Netease-y Street (NTES)
Netease (NTES)
Bought May 6, 2005 at $50.45
I've got to be honest with you -- I thought this was the safer, less volatile long term growth play on Chinese internet use and gaming, and Shanda, which I have a larger position in, was the one that might rocket to the sky without warning.
Nice to be wrong, sometimes ... and you never know what will happen when SNDA reports earnings next week.
So in one sentence, what do I like about Netease?
Netease is reaching a new audience for online gaming in China, and even after it's recent run up it trades at a tremendous discount to its meteoric growth rate.
Warning: three paragraph rant coming: Larry Kudlow was on the XM CNBC channel as I drove home last night, and when he mentioned Chinese internet stocks (in regard particularly to Netease, which obviously got everyone's attention with it's 25% jump up after earnings), he sounded as if he'd rather invest in rat feces than chinese internet stocks. This is not the first time I've thought he was wrong, but I can't seem to stop listening to him lecture to his sychophantic guests (does he ever even ask questions without answering them first?)
How can you avoid a whole class of companies that is undervalued relative to their growth, feeds the second largest and fastest growing marketplace in the world, and has developed a leadership structure with a few strong brands and companies at the top -- not only Shanda and Netease, but Sina, which is having its troubles lately thanks to mobile services, and Baidu and Sohu and maybe a few others?
His complaints were the lack of transparency in Chinese stocks, and the fact that they are subject to the whims of the Chinese government's regulations. On the first, sure, they are less transparent than US companies -- but there are a lot of US companies whose structures and filings I don't understand, too. The Chinese companies that trade as ADRs report to the SEC, and I don't see why they have much more reason to be fraudulent than US companies. I'm not going to buy a Chinese penny stock, I've seen to many of those that are clearly just shell companies with too many layers of confusing ownership, and I'm not crazy about some Chinese companies -- I owned China Yuchai until I realized that I couldn't figure out who really owned and controlled it, and that there was much more competition in their space (diesel engines) than I originally thought. And I'm a little nervous about owning government-controlled entities because I'm not sure their priorities will be in line with mine, but that's not a hard and fast rule -- I did own PetroChina for a while (after all, so does Warren Buffett), and in other countries I have much less compunction about that. I have profitably owned both PetroBras and Statoil (Brazilian and Norwegian, respectively), and probably sold both too soon.
But enough about that -- why did I buy Netease, and why do I like it? I am still holding, even after our ridiculous leap up the leaderboard this week.
Some of the argument in favor of investing in Chinese gaming stocks in general I already made in my writeup on Shanda -- no need to repeat it here, read it if you want to.
But Netease at first seemed to me to be a bit more stable a creature, at least in design, than Shanda. They've actually had a rockier past than Shanda, but have a broader portal business already, whereas Shanda is just trying to build one. In Wall Street Speak, Shanda has been a "pure play" on Chinese online gaming, whereas Netease's foray into gaming began as only one of the parts of their online businesses. That's changing with this earnings report, as wireless services now make up just a small and shrinking part of their business and advertising, which is also growing very fast, is not keeping up with the explosive growth of gaming revenue for Netease.
So now that we should really think of Netease as "just" a gaming company, why hold?
A big part of why I'm still holding and not taking profits is that their new game, Fantasy Westward Journey, is already a huge hit. We already know that it has been very successful particularly among women, who are not targeted by many of the popular games. I'm just guessing, along with everyone else, that Shanda's next generations of games will find an eager audience as their existing ones have, but I could be wrong. And both SNDA and NTES have several 3d or 2.5D games in development or early beta -- this is a big deal, as World of Warcraft's worldwide success should show us.
China Stock Blog has some good stuff on Netease, as usual -- notes from conference call and from bullish and bearish few analyst reports. Netease's interpretation of regulatory change seems to be a bit different than that of the news agency Interfax, which is reporting that significant adjustments are already underway to gaming rules. No one else is really sure what the Chinese will do -- on one hand they're investing huge amounts of money into building the gaming industry and building something akin to business incubators for gaming companies in several cities, and on the other hand they talk about the need to regulate video game "addiction" and antisocial behavior.
