My Thoughts on Netease (XIRR update)

 


Please click and read this disclaimer if you wish to continue with the contents below.

NetEase's (9999.HK) third-quarter revenue and profit were better than expected. The company achieved revenue of 18.66 billion yuan (+27.5% year-on-year, +2.6% quarter-on-quarter), which exceeded market expectations by 2.7%. All business segments achieved solid results, including:

1) Online game revenue grew steadily, reaching RMB 13.86 billion (+20.2% YoY, +0.2% quarter-on-quarter)

2) Youdao realized RMB 900 million revenue (+159.0% YoY, +43.8% quarter-on-quarter) 

3) Innovation and others Business revenue was 3.90 billion yuan (+41.6% YoY, +4.5% quarter-on-quarter). 

The company achieved a non-GAAP adjusted net profit of RMB 3.67 billion (-22.4% year-on-year, -29.8% quarter-on-quarter), which exceeded market expectations by 70.3%. The decline was mainly due to the increase and confirmation of operating expense ratios this quarter and net exchange loss of RMB 1.57 billion. The overall operating expense ratio increased from 31.0% in 3Q19 to 37.6% in 3Q2020. The sales expense ratio increased by 7.4 percentage points year-on-year to 18.5%, mainly due to the increase in Youdao and online game service sales expenses.

The profit pressure from the online education business is roughly reflected in the quarter's results. It is expected that major games will be launched in the first half of next year, and the rising contribution from overseas markets will also help drive the revaluation of the share price. With the average P/E ratio of its overseas peers at 24 times, NetEase's current core game P/E ratio is only 15 times, a lower level.

NetEase paid a dividend of US$0.2320 per ADS (US$0.0464 per share) for the first quarter of 2020 in June 2020, and paid a dividend of US$0.2970 per ADS (US$0.0594 per share) for the second quarter of 2020 in September 2020. The board of directors has approved a dividend of US$0.1950 per ADS (US$0.0390 per share) for the third quarter of 2020. Starting in the second quarter of 2019, the Company’s policy has been to set quarterly dividends at an amount equivalent to approximately 20%-30% of the Company’s anticipated net income after tax in each fiscal quarter. 

Under the influence of the epidemic, games have become an important way for many people to relax. The company has nearly 20 years of in house game development and operation experience. NetEase is the second-largest online gaming firm in China, behind only to Tencent. 

Company is well managed by Ding Lei who is known for doing only things that he can excel at. Netease is known to cash out business segments that are over monopolized by other competitors(eg selling Kaola their ecommerce business to Alibaba for 2bil USD in 2019). This kind of streamlining enables Netease to have decent ROE(25-30%) and be very cash generative(HKD25 net cash per share, 2.5x current ratio)

The prospect of companies with strong R&D and inhouse game development this size is promising to me, especially at this kind of valuation. Don't forget Netease's Youdao, which is listed on NYSE is China's largest online education brand in terms of number of users, and yet still growing at 159% YoY. 

Netease Music which is currently a duopoly with Tencent music is yet to be spun off. From the 10% stake of Netease Music that Alibaba bought in 2019, it is valued at ard 7bil USD slightly less than half of Tencent Music. Ding Lei, the founder cum CEO, said in an interview that the company will eventually divest its cloud music platform and make it an independent listed company. Ding Lei did not disclose the specific time of the NetEase Cloud Music’s IPO but said the company would list on the exchange when its streaming music business is matured and attained leading position in the market.

Though Tencent owns the largest social network in China, NetEase is the most popular service among younger users. Netease makes nearly 79% of revenue from online games, but is trying to grow in other areas such as education and music streaming. Hence it is more exposed to the China's mobile gaming track than Tencent.

Full disclosure, I have vested interest in Netease and it is currently up 21%(updated 14th Jan 2020).

Snap shot of my portfolio performance as of today: Total profit S$10,082.19(2020)


No comments :

Post a Comment