We saw a bullish thesis for the Chinese technology company NetEase Inc. (NTES) on ValueInvestorsClub by kerrcap. We like VIC because the ideas on their site are generally posted by aspiring analysts who produce top quality research. Click here for the full article. Below we summarized the NTES bullish thesis.
Dually-listed on the Hong Kong Stock Exchange and the NASDAQ, NTES is a mainland Chinese internet technology company providing services across a wide spectrum of content, community, communications, and commerce. Best known for its Chinese-language games, NTES is developer and operator of online PC and mobile games, advertising services, email services and e-commerce platforms in China. A dominant name in the online gaming industry, the company counts Tencent as the only formidable competitor.
A Strong Pipeline
With domestic iconic franchises such as Fantasy Westworld Journey (FWJ), WWJ, Onmyoji, and Knives Out introduced in Japan in the recent year, NTES is now foraying into Europe. The company’s strong portfolio of existing products and pipeline include Diablo Immortal, Harry Potter, and Revelation Mobile. These products should further boost the company’s traction. With a well-planned, partial or full exit from some of its businesses, NTES has successfully raised cash for better deployment over the past few years. Well-run franchises and continuous development of flagship titles have helped NTES clock strong compounding revenue growth of over 30% since 2008 in the highly competitive industry. Alibaba’s investment in NTES’ Cloud Music has created a buzz on the street about the business unit’s value being around $7 billion.
The company’s founder Ding Lei aka William Ding, a Chinese billionaire, has been instrumental in developing computer networks in mainland China. His position as the CEO at NTES for the past 23 years has demonstrated stable and effective leadership of the company. Ding has always advocated rewarding shareholders with special dividends and share buyback programs.
With all these strong fundamentals in place, NTES trading around 22x 2021 P/E multiple seems to be undervalued in comparison to the global gaming industry players valued at 23-30x as well as the broader indexes. Valuation multiple expansion to 26x 2021 P/E multiple would give NTES stock a $115 price target. (Note: The original bullish thesis was posted on VIC on November 10. Today, the stock is trading at around $124.)