One Guy's Investments: Beating Estimates with Netease (NTES)

I hope you understand how difficult it is to avoid resorting to pun-throwing when talking about NTES ...

Back on Netease-y street.

It's Netease-y being a Chinese gaming company.

Netease-y does it.

OK, got that out of my system.

Netease (NTES -- click to register for free RT streaming quote) is one of the titans of Chinese internet gaming, and a top tier web portal and wireless services firm (that wireless stuff is what pummeled the stock more than a year ago if I remember correctly, as the wireless fortune telling business got the ol' tsk-tsk from the People's Government). While they're still the largest free email provider in China, lately their earnings reports tell us that they're really just an online MMPORPG company -- most easily comparable to The9 or Shanda, though they seem to me to be both more diversified than The9 and much more stable than Shanda.

But the news is, they released their fourth quarter this week (transcript of the call is on the China Stock Blog), and all is once again well for NTES. They had a little hiccup in the third quarter, but they had a remarkably busy Q4 that included significant increases in the number of game players of their two core titles -- a nice recovery that made a mockery of my prior guess that Fantasy Westward Journey (the most popular game in China right now, according to them) and Westward Journey Online 2 had plateaued. It's nice to be wrong in this case.

So we're back on the climb with NTES ... the chart is pretty odd looking

for this one -- tremendous moves on earnings the last three quarters, a huge move up that shocked everyone when their earnings blew expectations away in August, then the dramatic fall when that growth rate stalled a bit last quarter, and now another huge climb back to where we were six months ago now that we are again allowed to believe that NTES is growing.

This is exhausting. But I think if we can ignore the short term blips caused, in large part, by how difficult it is for analysts to guess what's happening in the Chinese internet space these days, NTES looks to me to be very well positioned for the continuing overall growth of gaming and internet use in the middle kingdom.

While Shanda (SNDA) has moved to a free-play model (trying to sell avatar accessories, etc., instead of charge for game play), NTES seems to be doing quite well with continuing to charge for games. That means they're handling the development cycle significantly better than SNDA, since their current hit games are continuing to grow in popularity and they're now just a few months out from release of their next generation 2.5D and 3D games while Shanda's next generation games seem to be continually delayed and they gamble their future on hardware.

(And no, I have no idea what 2.5D means. How can you have half a dimension?)

So my opinion of NTES hasn't changed in the last month, though I'm happy to see that this latest swing was to the upside. I'm holding my shares, but with this and my Shanda position already giving me plenty of exposure to MMPORPG's in China I'm not interested in adding any more -- I think I've got enough, especially for someone who thinks this particular kind of entertainment is totally unappealing.

It's certainly worth checking out the transcript of the call and the recent Piper analyst notes over at the China Stock Blog -- with the lack of between-quarters information that we get out of China, it's that much more important to really pay attention to the filings and, as far as it's possible to understand what they mean, to the conference calls.

Labels: NTES