStock report by Richard Chen
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