So will China kill the goose that lays the golden egg? Will, frankly, the Chinese government do something that kicks their young men out of internet cafes and tries to get them working more hours, when the Chinese economy cannot create enough employment for it's people as it is? I don't think so. Like the long debate over the tiny blip in currency revaluation, this is a lot of sound and fury, signifying, I hope, not much. I don't have any contacts in the Chinese ruling committee, however, so take my conjecture with a big, kosher-size grain of salt.
Why or when might I sell Netease?
I try to avoid selling stocks just because I think they've gone up "too fast" or "too far" -- is there really such a thing? It can be very tempting to conver the paper profits scrolling across your ticker into cold, hard cash -- but I don't think it makes much sense to look backward like that and think only about your purchase price and the price you could now get. Look at the company -- is it still growing? Are prospects better or worse? Is the news that pushed it up so high really news that makes you understand the company differently and place a different value on them?
In the case of Netease, yes, now that I've seen the numbers they got for Fantasy Westward Journey and the growth they're capable of in their gaming business, I see no reason to sell. I might get clobbered if the chinese decide to destroy their most successful technology industry, or if competitors just beat early movers SNDA and NTES, but I have no reason to think either of those outcomes is probable. I'm trying to invest in companies that have the opportunity for dramatic long term growth -- why would I sell just because some of my hopes have come through?
This is not a part of my portfolio that I'm relying on to supply me with cat food in my old age -- I'm going to let it ride.
If Netease appears to development management "trouble", that might be a reason for me to sell (their management seems to have been pretty conservative thus far, from what I can tell, but I don't have as much confidence in them as I do in the leadership at Shanda). Other than that, as long as the Chinese economy continues to build a middle class, the government continues to support private enterprise, and the Chinese people continue to have an interest in low-cost entertainment, I see no reason to sell Netease.
There's a good Fool article here by the guy who recommended this in the Rule Breakers newsletter, if you want to read more.
Technorati tags: ntes Netease
Bought May 6, 2005 at $50.45
I've got to be honest with you -- I thought this was the safer, less volatile long term growth play on Chinese internet use and gaming, and Shanda, which I have a larger position in, was the one that might rocket to the sky without warning.
Nice to be wrong, sometimes ... and you never know what will happen when SNDA reports earnings next week.
So in one sentence, what do I like about Netease?
Netease is reaching a new audience for online gaming in China, and even after it's recent run up it trades at a tremendous discount to its meteoric growth rate.
Warning: three paragraph rant coming: Larry Kudlow was on the XM CNBC channel as I drove home last night, and when he mentioned Chinese internet stocks (in regard particularly to Netease, which obviously got everyone's attention with it's 25% jump up after earnings), he sounded as if he'd rather invest in rat feces than chinese internet stocks. This is not the first time I've thought he was wrong, but I can't seem to stop listening to him lecture to his sychophantic guests (does he ever even ask questions without answering them first?)
How can you avoid a whole class of companies that is undervalued relative to their growth, feeds the second largest and fastest growing marketplace in the world, and has developed a leadership structure with a few strong brands and companies at the top -- not only Shanda and Netease, but Sina, which is having its troubles lately thanks to mobile services, and Baidu and Sohu and maybe a few others?
His complaints were the lack of transparency in Chinese stocks, and the fact that they are subject to the whims of the Chinese government's regulations. On the first, sure, they are less transparent than US companies -- but there are a lot of US companies whose structures and filings I don't understand, too. The Chinese companies that trade as ADRs report to the SEC, and I don't see why they have much more reason to be fraudulent than US companies. I'm not going to buy a Chinese penny stock, I've seen to many of those that are clearly just shell companies with too many layers of confusing ownership, and I'm not crazy about some Chinese companies -- I owned China Yuchai until I realized that I couldn't figure out who really owned and controlled it, and that there was much more competition in their space (diesel engines) than I originally thought. And I'm a little nervous about owning government-controlled entities because I'm not sure their priorities will be in line with mine, but that's not a hard and fast rule -- I did own PetroChina for a while (after all, so does Warren Buffett), and in other countries I have much less compunction about that. I have profitably owned both PetroBras and Statoil (Brazilian and Norwegian, respectively), and probably sold both too soon.
