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NetEase Inc ADR NTES

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Morningstar’s Analysis

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Economic Moat

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NetEase Reports Broadly In-Line Fourth-Quarter Result; FVE Lifted to USD 88/HKD137

Dan Baker Senior Equity Analyst

Analyst Note

| Dan Baker |

NetEase’s fourth-quarter result showed strong revenue growth but was overall in line with our expectation. We lift our fair value estimate to USD 88/HKD 137 from USD 82/HKD 127 mainly due to a stronger yuan. The online game segment increased revenue 18% for the full year and 15% for the fourth quarter, supported by existing titles with long operating records, which are the source of our narrow moat rating. Strength in this business is essential, given that it generates around 74% of NetEase’s revenue and we estimate even more of its earnings and cash flow. Much of this cash flow is invested in Internet services, which showed pleasing growth this quarter, although this came at the cost of increased sales and marketing, particularly for Youdao, which lowered NetEase’s consolidated operating profit growth to 1% for the quarter and 5.4% for the year. Despite the slower operating profit growth, operating cash flow grew 49% for the quarter and 47% for the full year. After around a 23% share price increase since the third-quarter result announcement, we now see NetEase shares as slightly overvalued.

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Company Profile

Business Description

NetEase, which started on an Internet portal service in 1997, is a leading online services provider in China. Its key services include online/mobile games, cloud music, media, advertising, email, and e-commerce. The company develops and operates some of the China’s most popular PC client and mobile games, and it partners with global leading game developers, such as Blizzard Entertainment and Mojang (a Microsoft subsidiary).

Contact
No.599 Wangshang Road, NetEase Building
Hangzhou, 310052, Cayman Islands
T +86 57189853378
Sector Communication Services
Industry Internet Content & Information
Most Recent Earnings Sep 30, 2020
Fiscal Year End Dec 31, 2020
Stock Type
Employees 20,000

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