But enough about that -- why did I buy Netease, and why do I like it? I am still holding, even after our ridiculous leap up the leaderboard this week.
Some of the argument in favor of investing in Chinese gaming stocks in general I already made in my writeup on Shanda -- no need to repeat it here, read it if you want to.
But Netease at first seemed to me to be a bit more stable a creature, at least in design, than Shanda. They've actually had a rockier past than Shanda, but have a broader portal business already, whereas Shanda is just trying to build one. In Wall Street Speak, Shanda has been a "pure play" on Chinese online gaming, whereas Netease's foray into gaming began as only one of the parts of their online businesses. That's changing with this earnings report, as wireless services now make up just a small and shrinking part of their business and advertising, which is also growing very fast, is not keeping up with the explosive growth of gaming revenue for Netease.
So now that we should really think of Netease as "just" a gaming company, why hold?
A big part of why I'm still holding and not taking profits is that their new game, Fantasy Westward Journey, is already a huge hit. We already know that it has been very successful particularly among women, who are not targeted by many of the popular games. I'm just guessing, along with everyone else, that Shanda's next generations of games will find an eager audience as their existing ones have, but I could be wrong. And both SNDA and NTES have several 3d or 2.5D games in development or early beta -- this is a big deal, as World of Warcraft's worldwide success should show us.
China Stock Blog has some good stuff on Netease, as usual -- notes from conference call and from bullish and bearish few analyst reports. Netease's interpretation of regulatory change seems to be a bit different than that of the news agency Interfax, which is reporting that significant adjustments are already underway to gaming rules. No one else is really sure what the Chinese will do -- on one hand they're investing huge amounts of money into building the gaming industry and building something akin to business incubators for gaming companies in several cities, and on the other hand they talk about the need to regulate video game "addiction" and antisocial behavior.
So will China kill the goose that lays the golden egg? Will, frankly, the Chinese government do something that kicks their young men out of internet cafes and tries to get them working more hours, when the Chinese economy cannot create enough employment for it's people as it is? I don't think so. Like the long debate over the tiny blip in currency revaluation, this is a lot of sound and fury, signifying, I hope, not much. I don't have any contacts in the Chinese ruling committee, however, so take my conjecture with a big, kosher-size grain of salt.
Why or when might I sell Netease?
I try to avoid selling stocks just because I think they've gone up "too fast" or "too far" -- is there really such a thing? It can be very tempting to conver the paper profits scrolling across your ticker into cold, hard cash -- but I don't think it makes much sense to look backward like that and think only about your purchase price and the price you could now get. Look at the company -- is it still growing? Are prospects better or worse? Is the news that pushed it up so high really news that makes you understand the company differently and place a different value on them?
In the case of Netease, yes, now that I've seen the numbers they got for Fantasy Westward Journey and the growth they're capable of in their gaming business, I see no reason to sell. I might get clobbered if the chinese decide to destroy their most successful technology industry, or if competitors just beat early movers SNDA and NTES, but I have no reason to think either of those outcomes is probable. I'm trying to invest in companies that have the opportunity for dramatic long term growth -- why would I sell just because some of my hopes have come through?
This is not a part of my portfolio that I'm relying on to supply me with cat food in my old age -- I'm going to let it ride.
If Netease appears to development management "trouble", that might be a reason for me to sell (their management seems to have been pretty conservative thus far, from what I can tell, but I don't have as much confidence in them as I do in the leadership at Shanda). Other than that, as long as the Chinese economy continues to build a middle class, the government continues to support private enterprise, and the Chinese people continue to have an interest in low-cost entertainment, I see no reason to sell Netease.
There's a good Fool article here by the guy who recommended this in the Rule Breakers newsletter, if you want to read more.
Technorati tags: ntes Netease
This article posted by One Guy @ 8/04/2005 11:33:00 AM 0 comments
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